Can carbon emission trading policy promote green innovation? The perspective of corporate operating difficulties

Abstract

The carbon emission trading (CET) policy is widely recognized as a significant measure for achieving sustainable development goals, but the literature and practices have shown mixed results regarding its effectiveness. To shed light on this issue, this study integrates institutional theory and the behavioral theory of the firm to explore the relationship between CET policy, green innovation, and operating difficulties. Using a sample of 136 Chinese power firms with 997 observations from 2011 to 2021, this study offers robust evidence that the CET policy positively influences green innovation. Notably, this influence is primarily achieved by mitigating factor-market distortion. Additionally, this study uncovers that the operating difficulties firms face suppress CET policy's influence on firms. This intriguing discovery highlights the boundary conditions that affect the policy effect. Furthermore, the moderate-mediation analysis shows that operating difficulties not only weaken the direct effect of CET policy on green innovation but also strengthen its indirect impact. Consequently, while the CET policy demonstrates a beneficial effect on green innovation, its total effect is still somewhat diminished by the presence of operating difficulties. This study offers a new explanation for the mixed findings in past literature and provides theoretical guidance for policymakers and managers to formulate sustainable development plans.