China’s pilot carbon trading policy aims to force relevant enterprises to implement green technological innovation and then reduce carbon emissions in an efficient way. However, the green innovation effect of the carbon markets may differ in regions, depending on the specific economic structure and program design. Therefore, we try to estimate the heterogenous impacts of emissions trading on green technology innovation in several pilots through the synthetic control method and mediating effect model, based on the provincial panel data from 2000 to 2019. Our empirical analysis reveals the heterogeneous green innovation effects among the regions with diversified scheme designs. In specific, this market-based instrument helps to improve green innovation only in Hubei and Guangdong with active trading platform. In contrast, it has little effect in other regions because of the loose emissions cap related to the economic slowdown or the unnecessary inclusion of service sectors. In addition, the central findings remain robust when PSM-DID model is applied. The mechanism analysis suggests that the success in these regions may be related to the distinctive features of the market, including active transaction of carbon allowances and focus of regulation capacities on the energy-intensive emitters. Furthermore, the choice in benchmarking allocation approach also plays a positive mediating role between ETS and green innovation. The results of this paper offer some key insights into improving the policy design of a nationwide carbon trading market in China. This national-level market should include emissions from primary energy consumption in major energy-intensive industrial sectors but take no account of secondary energy consumption in non-industrial sectors. Policymakers should appropriately tighten the emissions control targets and strengthen the supervision mechanism for the incumbent firms’ performance to increase the liquidity of the carbon market and then provide effective incentives and a stable market environment for the emitters’ green technology innovation.

Emissions trading; Green innovation; Regional heterogeneity, Synthetic control method; Mediating effect; Pilots in China