The effects of capital-biased tax incentives on firm energy intensity: Environmental dividend or consequence?

Capital and energy are essential input factors in the production and operation of firms, and they are closely interconnected. Nudging firms to improve energy performance during capital investment is crucial for attaining green competitiveness. Nonetheless, little is known about how capital-biased tax incentives affect firm energy performance in the process of encouraging firms to update or expand fixed assets. To fill this critical gap, this paper leverages the 2014 and 2015 accelerated depreciation policy for fixed assets as quasi-natural experiments to investigate the impact of capital-biased tax incentives on firm energy intensity. This study uses information from a unique dataset of Chinese firms, and the staggered difference-in-difference strategy is constructed to address identification challenges. The findings of this paper are as follows: (1) The accelerated depreciation policy for fixed assets significantly increases firm energy intensity by approximately 11.2%. A series of validations reinforce the robustness of this result. (2) Restructuring energy use and the factor substitution of energy for labour are the main channels through which the accelerated depreciation policy for fixed assets increases firm energy intensity. (3) The accelerated depreciation policy for fixed assets has a more remarkable effect on the energy intensity enhancement of small-scale firms, capital-intensive firms, and firms in energy-endowed regions. These conclusions support shaping policy options moderately by coordinating tax incentives and government regulation as key factors in promoting sustainable firm development. Overall, this research provides empirical evidence regarding the micro-environmental consequences of capital-biased tax incentives and offers valuable insights for enhancing corporate energy performance.