Water Resource Tax in China Boosts Firm Productivity and Regional Ecological Performance

China's water resource tax pilot policy, expanded nationwide in 2018, appears to deliver a rare double dividend: higher productivity at water-intensive firms and measurable ecological improvements at the regional level, according to a new study published in Frontiers in Environmental Science. Economists Yake Wei of Wuhan University and Yang Wang of Nankai University analyzed the policy using firm-level and county-level data spanning 2012 to 2022, treating the 2018 tax expansion as a quasi-natural experiment to isolate its effects from other economic forces. The researchers applied a difference-in-differences approach, a standard econometric technique that compares outcomes before and after a policy change between affected and unaffected groups.

This design allows the authors to attribute observed changes to the tax policy itself rather than to broader trends in China's economy, water infrastructure, or environmental regulation. The central finding is that the Water Resource Tax Pilot Policy significantly improved the total factor productivity of water-intensive firms. The productivity effect was not uniform across the country.

The study found stronger improvements in cities with stronger industrial foundations, in the Yangtze River Economic Belt, in regions with relatively abundant water resources, and among larger listed firms. Environmental transparency played a notable role in shaping the outcome. The study reports that environmental performance disclosure strengthened the productivity effect of the tax.

Among the specific disclosure channels examined, green innovation and pollution treatment disclosure showed significant positive moderating effects, meaning that firms and regions with more visible commitments to these activities saw larger productivity gains. Environmental supervision disclosure, by contrast, did not show a significant moderating effect, indicating that the composition of environmental information matters, not merely its presence. At the county level, the ecological results were tangible.

The authors found that the policy reduced water consumption intensity and the area affected by soil erosion, while increasing sewage treatment capacity and investment in wastewater treatment. These are direct, measurable indicators of regional environmental performance, and their improvement alongside firm productivity suggests that the tax did not force a trade-off between economic and ecological goals in the regions studied. The dual outcome is significant because water scarcity is increasingly recognized as a constraint on sustainable development worldwide.

The study's design has important limitations that readers should keep in mind. The analysis covers the period from 2012 to 2022 and relies on firm-level and county-level data within China, so the findings speak most directly to that institutional and economic context. Difference-in-differences estimates depend on the assumption that affected and unaffected groups would have followed parallel trends absent the policy, and the authors' results are specific to the firms, counties, and time window examined.

The effects of the tax in other countries, or under different regulatory and market conditions, cannot be inferred directly from this evidence. Nevertheless, the authors conclude that water resource taxation can improve firm productivity while enhancing regional ecological performance, offering policy insights for advancing sustainable water governance in resource-constrained economies. For countries grappling with tightening water supplies, the Chinese experience suggests that pricing water realistically, combined with environmental disclosure that highlights green innovation and pollution treatment, may encourage firms to treat water efficiency as a source of competitive advantage rather than a regulatory burden.

Subject of Research: Economic and ecological effects of China's water resource tax pilot policy

Article Title: Does water resource taxation improve firm productivity and regional ecological performance? Evidence from China

Article References: Wei, Y., & Wang, Y. (2026). Does water resource taxation improve firm productivity and regional ecological performance? Evidence from China. Frontiers in Environmental Science, 14, 1965461. https://doi.org/10.3389/fenvs.2026.1965461

Image Credits: AI Generated

DOI: 10.3389/fenvs.2026.1965461

Keywords: water resource tax, China, total factor productivity, difference-in-differences, water scarcity, environmental performance disclosure, green innovation, soil erosion, wastewater treatment, water governance, quasi-natural experiment, environmental economics