Do tax incentives make firms greener? Evidence from the accelerated depreciation policy in China

Abstract

This study investigates the impact of tax incentives in the form of accelerated depreciation on corporate environmentally sustainable practices that facilitate the transition towards a low-carbon economy. Using a difference-in-differences estimation that exploits the staggered adoptions of the accelerated depreciation policy for fixed assets in China as a quasi-natural experiment, we investigate the influence of tax incentives on firms' carbon emissions. Our results show that the accelerated depreciation policy significantly reduces carbon emissions of firms operating in industries that adopt the policy relative to the remaining ones. Our study further suggests that the accelerated depreciation policy reduces firms' carbon emissions primarily through investment in abatement facilities, innovation, and productivity. Moreover, we find that the effect of the accelerated depreciation policy on carbon emissions is stronger for firms that are more socially responsible and capital intensive and firms in areas with a higher environmental regulation or a lower economic pressure. Overall, our study highlights the tax incentives as an unintended but paramount means to promote firms’ environmental governance.