Emissions Trading and Firm Innovation: Evidence from a Natural Experiment in China
48 Pages Posted: 17 Feb 2018
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: Suggested Citation