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| Can Market-Incentive Environmental Regulation Promote Corporate Innovation？ A Natural Experiment Based on China's Carbon Emissions Trading Mechanism |
| HU Jun, HUANG Nan, SHEN Hongtao
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| School of Management, Hainan University; School of Accounting, Nanjing Audit University;School of Management, Jinan University |
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Abstract “Socialism with Chinese characteristics” has entered a new era, in which the major social contradiction is between people's growing needs for a better life and the problem of inadequate and unbalanced development. China must address the current reality of severe environmental pollution as the same time as alleviating these major social contradictions. Environmental problems have many externalities, and thus environmental pollution control relies heavily on environmental regulation to internalize external costs. The “Porter hypothesis” suggests that reasonable and strict environmental regulation can promote enterprises' technological innovation; the resulting first-mover advantage can compensate for the costs of environmental regulation and achieve a win-win situation. Based on this argument, formulating and implementing appropriate and effective environmental regulation policies that realize the Porter hypothesis have become a key issue in the process of building socialism with Chinese characteristics in the new era.
Depending on the regulatory bodies and mechanisms involved, environmental regulation can be divided into two types: command control and market incentive. Since the beginning of the 21st century, market-incentive environmental regulation policies have been gradually implemented in China. Around 2002, China tentatively established an emissions trading policy mainly for sulfur dioxide emissions. In June 2013, China pioneered the introduction of a carbon emissions trading mechanism originating in the developed capital markets of Europe and the United States, and it successively established carbon trading exchanges in seven regions. At the end of 2017, the National Development and Reform Commission announced an official nationwide launch of a unified market for carbon emissions trading.
This gradual development of a carbon emissions trading mechanism indicates that China's environmental regulation system is gradually shifting from command control to market incentives. This paper uses data on Chinese listed companies from 2011 to 2016, based on the analytical framework of Porter hypothesis, and tests whether the carbon emissions trading mechanism can promote technological innovation. This paper finds that the implementation of carbon emissions trading has significantly promoted technological innovation in regulated enterprises. However, the positive effects of carbon emissions trading on firm innovation are constrained in two aspects. First, the positive effects of carbon emissions trading on the technological innovation of enterprises is stronger if the carbon market is more liquid. Second, the positive effects decrease if the industry in which the company is located is less competitive and the concentration of customers or suppliers is lower.
The main contributions of our study are as follows. First, based on the Chinese institutional background, relevant studies have paid more attention to the policy effects of command control environmental regulation. In contrast, this paper focuses on the implemented carbon emissions trading mechanism and tests whether market-incentive environmental regulation can achieve the Porter effect in China. Second, based on the inherent design differences between the seven Chinese carbon trading markets, our paper finds that liquidity constraints in a carbon market will reduce the positive impact of carbon emissions trading on enterprise technology innovation. Third, the relationship between environmental regulation and enterprise technology innovation is a matter of controversy. From an examination of the cost transfer ability of enterprises under environmental regulation, this paper finds that the positive impact of carbon emissions trading on enterprise technology innovation mainly affects enterprises with relatively low cost transfer ability.
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Received: 07 January 2019
Published: 10 February 2020
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