The impact of China’s emissions trading scheme on corporate green innovation

This study investigates the impact of China’s emissions trading scheme (ETS) on the level of green innovation among Chinese listed companies. The results derived from the staggered difference-in-differences model indicate a substantial decrease in companies’ green innovation after the implementation of China’s ETS pilot policy. The baseline regression results remain unchanged after a battery of robustness checks.

Cross-sectional analyses reveal that after the implementation of the ETS, companies with older executives are more inclined to reduce their level of green innovation. Moreover, private companies with higher financial constraints have experienced more significant decrease in their level of green innovation after the implementation of the ETS.

This study further investigates the underlying mechanisms through which the ETS influences corporate green innovation. The findings show that the ETS has significantly reduced enterprises’ financial liquidity and profitability, thus leading to a decline in the level of green innovation of enterprises.

More worryingly, additional analysis indicates that the decline in corporate green innovation brought about by the ETS has significantly increased corporate carbon emissions.

This study contributes to the existing literature from two perspectives. First, most of the current literature explores the positive side of ETS on corporate green performance. This study, however, finds that implementing the ETS may also exert environmental pressure on companies, forcing companies to reduce green innovation to maintain normal operations. Second, this study provides practical guidance for regulatory authorities. The primary regulatory attention should be directed towards companies that managed by older executives with higher financial constraints and non-state ownership to enhance the effectiveness of the ETS implementation and so to achieve corporate sustainable development.