The impact of carbon emission trading policy on firms' green innovation in China

This study aims to examine the green innovation effect of the carbon emissions pilot policy in China. First, using the difference-in-differences method and regressions of instrumental variables using the data from Chinese listed firms, we verify that the policy promotes green innovation among regulated firms and is more pronounced among state-owned enterprises, firms in the eastern region, and those with lower financing constraints. Furthermore, this positive effect spreads downstream relative to the regulated firms through input-output linkages, but reduces green innovation to upstream firms. Accordingly, such diffusion of innovation is achieved through the price mechanism. The results necessitate the introduction of various derivatives to mobilize the market to reduce the speculative volatility of carbon prices. In addition, relevant supporting policies must be established to encourage corporate innovation to reduce the crowding-out effect owing to emission reduction and the nonmarket factors.