Emissions trading

Business

Paleontology

Economics

Natural resource economics

Political science

Ecology

China

Operations management

Porter hypothesis

Allowance (engineering)

Context (archaeology)

Environmental policy

Carbon market

Industrial organization

Greenhouse gas

Monetary economics

Crowding out

Biology

Nature Communications

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.

Low-carbon innovation induced by emissions trading in China