Environmental consequences of fair competition: Evidence from China's corporate income tax merger policy

Abstract

An institutional environment of fair competition helps to enhance the economic performance of enterprises, while its potential environmental effects are often ignored. In 2008, China implemented a unified corporate income tax merger policy that set the same tax rate for domestic and foreign-invested enterprises to make the domestic enterprises competitive with foreign-invested enterprises in a fair tax environment. Taking this policy as a quasi-natural experiment, we conduct a difference-in-differences estimation to identify the impact of a fair competition environment on firm-level SO2 emission intensity. The results show that the fair competition environment significantly reduces the SO2 emission intensity of domestic enterprises in China. This finding also remains robust after considering factors such as various settings, metrics, and potential impacts. The possible mechanisms through which this policy shock affects firms' SO2 emission intensity are manifested by reducing corporate tax burdens, alleviating corporate financing constraints, promoting industry competition, elevating the production capacity of enterprises, and reducing the amount of pollutants generated. We also find firm-level SO2 emission intensity responses to fair competition vary with firm ownership, location, and industry pollution intensity. Hence, improving conditions of fairness in the market can bring about a win-win result for both the economy and the environment.