How do environmental taxes affect the environmental investment of high-emission enterprises: Evidence from China

Countries worldwide have adopted environmental taxes to reduce pollution, making it essential for policymakers and researchers to understand their impact on corporate environmental investment. This study investigates the impact of China's environmental tax law on the environmental investment behavior of high-emission enterprises, using a Difference-in-Differences (DID) approach based on a quasi-natural experiment. The findings reveal that environmental taxes significantly incentivize these enterprises to increase their environmental investments, with the proportion of investment relative to total assets rising by approximately 82% compared to low-emission firms. This effect remains robust after controlling for various tests, including parallel trends, placebo tests, and Propensity Score Matching (PSM) tests, as well as excluding firms that never disclosed pollutant discharge tax payments or expected effects. Motivation analysis shows that high-emission enterprises are driven primarily by the goal of reducing pollution costs to engage in environmental governance. Mechanism analysis indicates that the implementation of environmental taxes strengthens corporate governance, further encouraging environmental governance activities. Cross-sectional analysis reveals that these effects are most pronounced in firms with high financing constraints, elevated operating costs, or low profitability. Additionally, environmental investment is found to enhance corporate productivity, net sales margins, and social evaluations. This study enhances the understanding of how environmental regulation influences corporate behavior, offering empirical evidence that environmental taxes foster sustainable practices and enhance corporate performance. [Display omitted] •A difference-in-differences approach establishes a strong control condition.•Environmental taxes lead to increased investment in high-emission firms.•Stronger corporate governance drives the positive impact of environmental taxes.•Firms invest in environmental initiatives mainly to reduce pollution costs.•Environmental investment boosts productivity, sales margins, and image.