China’s Green Tax Reform Triggers Carbon Leakage Across Provinces

The analysis by Xinran Li and Tong Zhang, published in Economies, treats the 2018 transition from discharge fees to a formal tax system as a quasi-natural experiment. By examining 480 observations across 30 provinces, researchers found that provinces raising their tax standards saw significant declines in per-capita emissions and carbon intensity. Where tax intensity exceeded the national median, reductions were twice as deep, suggesting that financial pressure serves as an effective threshold for forcing industrial shifts toward greener technology and energy conservation.

However, the study highlights a phenomenon of local emission reductions paired with neighboring increases. Using spatial modeling, researchers observed that for every local gain, neighboring provinces often experienced a surge in emissions, with positive coefficients reaching up to 0.394. This suggests that the policy, while locally effective, can lead to carbon leakage rather than a net decrease in national output. The findings indicate that the tax reform currently functions better as a localized constraint than as a uniform national strategy.

To address this, the authors argue against a blanket tax increase, which ignores regional industrial differences. Instead, they propose that tax authorities implement stronger information-sharing systems to harmonize enforcement. Ultimately, they suggest that including carbon dioxide as a formal taxable item and expanding the tax scope to include soil and biological contamination could provide the consistent pressure needed to prevent companies from simply outrunning environmental regulations by crossing provincial borders.