Achieving win–win outcomes in productivity and pollution abatement through environmental tax reform: evidence from China

This paper exploits China’s Environmental Protection Tax Reform (CEPTR) as a quasi-natural experiment to examine whether market-based environmental regulation can simultaneously enhance productivity and reduce pollution. Using panel data on A-share listed firms over the period 2012–2024 and a difference-in-differences (DID) framework, we evaluate the reform’s impact on firms’ total factor productivity (TFP) and pollutant emissions. The results reveal a clear ‘double dividend’ effect: CEPTR significantly increases TFP while simultaneously reducing emissions. Mechanism analyses indicate that these effects are primarily driven by three channels: the promotion of green innovation, increased R&D investment and the alleviation of financing constraints. Heterogeneity analysis shows that firms in moderately polluting industries experience the most pronounced improvements in both productivity and emission reduction, suggesting that the reform is particularly effective where regulatory pressure is neither too weak nor excessively stringent. Overall, the findings provide firm-level evidence supporting the Porter Hypothesis in the context of a major developing economy and highlight the role of environmental taxation as an effective policy instrument for achieving coordinated economic and environmental gains.