The impact of environmental fees to taxes on total factor productivity of manufacturing enterprises: empirical evidence from China

Abstract Balancing environmental benefits with economic gains is a crucial challenge for developing countries striving for sustainable development in today’s context. On January 1, 2018, China transitioned from a sewage charge system to an environmental protection tax (EPT). This shift aims to determine whether it can incentivize businesses to enhance quality and efficiency, thereby achieving high-quality development while ensuring that both environmental and economic interests can thrive together. This paper examines the transition from environmental protection fees to tax (TEPFT) as a quasi-natural experiment. Utilizing microdata from A-share listed companies between 2013 and 2022, it focuses on manufacturing enterprises-characterized by high inputs, consumption, and pollution-as the experimental group. In contrast, non-manufacturing enterprises in the cleaning industry serve as the control group. Employing both difference-in-differences (DID) and triple-difference models, the study empirically analyzes the impact of the environmental protection fee tax change on the total factor productivity (TFP) of manufacturing firms. The findings indicate that: (1) TEPFT can significantly increase TFP of manufacturing firms by 4.9%. (2) this improvement in TFP is primarily driven by increased technological innovation within manufacturing enterprises. Additionally, while effective management practices have a positive moderating effect, financing constraints hinder this progress. (3) the impact of the TEPFT on TFP is particularly pronounced in state-owned enterprises and in provinces where tax rates are elevated.