Price of going green: The employment effects of the environmental protection tax in China

Abstract

Compared with command-and-control regulations, it is less known about the labor market consequences of environmental taxes. This study examines the employment impact of the 2018 Environmental Protection Tax (EPT). Applying a triple-difference framework, we empirically establish the employment-suppressing consequence of EPT, which is primarily attributable to output reductions and green technological advances. Moreover, our analysis highlights a size-dependent strategy adopted by companies to navigate the escalating environmental costs: while small companies opt for production downsizing, larger counterparts tend to invest more in technical abatement initiatives. Heterogeneity analysis reveals that the unemployment effect is more pronounced in companies facing higher financial constraints and greater public environmental attention, with low-skilled workers bearing the brunt, albeit without significant wage inequality. Further, we find that government green subsidies can mute this job-reduction effect. Our study illuminates an unintended incidence of environmental policy costs on labor in China and underscores comprehensive policy evaluation.