The Impact of Policy Signals of Environmental Tax Reform on the Structural Transformation of China’s Electric Power Industry

The structural transformation of the power industry is a critical pathway for China to achieve its “Dual Carbon” goals. This study investigates the pre-emptive impact of policy signals, rather than the implemented effects, of China’s environmental protection tax reform on this transformation. Utilizing panel data from four key power sectors (thermal, hydro, wind, and solar) from 2013 to 2022, we employ a Difference-in-Differences model to empirically analyze how the policy signal released during the legislative review of the Environmental Protection Tax Law in 2016 influenced the structural composition of the industry. The core focus is on the installed capacity contribution of thermal power. The findings reveal three key insights. First, the policy signal itself exerted a significant and direct inhibitory effect on the installed capacity share of thermal power, with an average reduction of 0.0998 units, demonstrating its power to reshape market expectations and investment directions prior to actual tax enforcement. Second, the levelized cost of electricity served as a fundamental market constraint, exhibiting a substantial negative impact on thermal power’s capacity share with an average inhibitory effect of 1.046 units. Third, the study uncovers complex moderating mechanisms: (1) a “policy-cost synergy” where declining clean energy costs amplifies the signal’s effect; (2) a “technology-regulation game” where innovation in emission reduction patents by thermal power firms weakens the policy pressure, indicating strategic compliance; and (3) a moderating role of government investment in waste gas treatment, which can dilute the intended policy constraint. Theoretically, this study builds a “political signal-cost expectation-industrial restructuring” framework, linking the management of expectations regarding tax reform with corporate decision theory. In practice, the study confirms the effectiveness of political signals as a management tool.