Why the effectiveness of ETSs on green innovation differs? The perspective from price stabilization mechanisms

Key policy elements may affect the effectiveness of an emissions trading system (ETS). In this paper, we find that price stabilization mechanisms (PSMs), one of a set of key policy elements aiming at supporting increasing and stable carbon prices, may affect the performance of ETS in terms of green innovation. By using the case of China’s regional carbon market pilots and data of listed firms, we found that pilots adopting both price-based and quantity-based PSMs significantly induced green innovation activities in covered firms, while a single type does not guarantee the effect. PSMs help to do so by lifting carbon prices and reducing firms’ perceived uncertainties. The above effects would be enhanced in firms with lower asset reversibility, lower ability of cost passthrough, higher ability of innovation, and state-owned enterprises.