The role of carbon price signal in green innovation: Evidence from China

The carbon emission trading scheme (ETS), a market-based environmental regulation, is critical for in combating climate change in China. According to the Porter effect, ETS can promote green innovation, while the specific impact of carbon price on a company's green innovation, and the role of price signals, remain unclear. This study examines the impact of carbon price on green innovation, utilizing a dataset of A-share listed companies spanning from 2010 to 2020. The difference-in-differences estimation results demonstrate that carbon price significantly increases green innovation, promoting both invention patents and utility model patents. Our findings further indicate that moderating variables such as ESG disclosure, larger institutional investor shareholding, local environmental penalties, price stabilization mechanisms, and free quotas allocation can all amplify the constructive influence of carbon pricing on sustainable innovation. Moreover, heterogeneity analysis suggests that state-owned and large-scale companies, particularly those in the power sector and polluting sector, are more sensitive to price signals impacting green innovation. Additionally, we discovered a spatial externality of carbon pricing on green innovation in a radius ranging from 150 km to 300 km. This paper provides specific policy recommendations to stabilize the carbon price signal.