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Market-Based Environmental Regulation and Green Transformation of Manufacturing Enterprises: Evidence from China’s SO 2 Emission Trading

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Listed:
  • Jiajian Zhou

    (Department of International Business, College of Business, Suwon Campus, Kyonggi University, Suwon 16227, Republic of Korea)

  • Huikai Yang

    (Department of International Business, College of Business, Suwon Campus, Kyonggi University, Suwon 16227, Republic of Korea)

  • Ziyang Liu

    (Department of International Business, College of Business, Suwon Campus, Kyonggi University, Suwon 16227, Republic of Korea)

Abstract

In the context of China’s sustainable development goals, this study investigates how market-based environmental regulation, specifically SO 2 emission trading, drives green transformation and upgrading in manufacturing firms. We argue that emission trading can spur firms to optimize their service portfolios and improve their embedded services, thus facilitating a shift toward greener operations—while its effect on a firm’s technological innovation capacity remains ambiguous. Using panel data from Chinese manufacturing firms, our empirical findings show that emission trading significantly promotes service transformation through optimizing embedded services and reducing mixed, noncore services but does not necessarily encourage increased R&D investment or breakthrough innovation. This suggests many enterprises prefer end-of-pipe pollution control measures rather than structural technological upgrading under regulatory pressure. Our results provide insights into refining emission trading mechanisms and designing supportive policies to better channel firm-level transformation toward sustainability.

Suggested Citation

  • Jiajian Zhou & Huikai Yang & Ziyang Liu, 2025. "Market-Based Environmental Regulation and Green Transformation of Manufacturing Enterprises: Evidence from China’s SO 2 Emission Trading," Sustainability, MDPI, vol. 17(22), pages 1-28, November.
    • Handle: RePEc:gam:jsusta:v:17:y:2025:i:22:p:10322-:d:1797425
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