Does the market-oriented environmental regulation promote firms’ technological innovation? Evidence from A-share listed companies in China

Launched in 2013, China’s carbon emission trading system (ETS) pilot program is often known as a successful example of developing countries using market mechanisms to accomplish environmental targets. However, few scholars have evaluated the economic incentives from the point of view of enterprise innovation behavior completely. Based on the financial records and patent statistics of China’s A-share listed companies, this paper uses China’s ETS pilot as a quasi-natural experiment to test. The results show that ETS has a significant incentive effect on enterprises’ R&D behavior, and the elastic coefficient between them is about 0.0333. Besides, the “relaxation of financing constraint” and “exerting cost pressure” are important transmission mechanisms for ETS to exert the incentive effect. Further analysis shows that ETS also has a significant effect on the R&D strategy and preference of enterprises, which significantly improves the quality of R&D and the enthusiasm of enterprises to carry out “green innovation.” In addition, we also find that the policy effect of ETS varies with different ownership and industries. Unlike the opponents of ETS, this paper believes that ETS can be used as a fundamental policy tool for developing countries to allocate environmental resources and control economic transition.