Taking advantage of the quasi-natural experiment generated by the adjustment of pollution levy standards in different Chinese provinces and utilizing detailed prefecture-level data from 2004 to 2014, we rigorously examine the effect of the increase in pollution charges on green innovation by adopting the difference-in-differences method. We find that the increase in the pollution levy standards can significantly promote regional green innovation, with the magnitude of being nearly 10%, as compared with their control group. Additionally, we further find that the positive effects tend to be reinforced by financial development and stringent environmental regulations. Particularly, the stimulating effects are mainly reflected in green invention patents, rather than utility model patents. Finally, this reform promotes green innovation in the central region, but has no effect on the eastern and western regions. Our study suggests that Chinese government should set different pollution levy standards for enterprises in different regions, rather than a one-size-fits-all standard.
JEL classification H23; O31; Q52; Q58