Over the past three decades, China’s economy has developed rapidly and has had remarkable achievements in many fields. It is now the world’s second-largest economy. However, the long-term economic growth created by an increase in factor inputs and the expansion of scales of production has brought about serious environmental problems, notably air pollution. In the 2008 Global Environmental Performance Index jointly published by Yale University and the World Economic Forum, China ranked 177th out of 180 countries and regions in air quality. In 2017, 239 of 338, or 70.7%, of Chinese cities exceeded air quality standards. A total of 36.1% of 463 Chinese cities with precipitation monitoring experienced acid rain [1
]. This terrible environmental pollution has seriously weakened residents’ health, decreased regional economic operational efficiency, and threatened the quality of the nation’s economic development.
Faced with this serious environmental pollution, the Chinese government has undertaken a series of environmental protection policies. Looking back at Chinese environmental protection policies since the reforms and opening up in 1978, the Chinese government has primarily focused on implementing command-and-control environmental regulations. In the 21st century, market-based environmental protection policies have gradually emerged. The implementation of a pilot SO2
emission trading policy in 2002 showed that China had begun to use market-based environmental protection policies to solve environmental problems. Environmental tax reforms are an important class of market-based environmental protection policies that have played an important role in promoting the coordinated development of the environment and the economy in recent years. However, many people are concerned that the government’s strict environmental regulations may slow down China’s economic growth. In theory, environmental regulations may impose additional emissions costs on companies, thereby reducing their productivity and market competitiveness. Some studies have found that the U.S. Clean Air Act, enacted in 1970, caused high structural unemployment in pollution-intensive industrial enterprises and a decline in capital stocks, economic growth rates, and total factor productivity (TFP) [2
]. Gray and Shadbegian [4
] analyzed the relationship between productivity, pollution abatement expenditures, and other measures of environmental regulation in plants across three industries, and they found that more-regulated plants had significantly lower productivity levels, and slower productivity growth rates than less-regulated plants. Compared with command-control environmental regulation, market-based measures that increased coal prices could effectively reduce coal usage and air pollution in India, but also hindered the entry of new enterprises and forced them to withdraw from the market [5
]. However, the Porter Hypothesis argues that appropriate and strict environmental regulations can spur innovation, which may in turn increase firm productivity and market competitiveness [6
]. Flexible environmental regulations could weaken the mediating effects of technological innovation on the relationship between environmental regulation and business performance. They could also mitigate the negative impact of environmental regulation on both technological innovation and business performance [7
]. In recent years, there have been many supporters of the Porter Hypothesis [8
However, the results of the research on different environmental policies may not be consistent [12
]. At present, most of the literature focuses on the impact of command-and-control environmental policies on economic growth. The acid rain and SO2
pollution control zone policies (also known as the “two control zones”), which were implemented in 1998, are the most powerful command-and-control environmental regulations in China at present. Studies have shown that the “two control zones” improved the profits and product conversion rate of export enterprises. They also promoted the TFP of pollution-intensive industrial enterprises by optimizing their industrial structure, upgrading clean technology, and eliminating high-polluting and inefficient enterprises [10
]. In addition to the “two control zones,” Li and Chen [16
] found that the Revision of Air Pollution Prevention and Control Law (APPCL2000) significantly improved the TFP of industrial sectors that created intensive air pollution. Long and Wan [17
] found that the implementation of clean production standards significantly increased enterprise profitability, but it did not promote corporate innovation or subsidies.
