Abstract
Based on the natural experiment of carbon emissions trading pilots in China, this paper investigates the effect of environmental regulation on corporate tax avoidance. The results show that: 1) Market-incentivized environmental regulation significantly increase the level of corporate tax avoidance. 2) Heterogeneity analysis shows that the effect is more obvious on the non-state-owned firms, firms with severe financing constraints, and firms in highly competitive industries. 3) We find that the reduction of cash flow is the channel for environmental regulation to affect corporate tax avoidance. 4) Further analysis shows that government subsidies can alleviate the enhancement of tax avoidance by environmental regulation. The more government subsidies a company receives, the less tax avoidance it has.
Highlights
Climate change is a global issue, which threatens human production and development, and has received widespread attention from governments
This paper explores the effect of carbon emissions trading policy, which are widely used by governments for carbon emission reduction, on corporate tax avoidance
This paper explores the effect of environmental regulation on corporate tax avoidance using a quasi-natural experiment with carbon emissions trading policy carried out in seven regions after 2011, using a difference-in-differences approach (DID)
Summary
Climate change is a global issue, which threatens human production and development, and has received widespread attention from governments. Countries have favored carbon emissions trading policies for their ability to reduce carbon emissions in the most cost-effectively way. The core idea of carbon trading is to impose total emission control on carbon emissions. The government allocates carbon emission allowances to firms, which can only emit within the limits of the carbon emission allowances they own and purchase in the trading market. By internalizing the external emission cost into the production cost of firms, the establishment of a carbon emission trading system provides a compelling incentive for carbon emission reduction. It reduces the total carbon emission and improves the carbon emission performance of firms (Zhang et al, 2019; Xuan et al, 2020; Zheng et al, 2021; Dong et al, 2022)
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