Environmental fee to tax reform and total factor carbon productivity of heavily polluting firms in China.

China's pollution discharge tax reform, which replaced the pollutant emission fee system with a standardized environmental tax, provides a quasi-natural experiment to examine the effects of market-based environmental regulation on firm performance. Using panel data on A-share listed firms in heavily polluting industries from 2012 to 2021, this study investigates the impact of the environmental fee to tax reform on total factor carbon productivity. Enterprise total factor carbon productivity is measured using a slacks-based measure global Malmquist-Luenberger index, and policy effects are identified through a difference-in-differences framework. The results show that the reform significantly improves total factor carbon productivity among heavily polluting firms. Parallel trend tests and a series of robustness checks, including trimming extreme values and placebo tests, support the validity of the findings. Heterogeneity analysis indicates that the effects are stronger for large firms, firms located in western China, and firms in the utilities sector. Mechanism analysis suggests that the reform promotes environmental investment and increases pollution-related discharge and compliance costs, thereby strengthening incentives for cleaner production and efficiency upgrading. Overall, the findings provide firm-level evidence that environmental taxation facilitates green transformation and high-quality development in pollution-intensive industries.