Does the environmental protection tax deter the entry of polluting firms? Evidence from China

As a key component of national environmental governance systems, environmental protection tax plays an important role in promoting energy conservation and facilitating green urban transformation. However, most existing studies focus on how environmental protection tax influences polluting firms’ pollution control or green innovation efforts, but pay insufficient attention to its impact on firms’ market entry decisions. We take the 2018 reform in China, which converts pollution discharge fees into environmental protection tax, as a quasi-natural experiment. Using firm registration data from 2011 to 2022, we construct a triple difference model based on industry-level pollution intensity, policy implementation timing, and regional variation in tax rate adjustments to examine the impact of the reform on the entry of polluting firms and its underlying mechanisms. The results show that the reform significantly reduces the entry of polluting firms. Mechanism analysis indicates that strengthened local environmental enforcement and increased compliance costs serve as important channels. Heterogeneity analysis shows that higher local GDP growth targets weaken the deterrent effect of the reform, while stronger public environmental concern amplifies it. Further analysis reveals that the reform does not significantly affect the exit of polluting firms but encourages intra-group pollution shifting to reduce overall tax burdens. In addition, we measure green total factor productivity using a slack-based measure model with undesirable outputs and the Global Malmquist–Luenberger index, and find that the reform significantly improves it. These findings shed light on micro-level pathways to green transition and offer practical policy implications for environmental tax design.