Carbon Markets 2.0 and Firms: Digital Technology's Role in Enhancing Productivity Under Emission Trading Schemes

ABSTRACT This study empirically investigated the influence of the carbon trading mechanism (CTM) on firms' total factor productivity (TEP). It also examined the mediating roles of digital technology, ESG performance, and innovation attention. The study used a sample of 3209 manufacturing enterprises listed on the Shanghai and Shenzhen A‐share markets from 2010 to 2023. A difference‐in‐differences (DD) approach was employed by treating the implementation of carbon trading pilots as a quasi‐natural experiment. Digital technology was examined from two dimensions: digital technology management (DTM) and digital technology innovation (DTP). The results showed that the CTM significantly increased enterprises' TEP by 7.5%. Further analysis indicated that carbon trading improved TEP by incentivizing firms to strengthen both DTM and DTP. The results also show that a strong focus on ESG performance and innovation may inhibit the impact of CTMs on enhancing enterprises' TEP. The heterogeneity analysis revealed that state‐owned enterprises and low‐carbon‐emission enterprises were more responsive to the CTM. The results provide valuable insights for businesses pursuing sustainable growth strategies in response to carbon pricing policies and deepen our understanding of how market‐based environmental regulation can boost productivity through digital transformation.