Assessing the effects of the Environmental Protection Tax Law on heavily polluting firms in China

Abstract In 2016, China enacted a law on environmental protection tax (EPTL2016) to promote the transformation and upgrading of heavily polluting industries through tax leverage. Using the panel data of China’s listed companies, this study assesses the treatment effects of environmental protection tax law on the transformation and upgrading of heavily polluting firms by incorporating the intermediary role of the financial market. Empirical evidence shows that the EPTL2016 has significantly reduced the innovation investment and productivity of heavily polluting firms but has no significant effect on fixed-asset investment. We also find that the EPTL2016 reduces the supply of bank loans to heavily polluting firms and increases the value of growth options for private enterprises and the efficiency of the supply of long-term loans to heavily polluting firms. Although the environmental policy of EPTL2016 benefits the transformation and upgrading of heavily polluting industries in many aspects, it generally hinders the industrial upgrading because of the reduction of bank loans.