Environmental protection tax and green innovation: an “open awareness” perspective

Purpose The purpose of this study is to assess the impact of China’s 2018 Environmental Protection Tax Law (EPTL) on corporate green technology innovation and to examine how polluting firms respond differently to varying tax rates. In addition, this study seeks to explain the effect of environmental taxes through the lens of “open awareness” and the adoption of open innovation strategies. Design/methodology/approach This study is based on micro-level data of listed companies from 2012 to 2022 and employs the implementation of the EPTL as a quasi-natural experiment to construct a difference-in-differences (DID) model for regression analysis. Various robustness checks are also conducted to support the validity of the findings. Findings Results indicate that the EPTL significantly enhances green innovation by fostering “open awareness.” It encourages managers to adopt open innovation strategies and reallocate resources toward R&D. The effect is stronger in large state-owned enterprises. In addition, the EPTL shows limited efficacy in advancing high-quality innovation. The relationship between environmental tax rates and green innovation may not be strictly linear. Compared with low-tax regions, polluting firms in medium- and high-tax regions have not shown significant growth in eco-innovation. This may result from the increased financial constraints brought about by the EPTL. Furthermore, these firms have not exhibited notable pollution relocation behavior. Originality/value These findings underscore environmental taxation’s dual role in spurring eco-innovation and highlight the need for policies balancing regulatory pressure with innovation incentives in developing economies. While environmental taxation is important, the intensity of environmental regulation should be better aligned with firms’ specific conditions to achieve sustainable economic and environmental development.