Does the emissions trading system promote regional green innovation? - Evidence from Chinese prefecture-level cities

The previous economic development model based on scale expansion has caused serious environmental pollution and resource constraints. Therefore, the development of green innovation with clean production and environmental protection as the core is particularly important. The emissions trading system (ETS) has been introduced in the process of market-oriented environmental regulation, and its impact on green innovation is of great significance. This paper examines the impact of the ETS on regional green innovation and its mechanism of action using the PSM-DID method based on data from 154 prefecture-level cities in China. The study finds that the ETS has a positive effect on improving green innovation, and this effect gradually increases over time. The impact mechanism test shows that the ETS promotes green innovation by increasing regional innovation R&D investment, and the regional business environment plays a positive role in this process. Heterogeneity tests show that the effects of ETS are more pronounced in more polluted regions and in regions with stricter environmental regulations. This paper provides theoretical support for the implementation of ETS in China and some developing countries, and empirical evidence and policy implications for the green innovation effect of ETS.