Do environmental taxes reduce air pollution? Evidence from fossil-fuel power plants in China

Taking environmental protection into consideration, China introduced the new Environmental Protection Tax Law in 2018, which levies taxes for pollutants with higher standards. The vast majority of existing studies have investigated the impacts of environmental taxes (ETs) at the city level or province level. In contrast, we estimate their effects on pollutant reductions for fossil-fuel power plants in 30 provinces in China. Our results show that ETs have positive effects on pollutant emission reductions compared with the pollution discharge fee policy. We provide empirical evidence that sulfur dioxide (SO2), nitrogen oxide (NOx), and dust from fossil fuel power plants significantly decreased by 2.186 (7.7%), 1.550 (6.84%), and 1.064 (16.1%) tons, respectively, after the implementation of the policy. Moreover, there is an inverted U-shape relationship between pollutant emission reductions and tax rates. We offer further evidence that they play a limited role in high environmental regulation regions. Finally, we compare how different types of firms responded to ETs. The results show that ETs have limited effects on pollutant reductions for large state-owned coal power plants, which may have achieved environmental transformation to a certain extent. Therefore, policymakers could consider promoting tax rates in areas with low tax rates and strengthening tax breaks to stimulate firms to achieve pollutant reduction. In addition, local governments should set tax rates taking regional environmental regulation levels and firm heterogeneity into account.