Green taxation, regional green development and innovation: Mechanisms of influence and policy optimization

Global climate change necessitates a transition to a green low-carbon economy. Green taxation, a key fiscal strategy for this transition, has been primarily studied at the macroeconomic level. This paper addresses a gap in the literature by examining green taxation's effects on regional green development and innovation in China. The research questions focus on how green taxation influences regional green growth and innovation, and the specific mechanisms involved, particularly considering potential negative impacts from resource reallocation. The study's importance lies in providing a more nuanced understanding of green taxation's effects beyond macroeconomic impacts, offering tailored policy recommendations for effective implementation in China and informing similar initiatives globally. The existing literature predominantly focuses on macroeconomic impacts and environmental quality, neglecting the detailed mechanisms and potential negative effects on regional innovation through resource allocation and crowding-out effects. This study bridges this theoretical gap by incorporating Resource-Based View (RBV), innovation system theory, and technological lock-in theory to analyze the complex interplay of green taxation, resource allocation, and innovation.

The literature review clarifies the definition and classification of green taxes, differentiating between narrow (focused on pollutant emissions) and broad (encompassing economic, ecological, and social factors) approaches. Existing research primarily highlights the positive impacts of green taxation on green development, citing studies that demonstrate its effectiveness in promoting environmentally friendly technologies, reducing emissions, and stimulating green investments. However, the literature lacks comprehensive examination of potential adverse effects, especially concerning the resource crowding-out effect. The review examines theories, such as RBV, innovation systems theory, and technological lock-in theory, which suggest that resource reallocation due to green taxation may negatively impact innovation in non-green sectors. The review summarizes existing research, highlighting the positive impact of green taxation on ecological progress, including reducing pollution and promoting green technologies. There is a lack of research on the negative impacts of green taxes on resource allocation. This paper aims to fill this gap in the literature.

The study uses panel data from 30 Chinese provinces over the period 2004-2021. Green taxation is categorized into narrow (environmental protection tax) and broad (environmental protection tax plus other environment-related taxes) categories. Green development is measured using green total factor productivity (GTFP) calculated with the SBM-DDF model. Regional comprehensive innovation capacity is measured using data from the China Regional Innovation Capability Report. A two-way fixed-effects model is employed to analyze the relationships between green taxation, green development, and innovation. The study incorporates lagged variables (one and two periods) and squared terms of green taxes to capture potential non-linear relationships and time lags. Control variables include education level, openness degree, economic development, foreign direct investment, technological innovation, labor force, and industrial structure. All data undergoes logarithmic transformation. The study uses the two-way fixed effects model and mediation effect analysis. Heterogeneity analysis is conducted to examine regional variations and differences in innovation capacity. A three-step regression method is used for mediation effect analysis and robustness tests are performed using substitution models and an alternative green tax metric (total amount instead of intensity).

The empirical analysis reveals that: 1. Green taxation, both narrow and broad, significantly hinders the overall innovation capacity of enterprises. 2. The impact of green taxes varies regionally. In eastern regions, green taxes promote green development, while in central and western regions, the impact is either weak or negative. Narrow green taxes hinder green innovation in eastern and central regions but promote it in the west. Broad green taxes enhance green innovation in eastern and central regions but not in the west. 3. Narrow green taxes have a delayed but positive effect on regional green development and stimulate green innovation. 4. A non-linear U-shaped or inverted U-shaped relationship exists between green taxes and green innovation, green development, and overall innovation capacity. 5. Over time, the impact of green taxes on innovation capacity and regional development becomes more rationalized. 6. While promoting green development, green taxes can lead to resource misallocation, reducing overall regional innovation capacity. The results show that narrow green taxes positively impact green development after a lag, positively impacting green innovation initially and negatively later. Broad green taxes do not have a significant impact on green development or innovation but consistently negatively affect innovation capacity.

The findings address the research questions by demonstrating that green taxation's impact on regional green development and innovation is complex and region-specific. While green taxes can promote green development and innovation, they also carry a risk of negatively affecting overall innovation capacity due to resource crowding-out effects. The non-linear relationships highlight the importance of optimal tax design. Regional variations emphasize the need for targeted policies. The results contribute to the literature by offering a more comprehensive understanding of green taxation's multifaceted effects, going beyond macroeconomic analyses to encompass regional dynamics and potential negative consequences. The study's implications for policy design and implementation are substantial, emphasizing a balanced approach that considers regional context and potential trade-offs between environmental goals and overall innovation.

This study demonstrates the complex relationship between green taxation, regional green development, and innovation. Green taxes can promote green development and innovation, but also negatively impact overall innovation capacity due to resource reallocation. Regional variations highlight the need for context-specific policies. Future research should focus on optimizing tax design, analyzing temporal dynamics, and exploring interactions between policies and market mechanisms.

The study's limitations include the reliance on data from China, limiting the generalizability to other contexts. The use of specific metrics for green development and innovation may also affect the results. Further research could explore alternative methodologies and broader geographic scopes.