Green Taxes, Greener Firms? Institutional Influences on Corporate Environmental Responses

Abstract

ABSTRACT Existing literature has paid limited attention to whether higher environmental taxation, measured as environmental tax revenue intensity, is associated with greater corporate environmental sustainability and whether the quality of national governance complements or substitutes for environmental taxation in shaping firms' environmental sustainability outcomes. To address this, we utilize a global sample of publicly listed companies covering the period from 2002 to 2020 and a sample of 51,407 firm‐year observations from 7360 companies across 48 countries. We find that environmental taxation per se is not sufficient in stimulating firms for greater environmental sustainability. It needs to be supported by national governance mechanisms such as control of corruption, government effectiveness, rule of law, absence of violence and political instability, regulatory quality, and voice and accountability. However, environmental innovation outcome is contingent upon the innovative eco‐system and financial market development of the country. Furthermore, we find that environmental tax is likely to be translated into improved environmental score in developed countries and countries with common law systems. Overall, study findings support the argument that broader institutional development is important in contributing to firm‐level resource use, emissions, and eco‐innovation outcomes.