There is also some literature on the economic effects of market-based environmental protection policies. Some studies have found that the EU’s carbon trading system has not significantly affected the income or employment of German enterprises [18
]. However, some studies claim that the environmental policy represented by the emissions trading mechanism could produce huge economic dividends [19
]. In China, Li and Shen [23
] found that the emission trading system implemented in 2002 not only failed to reduce pollution, but that it caused even more pollution in the pilot areas. Tu and Shen [24
] found that China’s SO2
emissions trading pilot in 2002 did not increase total industrial output in the short or long term, and it also failed to reduce pollution abatement costs [25
]. Tang et al. [26
] pointed out that the impact of carbon emission trading policies on economic output depended on the carbon emission authorities’ allocation mechanism. At the enterprise level, Ren et al. [27
] and Qi et al. [28
] found that the SO2
emissions trading pilot in 2002 significantly improved corporate TFP and green innovation. While environmental tax reform is an important approach towards market-based environmental regulations, it has not been extensively studied in the current literature. Some studies have found that pollution discharge fees cannot fundamentally solve the problem of pollution [29
]. In the long term, enterprises will increase their investment in technological innovation in order to improve enterprise productivity levers. Generally, after a one-time investment in environmental protection, enterprises are exempt from paying fees or economic penalties for excessive discharge. This is because their pollution emissions meet national and local environmental standards, which reduces the economic burden on the enterprises. Zhang et al. [30
] found that the expected effect of the Regulations on the Administration of the Collection and Use of Pollution Discharge Fees was not satisfactory, because it fundamentally failed to reduce pollution in China. Guo et al. [31
] found that the SO2
pollution levy standards reform (PSR) significantly reduced industrial SO2
emissions. Lu et al. [32
] and Li et al. [33
] found that the PSR constrained economic growth.
Although there is a growing amount of literature on environmental regulation, there is little research on environmental tax reform. There have been few investigations in the existing literature on the impact of PSR on green total factor productivity (GTFP), especially in China. To fill this gap, this study sets out to examine whether PSR results in positive changes in regional GTFP. First, unlike Lu et al. and Li et al., who studied the impact of PSR on environmental efficiency [32
], this paper uses directional distance function (DDF) to calculate Malmquist–Luenberger index (ML index), and study the impact of PSR on GTFP. It also discusses the direct mechanism through which PSR affects GTFP, to discern if the mechanism works through changes in efficiency or technology. Furthermore, this paper uses PSR as a quasi-natural experiment to re-examine the Porter Hypothesis and explore its mechanisms. This is the first paper to study the direct link between PSR and GTFP. Making use of Difference-in-Differences (DID) analysis, we identify the causal effects that PSR has on GTFP. By comparing the treatment and the control groups, we can better control for the effects of observable and unobservable factors, and thus identify the impact of PSR on GTFP. Finally, this paper is also significant as a reference for the recently implemented environmental protection tax.
This study is structured as follows. The second section is a brief description of the SO2 levy standards reform in China. The third section focuses on the data description, variables selection and empirical strategy, which includes the DEA model to measure GTFP, and the DID strategy to analyze how PSR affects GTFP. The fourth section presents the empirical results. The last section represents conclusions derived from the presented research, and some policy implications can also be proposed from the empirical results.
2. A Brief Description of SO2 Levy Standards Reform in China
Most research agrees that environmental pollution derives mainly from the externalities of economic behavior [34
]; therefore, internalizing the cost of environmental pollution is the best way to solve it. With this theory in mind, countries around the world have responded by levying taxes on polluters. China’s pollution levy system was first mentioned in the Report on Environmental Protection Work in 1978. Furthermore, in 1979, the Environmental Protection Law (Enforcement) clearly stipulated that pollutant discharges exceeding national standards would be fined according to their concentration and quantity. Since then, a pollution charge system has gradually been developed in various provinces. The Administration for Levy and Use of Pollution Discharge Fees promulgated by the State Council in 2003 has made major adjustments to many aspects, including levy objects, levy standards, management and use of pollution discharge fees, and the total charge system clarification [35
]. Subsequently, Management Measures for Levy [36
] and Use of Pollutant Discharge Fees [37
] were promulgated, and the system of Pollutant Discharge Fees was comprehensively and systematically established in China [38
]. Although the Administration for Levy and Use of Pollution Discharge Fees raised the SO2
levy standard from 0.2 RMB/kg to 0.63 RMB/kg, and the levy range was extended from the two control zones to the entire country, China’s current pollution levy standards are still very low. Therefore, polluters would rather pay the pollution fees than tackle pollution itself [39
]. In response to this problem, the State Council issued the Comprehensive Work Plan for Energy Conservation and Emission Reduction [40
] in May 2007, requiring all provinces to raise their SO2
levy standards, doubling the SO2
discharge fee from 0.63 RMB/kg to 1.26 RMB/kg. After the issuance of this regulation, provinces actively adjusted their SO2
levy standards. Moreover, the Notice on Adjusting the Levy Standard of Pollution Discharge Fee [41
] issued in September 2014 required all provinces to adjust their SO2
levy standards to no less than 1.2 RMB/kg by the end of June 2015. Therefore, other provinces that had not yet changed their SO2
emission fee adjusted their SO2
levy standards before 2015.
