Environmental Protection Tax Law on the synergy of pollution reduction and carbon reduction in China: Evidence from a panel data of 107 cities

Many of air pollutants and carbon dioxide (CO2) have common emission sources, determining that they should be controlled collaboratively rather than treated separately. To protect the environment, China implemented the Environmental Protection Tax (EPT) Law on January 1st, 2018. Yet CO2 is not included in the tax category, whether the EPT Law can achieve coordinated control of air pollutants and CO2 emissions remains unclear. This paper examines the role of the EPT Law in the synergy of pollution reduction (PR) and carbon reduction (CR) by employing the Difference-In-Differences (DID) model on China's 107 cities from 2015 to 2019. We find that the policy, although not including CO2 as one taxable item, has significantly increased the synergistic reduction degree of “sulfur dioxide (SO2)-CO2” by 41%, and the synergistic reduction degree of “particulate matter (PM)-CO2” by 39%. Moreover, strengthening environmental protection supervision, optimizing energy structure and improving green technology innovation are main transmission mechanisms through which EPT Law affects the synergy degree of PR and CR. Further, the heterogeneity of policy effects caused by different magnitudes of tax rate increase is unveiled, showing that the policy effects on the synergy of PR and CR are most significant in regions that raised the SO2 tax rate beyond 2.4 Yuan and raised the PM tax rate between 2.4 Yuan and 6 Yuan. This paper suggests that the EPT Law serves a critical function in enhancing the synergy of PR and CR, and thus the synergistic effect of air pollutants reduction on carbon reduction should be considered when formulating possible carbon tax rate in the future.