The Spillover Effects of Environmental Regulations: A Perspective of Chinese Unregulated Firms' Tax Burden

• Published date: 01 March 2023
• Author: Yong Geng,Wei Liu,Hanshu Chen,Xinyu Zou
• Date: 01 March 2023
• DOI: http://doi.org/10.1111/cwe.12465

©2023 Institute of World Economics and Politics, Chinese Academy of Social Sciences

China & World Economy / 84–111, Vol. 31, No. 2, 2023

84

*Yong Geng, Lecturer, School of Economics, Yunnan University, China. Email: gyhzsd@126.com; Wei Liu

(corresponding author), Professor, Economics and Management School, Wuhan University, China. Email:

liuweiabc9055@whu.edu.cn; Hanshu Chen, Research Assistant, Economics and Management School, Wuhan

University, China. Email: 2019201050122@whu.edu.cn; Xinyu Zou, Research Assistant, Economics and

Management School, Wuhan University, China. Email: ZXY17829798026@163.com. This research was

financially supported by China National Social Science Fund (No. 19BJY008), Humanities and Social Science

Fund Project of Ministry of Education in China (No. 18YJA790055), Graduate Project of Wuhan University

(No. 1201-413100137), and Undergraduate Education Quality Construction Project of Wuhan University (No.

1201-413200294).

The Spillover Eff ects of Environmental Regulations:

A Perspective of Chinese Unregulated Firms’ Tax Burden

Yong Geng, Wei Liu, Hanshu Chen, Xinyu Zou*

Abstract

Previous studies focus on the direct impacts of environmental regulations while

paying less attention to spillover eff ects. Taking the Eleventh Five-year Plan in China

as a quasi-natural experiment, our results show that environmental regulations

signifi cantly increase the tax burden of unregulated fi rms. Environmental regulations

generate spillover eff ects on fi rms that should not be subjected to regulatory policies.

Further channel analysis shows that the fiscal pressure of local governments caused

by environmental regulations is a major channel for the increase in the tax burden

of unregulated firms. Finally, according to the heterogeneity results, the spillover

effects are more pronounced in small firms, non-state-owned enterprises, and

provinces with stricter enforcement. Our findings emphasize the additional costs

of environmental policies, and the government should consider these costs when

formulating policies.

Keywords: continuous DID, environmental regulations, spillover effects, tax burden,

unregulated fi rms

JEL codes: H25, Q56, Q58

I. Introduction

Air pollution is becoming a huge challenge for China in industrial development.

According to the Report on the State of Ecology and Environment in China 2019,

among 337 cities in China at the prefecture level and above, more than 50 percent failed

©2023 Institute of World Economics and Politics, Chinese Academy of Social Sciences

The Spillover Eff ects of Environmental Regulations 85

to meet air quality standards.1 Since SO2 is one of the primary air pollutants, China

has formulated relevant policies to control SO2 emissions. In 2006, the Report on the

Outline of the Eleventh Five-year Plan for National Economic and Social Development

(hereafter the Eleventh Five-year Plan) put forward the national goal of reducing SO2

emissions by 10 percent from 2005 levels by 2010. Specifi cally, this plan specifi ed and

allocated the reduction targets at the provincial level. Moreover, the Eleventh Five-year

Plan also included the attainment of SO2 reduction into the cadre evaluation system, the

implementation of which has effectively alleviated SO2 pollution in China. By 2016,

China’s total SO2 emissions had been reduced by at least 75 percent (Geng et al., 2021).

While the environment is improving, the existing literature shows that the Eleventh

Five-year Plan has negative impacts on regulated fi rms, for example, inducing regulated

industries in coastal provinces to relocate and worsening the environmental quality of

inland areas (Wu et al., 2017), and reducing the likelihood and volume of exporting

(Shi and Xu, 2018). However, the existing literature focuses on the direct impacts of

environmental regulations on regulated fi rms while ignoring the impacts on unregulated

fi rms (defi ned as those not listed in key industries under state supervision for SO2). It is

noted that environmental policies may change the tax environment faced by fi rms (Ye

and Lin, 2020). As in Figure 1, the trend in tax burden of unregulated fi rms declined

gradually before the Eleventh Five-year Plan, and increased after the Eleventh Five-year

Plan.2

Firms’ tax burden is closely related to the fiscal pressure of local governments

(Ye and Lin, 2020). Environmental regulations may aggravate the fiscal pressure

on local governments through three channels. First, environmental regulations will

force firms that fail to meet environmental protection standards to exit the market,

directly reducing local government revenue (Jefferson et al., 2013). Second, the

raised environmental standards will increase the entry barriers for new fi rms. Namely,

1Available from: https://www.mee.gov.cn/hjzl/sthjzk/zghjzkgb/202006/P020200602509464172096.pdf (online;

cited August 2022).

2The sharp increase in the tax burden of unregulated fi rms in 2008 may be attributed to the following three

reasons. First, the result may be infl uenced by the Eleventh Five-year Plan. Specifi cally, the Eleventh Five-

year Plan requires a mid-term assessment of SO2 emission reductions in 2008. Therefore, in general, the policy

enforcement of local governments was stricter in 2008. The results of channel analysis in the following part

show that environmental regulation can lead to increased fi scal pressure on local governments. Therefore, in

2008, the fi scal pressure on local governments was higher, resulting in a sharp increase in unregulated fi rms’

tax burden. Second, the result may also be infl uenced by the general anti-avoidance reform (GAAR) in China

in 2008. Last, it may also be infl uenced by the 2008 fi nancial crisis. In the following text, after excluding the

impacts of the GAAR in China and the fi nancial crisis, the Eleventh Five-year Plan still has positive eff ects on

unregulated fi rms’ tax burden.