Environmental tax-for-fee reform and China's urban green innovation: A local government behavior perspective

Abstract

This study aimed to examine the impact of the environmental tax-for-fee reform on urban green innovation levels, with a focus on local government behavior. Using panel data from Chinese cities (2011−2022) and a difference-in-differences model, we analyzed the reform's effects and explored three potential mechanisms: government decision-making, performance pressure transmission, and fiscal pressure transmission. The reform promoted green innovation by increasing local attention to green development, which enhanced environmental oversight, increased scientific funding, and improved market integration. Environmental performance pressure amplified the reform's effect, with variations based on officials' age and turnover. A fiscal-administrative power mismatch diminished the reform's effect, influenced by financial decentralization and fiscal transparency. The environmental tax-for-fee reform effectively promoted green innovation, primarily through strategic rather than substantial innovation. Increasing fiscal support and addressing information asymmetry could further strengthen its impact on substantial green innovation. The study recommends optimizing the environmental protection tax system and strengthening incentives for local governments to foster green innovation.