Low-carbon innovation induced by emissions trading in China

TLDR

Emissions trading schemes are adopted worldwide for carbon mitigation, yet their effectiveness depends on design and context; China’s seven regional pilots, preceding its world‑largest ETS, have been only indirectly examined. This study provides firm‑level evidence of low‑carbon innovation effects from China’s pilot ETS using patent data and a quasi‑experimental design. The analysis employs a quasi‑experimental design on patent data from pilot ETS firms, while China’s national market uses a rate‑based allowance allocation. Pilot ETS firms in China increased low‑carbon patents by 5–10%, contributing about 1% of regional low‑carbon patent growth, without hindering other innovation, and the effect is driven by mass‑based allowance allocation rather than permit price, auction, or firm characteristics.

Abstract

Abstract Emissions trading scheme (ETS) has been adopted by an increasing number of countries and regions for carbon mitigation, but its actual effect depends on specific program design and institutional context. Before launching the world largest ETS, China experimented with seven independent regional pilots, whose effects are only indirectly explored. Here we provide firm-level evidence of the innovation effect directly from China’s pilot emissions trading, based on latest patenting information and a quasi-experimental design. China’s pilots increase low-carbon innovation of ETS firms by 5–10% without crowding out their other technology innovation. The increase from ETS firms accounts for about 1% increase of the regional low-carbon patents, while a similar increase from large non-ETS firms is also induced by the ETS. Most importantly, the effect is not associated with permit price, auction, or firm characteristics, but is driven by mass-based allowance allocation. A rate-based approach, however, is adopted by China’s national market.