Relationship between carbon emission trading schemes and companies’ total factor productivity: evidence from listed companies in China

The promotion of innovation by the market transaction mechanism is affected by the perfection of the market system, the support of government policies, and companies’ operational strategies. However, few empirical studies explore this subject. In this context, we investigated how China’s carbon emission trading (CET) policy promotes companies’ total factor productivity (TFP) from the perspective of operational strategies, technological innovation, and market environment. Using the micro-data of listed companies from the Chinese stock “A” markets, we employed the difference-in-differences method to identify the CET policy’s effect on companies’ TFP. The benchmark regression results reveal that the policy has significantly boosted companies’ TFP. Furthermore, the mechanism analysis shows that companies could enhance their TFP by promoting technological innovation instead of operational strategies. Meanwhile, the government can facilitate this improvement effect by optimizing the market environment. Moreover, the heterogeneity analysis of market failure demonstrated that it would affect the performance of the CET mechanism. Additionally, the CET scheme’s effect on companies’ TFP is heterogeneous in terms of industry, ownership, and region. The results suggest that the Chinese government should continue to improve the market and institutional systems, increase R&D technology subsidies for innovation activities, and enhance the level of financial development.