The Impact of Export VAT Rebate Reduction on Firms’ Pollution Emissions : Evidence from Chinese Enterprises

This paper investigates firm-level environmental responses to China’s export value-added tax (VAT) rebate reduction policy launched in 2007. Using the matched dataset of firms’ production, pollution, and export structure, we employ a difference-in-differences a strategy that exploits variations in a firm’s pre-policy exposure to products targeted by the policy. Empirical analysis shows that exports of polluted products are reduced for affected firms, while the total emissions of SO2 and COD of are not significantly influenced by the policy. Further decomposition suggests that the rebate reduction policy raised treated firms’ pollution intensity (“technique effect”) and reduced their gross output (“scale effect”) relative to non-treated firms, resulting in an insignificant effect of the rebate reduction policy on firms’ total pollution emissions. These results are robust under a battery of robustness checks. Tests for mechanism reveal that firms’ financial constraints become tighter if affected by the rebate reduction policy, which is evidenced by reduced sales, revenues, profits, and TFP. This further translates into lowered purchases in environmentally friendly technologies and worse capacity to adopt clean production practices, which account for increased pollutant emission intensities following the export VAT rebate reduction policy