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<p>A well-designed environmental legislation system is a crucial institutional foundation&#xa0;for maintaining&#xa0;sustainable development, which has become a widespread consensus in the international community. Nevertheless, despite its critical policy significance, whether and in what way environmental legislation impacts corporate green innovation still remains a puzzle. Hence, exploiting the <i>Environmental Protection Tax Law</i>&#xa0;(EPTL) reform in China as an exogenous shock, this study investigates&#xa0;the causal impact of environmental legislation on green innovation among heavily polluting enterprises. We find&#xa0;that the EPTL reform&#xa0;significantly triggers green innovation of heavily polluting enterprises,&#xa0;and this causality&#xa0;remains valid following a nest of robustness and endogeneity tests. Moreover, the mechanism analysis uncovers that the reform&#xa0;mainly promotes green innovation through the back-forcing effect of enforcement rigidity and the compensation effect of government green subsidies, but the increase of green innovation depends on the crowding-out effect on other innovation activities. Furthermore, the policy effects are more prone for state-owned enterprises, large-scale enterprises, as well as enterprises with weak innovation ability, and the enhancement of green innovation beneficially stimulates corporate total factor productivity. Overall, our findings furnishes evidence for emerging economies like China to utilize the environmental legislation system to steer the economy towards a just green transition.</p>

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How does environmental legislation trigger green innovation? Quasi-natural experimental evidence from an emerging economy

  • 期刊论文

  • 发表日期：

    2026年4月16日

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  • Xinwei Qu,
  • Fengrong Wang,
  • William Mbanyele,
  • Hongyun Huang,
  • Tomas Balezentis

摘要

A well-designed environmental legislation system is a crucial institutional foundation for maintaining sustainable development, which has become a widespread consensus in the international community. Nevertheless, despite its critical policy significance, whether and in what way environmental legislation impacts corporate green innovation still remains a puzzle. Hence, exploiting the Environmental Protection Tax Law (EPTL) reform in China as an exogenous shock, this study investigates the causal impact of environmental legislation on green innovation among heavily polluting enterprises. We find that the EPTL reform significantly triggers green innovation of heavily polluting enterprises, and this causality remains valid following a nest of robustness and endogeneity tests. Moreover, the mechanism analysis uncovers that the reform mainly promotes green innovation through the back-forcing effect of enforcement rigidity and the compensation effect of government green subsidies, but the increase of green innovation depends on the crowding-out effect on other innovation activities. Furthermore, the policy effects are more prone for state-owned enterprises, large-scale enterprises, as well as enterprises with weak innovation ability, and the enhancement of green innovation beneficially stimulates corporate total factor productivity. Overall, our findings furnishes evidence for emerging economies like China to utilize the environmental legislation system to steer the economy towards a just green transition.