Carbon Price, Innovation, and Firm Competitiveness

Using China’s regional carbon market pilots as a natural experiment, we examine the impacts of the emission trading system (ETS) on firms’ innovation and competitiveness. We show that the ETS directs innovation towards climate-friendly technologies; it increases the climate patent ratio by 2.1 percentage points, equivalent to a 20.5 percent increase in the total climate patent counts. We find no evidence that the ETS harms firms’ profitability and productivity, partly due to the beneficial effect of climate innovation. We demonstrate early climate innovators can gain competitive advantages after the ETS launch. The climate patents accumulated before the ETS enable regulated firms to improve total factor productivity and financial performance