Corporate carbon reduction and tax avoidance: International evidence

Abstract

Using data on firms’ carbon emissions in 28 countries, we document that a firm’s initiation of carbon reduction activities relates to lower tax payments. This result endorses a perception of legitimacy theory suggesting that companies can gain legitimacy with tax authorities by adopting carbon reduction strategies. Our study also shows that the positive relationship between lower tax payments and a firm’s carbon reduction leads to higher Return on Assets (ROA), particularly for firms with lower operating performance. Moreover, our study documents that firms that engage in carbon reduction activities can mitigate their tax burden in countries that impose a carbon tax, have higher media freedom, judicial independence, and robust legal systems. These various institutions within a country can influence the relationship between a company’s carbon emission reductions, lower tax payments, and its overall performance. Our findings are robust even when using alternative measures of carbon emissions, control variables for corporate social responsibility, and the entropy-balance or propensity score matching sample.