Is environmental tax legislation effective for pollution abatement in emerging economies? Evidence from China

Abstract

This study estimates the effect of environmental tax legislation on air pollution, using the implementation of China’s Environmental Protection Tax Law (EPTL) as a quasi-natural experiment. For cities which have been authorized to raise tax rates by the EPTL, the air quality index (AQI) is 2.36 lower after the reform. The effect is reinforced in cities with stricter tax enforcement, lower fiscal stress, as well as higher initial pollution levels. Heterogeneity analyses show that the reform is more effective in cities with lower levels of marketization and legalization, as well as in developed cities. In addition, the impact of the reform is more significant in cities with higher levels of public participation in environmental governance, higher tax competition levels, and higher share of secondary industry. A series of robustness tests corroborates the results. This paper provides evidence that environmental tax legislation is efficacious in pollution abatement for developing economies.