Investigating the role of emissions trading policy to reduce emissions and improve the efficiency of industrial green innovation

Rapid economic development usually leads to serious environmental pollution problems. In order to solve the problem of pollutant emission in sustainable industrial development, it is urgent to examine the implementation effect of emissions trading policy (ETP) and its impact on green industrial development. This study adopts China's ETP as a case study and selects provincial panel data from 2004 to 2018. We first use a non-radial, non-directed, slack-based measure-directional distance function (SBM-DDF) to measure industrial green innovation efficiency. Then we use a difference in differences (DID) model to empirically test the emissions reduction effect of China's policy and whether it promotes industrial green innovation. Thereafter, results show that: (1) the ETP reduces sulfur dioxide (SO2) emissions indicating the effectiveness of the policy; (2) the policy significantly improves industrial green innovation efficiency, meaning it promotes the sustainable development of the economy; (3) heterogeneity analysis highlights that ETP produces greater benefits for the most polluted regions of China which have more strict environmental regulations. The study examines the effect of emissions trading policy implementation from a new perspective. The study also provides a reference point for China to further refine its policy mechanisms and for other countries to formulate suitable ETP.