Emissions Trading and Firm Innovation: Evidence from a Natural Experiment in China

48 Pages Posted: 17 Feb 2018

See all articles by Shenggang Ren

Shenggang Ren

Central South University

Yucai Hu

Central South University, School of Business, Students

Jingjing Zheng

Central South University, School of Business, Students

Yangjie Wang

Central South University

Shanjun Li

Cornell University - School of Applied Economics and Management

Date Written: February 4, 2018

Abstract

This study investigates the impact of market-based environmental regulations on firm innovation by examining one of the first large-scale market-based regulatory attempts in a developing country, China’s sulfur dioxide emissions trading program. Based on the difference-in-differences method, triple differences, and a rich set of robustness checks, we find robust evidence that the emissions trading program has led to a significant increase in patents and environmental friendly production practices among regulated firms. Furthermore, our analysis shows that private firms are more responsive to the regulation than state-owned firms. Our findings suggest that market-based environmental regulations could incentivize regulated firms to innovate even in a weak institutional environment.

Keywords: emissions trading; firm innovation; environmental regulation

JEL Classification: O31, O44, Q55

Suggested Citation

Ren, Shenggang and Hu, Yucai and Zheng, Jingjing and Wang, Yangjie and Li, Shanjun, Emissions Trading and Firm Innovation: Evidence from a Natural Experiment in China (February 4, 2018). Available at SSRN: https://ssrn.com/abstract=3117929 or http://dx.doi.org/10.2139/ssrn.3117929

Shenggang Ren

Central South University ( email )

Changsha, Hunan 410083
China

Yucai Hu

Central South University, School of Business, Students ( email )

Changsha, Hunan 410083
China

Jingjing Zheng

Central South University, School of Business, Students ( email )

Changsha, Hunan 410083
China

Yangjie Wang

Central South University ( email )

Changsha, Hunan 410083
China

Shanjun Li (Contact Author)

Cornell University - School of Applied Economics and Management ( email )

405 Warren Hall
Ithaca, NY 14853
United States

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