How do capital tax incentives affect carbon productivity? Evidence from China’s VAT reform

Abstract

China launched a pilot value-added tax reform in 2004 that allowed eligible firms to deduct input VAT on purchases of fixed assets, thereby lowering the user cost of capital. Using firm-level panel data from 2001 to 2008 and a difference-in-differences design, we find that the reform increased treated firms’ carbon productivity by approximately 28%. The effect emerged gradually and peaked in 2006. Mechanism eviden.ce suggests that the improvement was more closely associated with higher R&D investment and gains in total factor productivity than with simple input expansion. The results suggest that general-purpose investment policies can deliver climate co-benefits by promoting innovation and resource efficiency, even without explicit environmental objectives.