Environmental Levies and Business Ethics: Unintended Labor Market Impacts and Corporate Responsibility in China

ABSTRACT Environmental taxation is often seen as a necessary tool for promoting sustainability, yet its impact on employment remains a subject of debate. This study empirically examines how China's environmental protection tax (EPT) affects labor demand, uncovering distinct responses among firms of different sizes. Using a triple‐difference approach, we find that environmental taxes lead to job losses primarily by increasing production costs, which, in turn, drive firms to either cut output or invest in greener technologies. Large firms tend to mitigate tax burdens by adopting cleaner production methods and improving efficiency, while small firms, facing financial constraints, often resort to reducing production, leading to more significant employment declines. Further analysis reveals that low‐skilled workers bear a disproportionate share of job losses, raising concerns about social inequality. However, government green subsidies play a crucial role in cushioning the negative effects by helping firms transition to environmentally friendly operations without sacrificing jobs. These findings underscore the need for balanced environmental policies that support businesses in adapting to regulatory changes while minimizing labor market disruptions. This study not only highlights the unintended employment consequences of environmental taxation but also provides policy insights for fostering both economic stability and environmental sustainability.