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How can market-based environmental regulation drive industrial transformation upgrading? Evidence from China's carbon emissions trading pilot policies

Author

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  • Luo, Shuangcheng
  • Cai, Xiaoqing
  • Qian, Qiulan
  • Xia, Hongmei

Abstract

Under the background of dual-carbon target, market-based environmental regulation influences the production decision and resource allocation of enterprises, and profoundly affects industrial transformation and upgrading. Based on the carbon emissions trading pilot policy, this paper constructs difference-in-differences model to evaluate the impact of market-based environmental regulations on industrial transformation and upgrading. The results show that market-based environmental regulation is conducive to promoting industrial transformation and upgrading, and it still holds under a series of robustness tests such as placebo test and PSM-DID. The mechanism analysis finds that market-based environmental regulation promotes green innovation and accelerates technology diffusion, renovating and upgrading equipment, and forcing low value-added and high-pollution industries to climb along the middle and high end of the value chain. It is further found that market-based environmental regulation has a greater impact on industrial transformation and upgrading in resource-oriented cities and western regions. The digital economy has an important moderating effect on the impact of market-based environmental regulation on industrial transformation and upgrading, mainly by reducing information asymmetry and improving the enforcement of environmental regulation policies. Finally, the analysis of economic consequences found that market-based environmental regulation for industrial transformation and upgrading can promote regional “energy saving and carbon reduction” and significantly improve regional environmental performance. Therefore, we should expand the scope of carbon emissions trading market, promote digital innovation to create a safe and controllable digital industrial system, and promote industrial transformation and upgrading.

Suggested Citation

  • Luo, Shuangcheng & Cai, Xiaoqing & Qian, Qiulan & Xia, Hongmei, 2025. "How can market-based environmental regulation drive industrial transformation upgrading? Evidence from China's carbon emissions trading pilot policies," International Review of Economics & Finance, Elsevier, vol. 102(C).
    • Handle: RePEc:eee:reveco:v:102:y:2025:i:c:s1059056025004630
    DOI: 10.1016/j.iref.2025.104300
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    2. Wu, Yan & Li, Jinye & Zhu, Fuxian & Zhang, Lixia, 2026. "Environmental regulation and urban green development quality and efficiency: Evidence from China's environmental protection tax law as a quasi-natural experiment," International Review of Economics & Finance, Elsevier, vol. 105(C).
    3. Xu, Wanshu & Wang, Haoyu, 2026. "Judicial efficiency, carbon emission trading regulation, and regional financial risk," Finance Research Letters, Elsevier, vol. 90(C).
    4. Wu, Peng & Zhang, Qiong, 2026. "High-speed rail benchmark train, efficient allocation of factors and industrial transformation and upgrading ——Theoretical model analysis and empirical evidence from 288 cities in China," Transport Policy, Elsevier, vol. 179(C).

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