The impact of export VAT rebate reduction on firms' pollution emissions: Evidence from Chinese enterprises

Abstract

This study investigates firm-level environmental responses to China's export value-added tax (VAT) rebate reduction policy launched in 2007 that aims to reduce exports in high-polluted and high-energy-consumption sectors. First, we combine firm-level export information from the Customs dataset and the list of policy-targeted products to identify firms affected by export VAT rebate reduction policy. Then, we employ a difference-in-differences strategy to examine changes in the affected and unaffected firms' sulfur dioxide and chemical oxygen demand emissions before and after policy implementation. Empirical analysis reveals that the export rebate reduction policy increases firms' pollution emission intensities and decreases their total outputs, leading to a negative but less significant effect on total pollution emissions. Tests to explore the mechanism reveal that firms' financial constraints become tighter if affected by the export VAT rebate reduction, as evidenced by reduced revenues, profits, and total factor productivity. This further translates into lowered purchases of environment-friendly technologies and a worse capacity to adopt clean production practices, which accounts for increased pollutant emission intensities following the export VAT rebate reduction policy.