Short-term relief and green transformation: Evidence from the unintended environmental governance effects of China’s VAT credit refund policy

Tax incentives are important for alleviating short-term challenges and stimulating long-term transformational activities in enterprises. We utilize the Difference-in-Differences (DID) method to assess the impact of China’s value-added tax (VAT) credit refund reform on promoting green transition. We find that the VAT credit refund policy significantly reduces firms’ carbon emissions and intensity by 0.32% and 5.17%, respectively, facilitating a green transition. Mechanism analysis reveals that these reductions are achieved by alleviating liquidity constraints, fostering green innovation, and optimizing the factor structure. Following the reform, environmental expenditures and the number of green invention patents in the treatment group increase by 1.23% and 3.54%, respectively, while the energy-capital ratio decreases by 1%. Finally, based on corporate life cycle theory, we find that the carbon reduction effects of the VAT credit refund policy are particularly significant for transitional firms, which experience higher financing constraints, tax burdens, and R&D intensity. This paper contributes to the literature on VAT reform and green taxes, reexamining the role of tax incentives in guiding enterprises toward green transition.