The role of carbon emission trading system in driving firm-level innovation and cross-region pollution

Amid climate change, emissions trading systems (ETS) aim to balance environmental regulation and economic growth, but two key questions persist: Do they effectively stimulate firm-level carbon innovation, and do they inadvertently induce cross-regional pollution transfer? This paper uses China's ETS as a quasi-natural experiment, focusing on A-share listed firms in pilot regions and employing the difference-in-differences method. The findings show that the ETS promotes carbon innovation among pilot firms while driving them to establish subsidiaries in non-pilot regions, causing pollution transfer. Heterogeneity analysis indicates that ETS design features (allocation methods, carbon prices, offset ratios, enforcement stringency) and firm characteristics (fixed asset proportion, financial constraints, political connections) significantly affect policy outcomes. To enhance ETS effectiveness, optimize market design through scientific quota allocation, price controls and offset reforms and establish cross-regional collaborative oversight to spur carbon innovation and curb pollution leakage.