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Effect of environmental protection tax law on firm markup

Author

Listed:
  • Tu, Yuanfen
  • Ye, Daocun
  • Xia, Siwen

Abstract

Amid growing attention to market-based environmental policies, this study uses China's first green tax law (i.e., the Environmental Protection Tax Law (EPTL)) as a quasi-natural experiment. Drawing on partial equilibrium analysis, it outlines the mechanisms through which the EPTL affects firm markups and applies a difference-in-differences model for empirical testing. Results show that the EPTL significantly raises firm markups through innovation compensation and market structure change effects, although compliance costs impose a short-term negative impact. The positive effect is stronger for heavily polluting firms, firms with high research and development intensity or low financing constraints, and those operating in regions with weaker legal development. The EPTL also enhances industry-level resource allocation efficiency through market structure changes. Overall, the findings suggest that well-designed environmental policies can help developing countries achieve both environmental protection and improved corporate competitiveness.

Suggested Citation

  • Tu, Yuanfen & Ye, Daocun & Xia, Siwen, 2026. "Effect of environmental protection tax law on firm markup," Economic Modelling, Elsevier, vol. 158(C).
    • Handle: RePEc:eee:ecmode:v:158:y:2026:i:c:s0264999326000593
    DOI: 10.1016/j.econmod.2026.107530
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    Keywords

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    JEL classification:

    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity

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