Identifying the Impact of Climate Policy on Urban Carbon Emissions: New Insights from China’s Environmental Protection Tax Reform

Environmental protection tax (EPT), as a major tool to improve air quality and reduce carbon emissions, is of great significance for promoting urban low-carbon transformation. In this context, this paper has compiled a dataset from 282 Chinese cities during 2006–2022 and empirically identify the implication of EPT for carbon emissions at the city level by using the intensity difference-in-differences (I-DID) model. The result discloses that EPT greatly lowers carbon emissions by an average of 10.9% compared to non-pilot cities. Even after conducting some robustness checks, the result remains unchanged. Mechanism testing reveals that EPT curbs carbon emissions through enhancing energy utilization efficiency, fostering green technological advancements, and modernizing urban industries. Meanwhile, we show that EPT exerts a more substantial effect on carbon emissions in innovative cities, central and western cities, non-industrial-based cities, and non-resource-dependent cities. More importantly, EPT greatly promotes imitation and learning in neighboring regions, forming a radiation impact upon carbon reduction in surrounding areas. Hence, these results offer an important decision-making guide for optimizing the EPT system, strengthening the coordinated governance of carbon emission across regions, and ultimately promoting urban low-carbon development.