Does it pay to be green? The impact of emissions reduction on corporate tax burden

Abstract

Is there any benefit to reducing emissions for firms? Based on the China Industrial Enterprises Emission and Pollution Database and the Annual Survey of Industrial Firms, this study investigates the impact of firms’ emissions reduction on their tax burden. We find strong and consistent evidence of a significant reduction in the tax burden following a reduction of firms polluting emissions. This effect mainly manifests in large-scale firms, firms whose taxes are collected by the local taxation bureaus (LTB), and firms in regions with stricter environmental regulations. We also find that tax breaks and government subsidies are important pathways to reduce corporate tax burden. Further exploration documents that firms’ bargaining power and local tax enforcement have significantly moderating effects on the relationship between firms’ emissions reduction and their tax burden.