Emission trading, induced innovation and firm performance

Whether or not carbon emission policies can achieve the “double dividend” of carbon reduction and economic growth is vital for realizing sustainable development. This paper investigates whether a market-based carbon emissions trading scheme (ETS) can stimulate firm innovation and further achieve a win-win situation for environmental and economic performance. Based on panel data for listed firms from 2006 to 2017, we use a difference-in-differences model to investigate the effects of China's ETS pilot policy. The results show that first, the pilot ETS is related positively to firm environmental and economic performance and performs better in areas with more stringent emissions caps, and second, that the pilot ETS is positively correlated with firm innovation. Moreover, further analysis shows that innovation induced by the ETS significantly improves firm environmental and economic performance. These findings suggest that imposition of an ETS which induces innovation could achieve a win-win situation for environmental and economic performance and provides direct empirical evidence supporting the Porter hypothesis.