Increase in Industrial Sulfur Dioxide Pollution Fee and Polluting Firms’ Green Total Factor Productivity: Evidence from China

Green total factor productivity (GTFP) is an important indicator to measure sustainable development, since it considers both the desired and undesired output of the production process. To evaluate whether and how an environmental policy implemented by the central government of China that doubled the emission fee of industrial sulfur dioxide affected polluting firms’ GTFP, and to evaluate the heterogeneity of its effects, the generalized difference-in-difference model was applied to firm-level production and pollution data. There are three main findings. First, this policy significantly increased polluting firms’ GTFP in pilot provinces, and the magnitude of this impact is equivalent to the gap between the sample median and the 85th percentile of the sample GTFP distribution. Second, this positive impact is mainly caused by polluting firms in eastern pilot provinces and by foreign polluting firms. Third, the mechanism analysis shows that polluting firms in eastern pilot provinces significantly enhanced their innovation in green technology and increased their exports, and they increased the installation of pollution-reducing facilities per unit of output value. This paper provides new and insightful policy implications for environmental protection and sustainable development, especially in developing countries.