Not all innovations are created equal: environmental taxes, strategic R&D accounting, and green patent quality in China

Abstract

This article examines whether environmental taxation induces substantive green innovation or strategic compliance. Using China's 2018 Environmental Fee-to-Tax Reform as a quasi-natural experiment, I study how heavily polluting listed firms adjust their R&D accounting choices and green patenting behavior. I construct an entropy-balanced DID design using firm-level pre-treatment covariates from 2013 to 2017 and analyze Chinese A-share listed firms from 2013 to 2024. The results show that the reform increases R&D expensing while reducing capitalized R&D and the R&D capitalization ratio, suggesting a shift in R&D recognition toward expensing. On the innovation-output side, the reform increases total green patent applications, but the increase is concentrated in green utility model patents rather than green invention patents. The asymmetric patent-quality pattern is robust to PPML, inverse hyperbolic sine transformations, and extensive-margin models. Additional tests show that the results are not driven by MD&A R&D disclosure selection or sample-composition differences. Ownership heterogeneity reveals that SOEs exhibit stronger increases in R&D expensing and utility model patenting, consistent with symbolic compliance, whereas private firms mainly reduce capitalized R&D, consistent with defensive contraction. Overall, the findings suggest that environmental taxation can increase measured green innovation without generating a robust improvement in substantive innovation quality.