Environmental Protection Tax and Green Innovation: The Mediating Role of Digitalization and ESG

In the wave of the digital economy and “carbon neutrality”, digital governance and green governance are effective measures for firms to achieve sustainable development goals. The purpose of this paper is to examine the impact of environmental protection tax (EPT) policies on green innovation (GI) using panel data from Chinese A-share listed firms from 2010 to 2022. Using fixed effects models, we find that EPT significantly promotes firms’ GI. Mechanism tests reveal that digitalization and environment, social, and governance (ESG) performance both mediate the relationship between EPT and GI. Further analysis shows that government subsidies and analyst coverage both strengthen the effect of EPT on GI, while supplier concentration exerts a reverse moderating influence. Economic outcome tests confirm the multiple impacts of EPT in improving total factor productivity (TFP) and economic performance through GI. Our findings contribute to fulfilling the extant literature gap on the relationship between EPT and GI, and provide practical insights for firms engaged in digital and green governance.