The effect of tax incentives on energy intensity: Evidence from China's VAT reform

This paper examines the effect of how firms' energy intensity is affected by China's value-added tax reform, which provides permanent tax incentives for firms to invest in fixed assets. Using the difference-in-differences method, a unique firm-level data set is employed to examine the impact of VAT reform on firms' energy intensity. The results show that VAT reform significantly reduces firms' coal intensity by approximately 9%. There is a greater decrease in coal intensity for large-scale firms, firms in energy-intensive industries, and private firms after the reform. By encouraging firms to invest in fixed assets and improve output, this reform achieves an energy-saving effect. Our results shed new light on the effect of tax policy and can help inform the development of energy policies.