Water resource tax policy and micro environmental performance improvement in China's water-intensive industries

Abstract

The rapid industrialization of developing countries has led to irrational water usage and over-exploitation, exacerbating global water scarcity. While resource tax represents a well-established policy instrument, its micro-level effectiveness in water resource management remains empirically understudied. This paper employs differences-in-differences method to comprehensively evaluate the impacts of China's water resource tax on environmental performance improvements of micro-enterprises. With a panel data from 456 listed firms in water-intensive industries in China from 2012 to 2022, this paper finds that water resource tax significantly enhances environmental performance, with green innovation serving as a crucial mediating mechanism. By uniquely controlling for concurrent water pollution charging systems, our analysis reveals the comparative advantage of tax-based approaches. The results demonstrate pronounced heterogeneous effects: the policy's impact is most significant in the mining sector, followed by manufacturing, while showing negligible effects in power and electricity sectors. Additionally, non-state-owned enterprises and small-scale firms exhibit stronger environmental improvements. This study contributes existing literature by providing robust micro-level evidence of water resource tax effectiveness, employing current official classifications of water-intensive industries to avoid policy impact underestimation, and establishing robust causal relationships through rigorous econometric testing. These nuanced findings provide insights for policymakers in developing nations facing water resource challenges, offering an evidence-based blueprint for implementing targeted regulatory approaches and calibrating sector-specific environmental policies.