Navigating Environmental Tax Challenges: Business Strategies for Chinese Firms Sustainable Growth

The environmental tax burden on Chinese firms is continuously increasing. How do firms respond to environmental tax pressure to achieve sustainability? This study aims to investigate whether environmental tax burden affects firms’ total factor productivity (TFP), an important indicator of sustainable development. Utilizing panel data of Chinese A-share listed firms from 2018–2022, we find that environmental tax burden positively impacts Chinese firms’ TFP. Interestingly, the impact of environmental tax burden on TFP is mediated through fixed asset investment rather than technological innovation. This indicates that in the short term, the pressure of environmental tax on Chinese firms has not triggered the Porter Effect. Additionally, this effect is stronger in larger firms, non-state-owned firms, and sample firms with weaker financial constraints and lower transaction costs. Therefore, different firms can flexibly adopt different business strategies to achieve sustainable development when facing environmental tax burden.