The effect of innovation pilot on carbon total factor productivity: Quasi-experimental evidence from China

Abstract

Since the policy design for carbon emission reduction must consider both the efficiency and the cost of emission reduction, improvement in carbon total factor productivity (CTFP) is widely regarded as an important economic path in reducing carbon emissions. With prefecture-level data in China from 2003 to 2016, this paper explores the role of innovation pilot on the CTFP using China's Innovative City Pilot (ICP) policy as a quasi-experiment. First, we construct a novel CTFP framework, that combines the non-parametric Luenberger productivity indicator with the biennial non-radial directional distance function, to take the slack issues and infeasibility problem into consideration. Next, with the staggered difference-in-differences model, we examine whether innovation can stimulate CTFP improvement. The results show that the ICP policy exerts a significant positive effect on CTFP, increasing cities' CTFP by 0.015 on average. Moreover, we identify five potential channels from both economic analysis and comprehensive factor decomposition: technological and low-carbon innovation, industrial upgrading, energy efficiency, carbon emission intensity, and efficiency change. These positive impacts are heterogeneous across different kinds of cities. Specifically, the effects of innovation are stronger in the eastern and central cities, large cities, and cities with tighter environmental regulations. Meanwhile, the political incentives analysis shows that in cities with higher political incentives, officials perform better in energy intensity reduction and CTFP improvement. This paper explores direct evidence for the innovation's effect on carbon productivity, which provides a novel perspective for improving carbon productivity and the future direction of innovation in China.