Optimizing environmental regulation tools to accelerate the clearing of inefficient capacity and enhance industrial competitive advantage is a crucial pathway to resolving the structural dilemmas of “involutionary” competition and being “large but not strong” in China’s manufacturing sector. Taking the implementation of the Environmental Protection Tax Law as a quasi-natural experiment, this study employs a difference-in-difference-in-differences (DDD) model to examine the impact of the green tax system on corporate markups. The study finds that the implementation of the Environmental Protection Tax Law has significantly increased corporate markups, thereby enhancing the market competitiveness of manufacturing firms. The regulation primarily increases corporate markups through two channels: the “innovation compensation” effect and the “industry competition” effect. Furthermore, the law’s positive effect on markups is more pronounced for non-state-owned, mature-stage firms, and those with low financing constraints. At the industry level, it has accelerated the “survival of the fittest” process in heavily polluting sectors and effectively optimized resource allocation efficiency. The findings provide empirical evidence and practical insights for further advancing the market-oriented reform of environmental regulation, assisting manufacturing firms in their transformation and upgrading, and fostering a virtuous cycle between high-level environmental protection and high-quality economic development.