The mechanism of high carbon economy, local tax system and urban environmental pollution: Insights from China

Abstract

The phenomenon of ‘pollution for promotion’ has been addressed in the literature from the perspective of tax competition or local protection, but the underlying institutional causes have not been thoroughly discussed. In this study, we put forward the theoretical hypothesis of ‘industrial pollution as a last resort due to reliance on commodity taxes’ and empirically tested this hypothesis using data on commodity taxes and industrial pollution in prefecture-level cities from 2003 to 2019. Our findings indicate that a 1% increase in the share of GST (Goods and Services Tax) is associated with a significant average increase of approximately 0.51% in industrial pollution. The primary channels through which GST affects industrial pollution include the expansion of production scale amongst heavy polluters, reduced environmental requirements for large taxpayers and increased land development. Commodity tax dependence creates a barrier for local governments to adopt more sustainable economic development models, leading to increased industrial pollution. The findings of this study contribute to a better understanding of the institutional barriers during China’s economic transformation, shed light on the responses of firms and governments within existing institutional frameworks, and provide policy insights for transitioning towards high-quality economic development.