This study collected detailed information on the reform of SO2
levy standards for each province from 2007 to 2014, as shown in Table 1
(The provinces of Shanxi and Heilongjiang stipulated that only enterprises that have not completed the construction of flue gas desulfurization facilities, or whose SO2
emissions exceeded standards, should adjust their SO2
levy standards. Therefore, this study did not include these two provinces in the treatment group). It considers the adjustment of SO2
levy standards as a quasi-natural experiment, placing the provinces shown in Table 1
into the treatment group by the date on which they adjusted their SO2
discharge fees. This study used the DID method to evaluate the impact of improvements in SO2
levy standards on regional GTFP.
This study used the ML index to calculate GTFP, examined the impact of PSR on the green growth, and thoroughly analyzed the direct impact mechanism. The empirical results showed that PSR has a statistically significant and negative effect on regional GTFP. A series of robustness analyses validated the results, which are contrary to the conclusions of the Porter Hypothesis. In this sample, the growth rates of GTFP and industrial output between 2004 and 2014 were 4.1% and 17.6%, respectively. Therefore, GTFP growth accounts for 23.8% of total industrial output growth in China from 2004 to 2014 (As per Chen [65
], the share was defined as the ratio of productivity growth to total industrial output growth). PSR implementation reduced the growth rate of GTFP by 1.58% when including all control variables, so this study concludes that PSR reduced the growth rate of industrial output by 0.37%. PSR in this study may have affected GTFP by promoting efficiency changes and technological progress, but the mechanism analysis proved that PSR only affected GTFP through technological progress. In addition, PSR reduced the technological growth rate by 0.76% when including all control variables. Further analysis found that technological innovation, industry structure, and the proportion of capital-intensive industry could greatly improve regional GTFP. The heterogeneity analysis revealed that PSR had a greater impact on GTFP in eastern region, KEPCs, and large cities and that all affected GTFP through technology. In large cities, PSR affected GTFP by reducing technology and efficiency levels.
This paper, therefore, proposes the following policy suggestions. First, as mentioned above, the effect of PSR on GTFP varies by region. Therefore, different policies should be formulated according to the conditions in each region, such as reasonable environmental tax rates that do not curb local economic development and gradually reduce pollution. Through a suitable environmental policy system, enterprises could gradually improve their environmental performances while achieving high-quality development.
Second, TECH is the main mechanism through which PSR affects GTFP, thus improvements in technological innovation and industrial structure can significantly improve GTFP. Therefore, the government should endeavor to support enterprise innovation and improve enterprise resource allocation and production efficiency. In addition, the government needs to design a better blueprint for guiding regional industrial transformation and promoting regional GTFP.
Finally, in order to achieve a positive policy effect from its environmental protection tax, China needs to improve the measures supporting it, strengthen the scope and intensity of the environmental protection tax, and vigorously construct an environmental legal system. The higher-level government should increase the weight of environmental performance in evaluations of official performance and avoid problems such as “political shielding” and “economics always takes priority” at the expense of the environment.