Can Raising Environmental Tax Reduce Pollution? Firm-Level Evidence from China

Using China’s environmental tax reform in 2018 as a quasi-natural experiment, this paper identifies the effect of raising tax rates on reducing pollution based on micro-level data of over 19 thousand firms nationwide. We estimate that for every unit of tax rate increase, the discharge concentrations of water pollutants, Chemical Oxygen Demand (COD) and Ammonia Nitrogen (NH 3 -N), have significantly decreased by 1.37% and 1.51%, and the emissions have decreased by 8.79% and 2.81%. Firms with a high emission intensity reduce their emissions more than firms with a low emission intensity. We also find that state-owned enterprises, relative to private firms, are less responsive to the tax increase in terms of emission behaviors. Our findings provide evidence that the raised environmental tax has contributed to significant reductions in firm emissions in China, which implies that previous tax rates are below the marginal abatement cost on average