China's rapid economic growth has come at the cost of high resource consumption and significant emissions, prompting the implementation of various environmental regulations. This study examines the impact of the Environmental Fee-to-Tax Reform (EFTR), introduced in 2018 as a market-based regulatory instrument, on corporate green technological innovation. It particularly explores the role of government guarantees within the EFTR context and their interaction with firm characteristics. Using data on A-share listed firms in China from 2012 to 2022, we find that while the EFTR promotes the quantity of green technological innovation, both the EFTR and standalone government guarantees individually hinder its quality, revealing both “compensation” and “crowding-out” effects. However, when government guarantees are provided in conjunction with the EFTR, they significantly mitigate the EFTR's adverse impact on green technological innovation quality, with their effectiveness varying by firm attributes. Government guarantees exacerbate the policy's adverse effects for state-owned enterprises but alleviate them for non-state-owned enterprises. High-tech certified firms benefit more from government guarantees in offsetting the policy's adverse impact than their non-high-tech counterparts. These findings provide valuable insights for policymakers seeking to optimise environmental regulations and enhance the efficiency of government guarantees, ensuring better alignment between corporate strategies and sustainability goals. • Examines how Environmental Fee-to-Tax Reform (EFTR) affects green innovation, and the role of government guarantees. • EFTR increases green innovation quantity but reduces quality; standalone government guarantees also reduce quality. • Measures firm-level government guarantees as contingent liabilities and finds they mitigate EFTR-driven quality loss. • Under EFTR, guarantees amplify quality loss in state-owned enterprises but offset it in non-state-owned enterprises. • High-tech certified firms benefit more from guarantees in sustaining green innovation quality under EFTR.
Qu et al. (Sun,) studied this question.