Does environmental protection tax improve green total factor productivity? Experimental evidence from China

Enhancing green total factor productivity (GTFP) is essential for achieving the objective of green development, and the effect of environmental protection tax (EPT), a crucial instrument for addressing environmental challenges, on green TFP is crucial. Based on provincial panel data from 2004 to 2020 in China, this study uses inter-provincial differences in environmental protection tax rates as a quasi-natural experiment and utilizes a synthetic control method to assess the impact of the “changing sewage charge to tax” on regional GTFP. The empirical results suggest that EPT can help enhance GTFP, a finding that still holds after regional placebo tests, time placebo tests, and difference-in-differences robustness tests. The mechanism test demonstrates that EPT influences GTFP via the industrial structure impact and the green technological innovation effect. According to heterogeneity research, regions with a high level of marketization and financial growth are more significantly affected by environmental protection tax policy. This paper offers crucial empirical data for assessing the efficacy of environmental protection tax policy and enhancing the environmental tax system.