False booms in green innovation: evidence from China’s carbon emissions trading and smart city dual-pilot policy

This study investigates an unintended consequence of policy mixes: the emergence of ‘Green Innovation Bubble’ (GIB). Employing a quasi-experimental difference-in-differences (DID) design on panel data from China’s A-share listed manufacturing firms (2009–2023), we examine how the combined pressure of the dual-pilot policy of Carbon Emissions Trading Pilot (CETP) and Smart City Pilot (SCP) induces GIB. We find that the dual-pilot policy significantly triggers GIB by reducing corporate agile responsiveness, weakening their emphasis on green strategy, and diminishing substantive environmental actions, accompanied by heightened corporate short-termism, distorted managerial incentives, and intensified perceived market pressure. Importantly, the policy mix presents a greater risk of triggering GIB compared to the single-pilot policies. This effect is more pronounced in SOEs, high-tech firms, and firms facing lower financing constraints. Our findings contribute to an emerging theme at the intersection of environmental policy, innovation, and corporate governance, providing theoretical insights for regulatory authorities to refine policy design.