Can environmental tax curb air pollution: evidence from China

ABSTRACT

Using the environmental tax reform implemented in 2018 in China as a quasi-experiment, this paper employs PSM, DID, and DDD methods to investigate the causal impact of environmental tax on air pollution. Viewing those provinces that choose to set a higher tax rate than the original pollution fee rate as the treatment group and provinces that do not increase the tax rate as the control group, this paper provides robust evidence that the environmental tax reform is effective in reducing PM2.5 and SO₂ concentration level, while the effect is smaller and inconsistent for NO₂. A back-of-the-envelope welfare analysis suggests that a 1-unit increase in the environmental tax rate is associated with a reduction of 5,616 in total deaths and a welfare gain of $28.256 billion in 2005 USD for all Chinese households.

KEYWORDS:

• Environmental tax
• air pollution
• PM2.5
• China

JEL CLASSIFICATION:

• Q51
• Q53
• Q58

Disclosure statement

No potential conflict of interest was reported by the author(s).

Supplementary material

Supplemental data for this article can be accessed here.

Notes

¹ See https://www.bbc.com/zhongwen/simp/china/2015/04/150401_china_9_cities_environmentnt for details (in Chinese), accessed on 1 March 2022.

² The results are available upon request.

³ The CSMAR database only provides information on industrial SO₂ emissions, while city-level data on industrial NO₂ emissions is not available. Therefore, I am only able to use SO₂ emissions as the intensity variable.

⁴ The BSPC areas tend to experience more air pollution regulations starting from June 2018. For more information about the BSPC, please visit http://www.gov.cn/zhengce/content/2018-07/03/content_5303158.htm (in Chinese), accessed on 1 March 2022. A brief description is also available upon request.

⁵ The correlation coefficient between SO₂ and NO₂ in 2017 is 0.5.

⁶ I also perform a heterogeneity analysis by comparing the BSPC areas and non-BSPC areas and using both the DID and DDD specifications and find that the effect of the environmental tax is more significant for the non-BSPC areas. The results are available upon request.

⁷ The process of welfare analysis is available upon request.