<p>A key tactic for achieving transformation and upgrading (TAU) is collaborative innovation; nevertheless, the outcomes of collaboration among various innovative entities will vary. Who do heavy polluting enterprises (HPEs) want to interact and work with to boost their total factor productivity (TFP) under the strain of the “environmental fee to tax” policy (ETP)? According to the study’s empirical test conducted on a sample of A-share industrial enterprises in Shanghai and Shenzhen between 2014 and 2022, ETP considerably increases HPEs’ TAU. And rather than using “industry-academia-research” (IAR) co-innovation, ETPs primarily use “parent-subsidiary” co-innovation (PS). Because ETPs will “crowd out” the resources of other technical innovation activities, they will also transfer current R&amp;D resources to PS by lowering green agency expenses and enhancing internal management capacities. Further analysis shows that when management is more environmentally conscious, executives have experience in research and development, have less information asymmetry, and are situated in areas with greater government environmental governance and weaker public environmental concern, ETPs are better equipped to use PS to positively impact TAUs. Furthermore, economic consequences analysis discovered that although ETPs are successful in lowering pollutant emissions through PS, they greatly expand the scope of CO₂ emissions. The study’s conclusions are useful for enhancing ETP’s institutional architecture and encouraging the economy and environment of China to expand in tandem.</p>