Spatial threshold effect of tax competition on carbon dioxide emissions intensity in China

Tax policymaking in China has created conditions for local governments to strategically leverage tax policies (e.g. tax preferences, tax collection and management efficiency, and fiscal subsidies) to have carbon dioxide (CO2) emissions peak before 2030 and carbon neutrality before 2060. By constructing an endogenous growth model with tax competition, capital mobility, technological innovation, and carbon emissions, this study investigates how tax competition is influencing firm-level behaviour and providing climate-relevant policy implications. It has theoretically demonstrated that this effect depends on technological innovation and operates through the capital mechanism. This finding is empirically confirmed in this analysis using a spatial panel threshold model with fixed effects designed to fit a balanced provincial panel dataset in China over the period 2005-2018. The main results are fourfold. First, provinces with similar carbon emissions intensity (CEI) tend to cluster spatially. That is, a province with a high CEI usually has neighbours with high CEIs. Second, a threshold effect is confirmed, revealing that higher tax collection and management efficiency (lower tax competition) decreases CEI if technological innovation is below the threshold value; otherwise, lower tax competition usually increases CEI. Third, capital mobility is a potential mechanism through which tax competition influences CEI. Specifically, provinces with a high level of technological innovation attract more knowledge- and technology-intensive firms and crowd out firms with low innovation capacities, potentially reducing local CEI. Finally, as indicated in our spatial heterogeneity analysis, the effect of higher tax competition decreasing CEI is only observed in the western region. These findings suggest the need for cross-provincial collaboration in developing taxation policies to ensure these policies help to advance the transition to a low-carbon economy and raise capital entry barriers for high-carbon emission projects in provinces with a low level of technological innovation. Key policy insights: Cross-provincial taxation policies can be designed to encourage the transition to a low-carbon economy due to spatial agglomeration and heterogeneity of carbon emissions intensity (CEI). The focus of tax competition should be knowledge- and technology-intensive firms with a high level of technological innovation. Tax competition can be relaxed in China's provinces with a low level of technological innovation to reduce CEI; otherwise, it should be strengthened. The central government in China could usefully raise capital entry barriers for high-carbon emission projects in provinces with low levels of technological innovation and guide local governments to attract more projects with high returns and low carbon emissions to avoid a race to the bottom.