China’s Environmental Protection Tax and Green Innovation: Incentive Effect or Crowding-out Effect

Abstract Whether the reform of China’s environmental protection tax will exert an incentive effect or crowding-out effect on enterprises’ green innovation remains unanswered by existing research. Faced with more stringent environmental protection taxes, whether enterprises will adopt substantive or strategic green innovation activities in response is also unclear. This paper uses the implementation of China’s environmental protection tax reform as a natural experiment, based on micro-level enterprises’ green patent data, and uses the triple difference method. The findings reveal: First, the environmental protection tax reform effectively promoted enterprises’ green innovation activities, primarily stimulating green innovation activities aimed at improving fossil fuel efficiency and reducing pollutant emissions at the end of the chain. Green innovation in the new energy sector, which fundamentally reduces pollution emissions, is not significantly enhanced. Second, the green technological innovation induced by this reform is not an incentive effect built upon existing enterprises’ innovation activities but rather a crowding-out effect on other technological innovations. Third, the reform mainly stimulated substantive green innovation activities among non-state-owned enterprises and large-scale enterprises, but the path dependence of green innovation is relatively prominent. This paper provides important empirical evidence for further advancing the improvement of China’s environmental protection tax system.