Possible green-technology innovation motivated by China’s pilot carbon market: new evidence from city panel data

Whether the carbon market can promote green technology innovation is a controversial topic because of an incomplete understanding of the mechanism and inconsistent datasets. This study first comprehensively explores the theoretical mechanism of the carbon market on green technology innovation from four aspects: the compensation effect, cost control motivation, crowding-out effect, and spillover effect. A sample of 209 cities in China is employed to empirically test the impact of China’s pilot carbon market on green technology innovation and its regional and industry heterogeneity using quasi-natural experiments. We found that China’s pilot carbon market has significantly promoted green technology innovation at the city level, especially in provincial capital cities, achieving a maximum effect two years after the shock. However, there is no significant spillover effect on the surrounding non-pilot cities, and Chongqing has realized the suppression of green technology innovation under the domination of the crowding-out effect. At the industry level, the pilot carbon market significantly promotes green technology innovation in the transportation, construction, chemical, and power industries but exhibits crowding-out effects in the steel industry. Finally, we propose policy implications for maintaining reasonable and stable carbon prices to stimulate compensation effects, scientifically determining the order of industry inclusion to avoid crowding-out effects, and accelerating inter-regional supply chains and technological cooperation to release spillover effects.Key policy insights:It is recommended to scientifically determine a reasonable carbon price range and introduce institutions, individuals, and other trading entities to improve the liquidity of the carbon market and the effectiveness of carbon prices.Considering the high cost triggered by the complex processes of the steel industry in developing countries, its inclusion may inhibit green technology innovation; thus, it is necessary to be cautious about including the steel industry in the carbon market.To build a carbon market in developing countries, the order of industry inclusion must be determined based on scientific calculations of the costs of green technology innovation in the industry. Avoid using self-declaration for carbon quota allocation and focus on improving national basic innovation capabilities to ensure the supply of green technology innovation.