Who pays for environmental protection? The impact of green tax reform on labor share in China

Abstract

To cope with increasing environmental pollution, the Chinese government has introduced a nationwide Environmental Protection Tax Law (EPTL) policy, which encourages enterprises to step up pollution control efforts and optimize their production decisions. However, the “green cost” generated by the EPTL policy has received less attention in existing research. Based on the manually collected data on China's listed companies during 2013–2020, this paper innovatively calculates the substitution elasticity of green capital to labor. By regarding the EPTL policy as a quasi-natural experiment, the difference-in-difference (DID) model and other causal identification methods are further adopted to examine the real effect and influencing mechanism of green tax reform on labor share. The results indicate that the EPTL policy significantly reduces the labor share through two influencing paths: promoting green capital and squeezing out low-skilled labor. This finding demonstrates that the EPTL policy leads to green capital gains and human capital losses, and it is mainly low-skilled labor in enterprises that “pay for” environmental policy shocks. By decomposing the labor share, we find that the EPTL policy leads to a decrease in employees' average wages and an increase in labor productivity, which indirectly proves the rationality of the two mechanisms. Further analysis reveals that in capital-intensive and growth enterprises, and in enterprises that did not receive green subsidies from the government, the decrease in labor share caused by the EPTL policy is more pronounced. Finally, this paper proposes targeted policy recommendations for governments seeking to balance national welfare and green development.