Will China's Carbon Emission Trading Regulation Really Decrease the Green Investment of Firms? A Microperspective on Corporate Governance

Although China initiated pilot carbon emission trading (CET) regulations in 2014, systematic research specifically examining their impact on corporate green investment expenditure (GIE) and the underlying mechanisms from an internal and external perspective remains limited. To this end, we conducted a quasinatural experiment to investigate how CET regulations affect the GIE of firms in eight high‐emission industries. Using a difference‐in‐differences (DID) approach and propensity score matching (PSM‐DID) on 4117 year‐firm observations of listed A‐share firms located in China's covered areas from 2010 to 2019, we found that CET regulations have a negative impact on firms' GIE. Further, from the microperspective of internal and external mechanisms of corporate governance, we also find negative moderators of corporate innovation capability and carbon trading market efficiency, respectively. The detailed heterogeneity impacts of the CET policy on the GIE of CET‐covered firms in different regions, industries, and ownership types are illustrated. This study systematically analyzes the impact of CET policy on GIE in high‐emission industries in China, focusing on the internal and external mechanisms of corporate governance. By doing so, it contributes to the literature in environmental economics and corporate green investment, offering new insights into the effects of regulatory policies on corporate behavior in high‐emission sectors. Enterprises should properly deal with the relationship between carbon emission quotas and green investment to realize a virtuous cycle of reasonable GIE and carbon emission reduction targets and ultimately achieve a win–win situation for both the economy and the environment.