How do environmental protection taxes affect the ESG performance of heavy polluters? Evidence from China

As a pivotal measure in the green-oriented reform of China’s tax system, the Environmental Protection Tax plays a crucial role in exploring how tax policies regulate enterprises’ environmental and social behaviors. In this paper, based on the implementation of environmental protection tax as a quasi-natural experiment, we empirically investigate the impact of environmental protection tax on the ESG performance of heavily polluting enterprises based on the data of 3414 listed companies in A-shares of Shanghai and Shenzhen from 2013 to 2022 using the triple-difference model. The results demonstrate that the introduction of the Environmental Protection Tax significantly enhances the ESG performance of heavily polluting enterprises, and its action mechanism is primarily realized by promoting enterprises’ environmental protection investment and alleviating their financing constraints. Heterogeneity analysis results indicate that the ESG incentive effect of the Environmental Protection Tax is more pronounced for enterprises located in eastern and central China, those subject to high media attention, and those with political connections. Accordingly, this study proposes the following policy recommendations: continuously optimize the Environmental Protection Tax policy system, strengthen law enforcement, dynamically adjust tax collection standards, formulate differentiated policies, and improve information disclosure mechanisms by leveraging media monitoring. These measures aim to enhance the effectiveness of policy implementation and drive the improvement of ESG performance among heavily polluting enterprises. Additionally, it is recommended to improve the policy support system for environmental protection investment, deepen the reform of the green financial system, facilitate the green transformation of industries, and further promote high-quality and sustainable economic development.