How does environmental regulation promote green technology innovation? Evidence from China's total emission control policy

Whether environmental regulation incentivizes green technology innovations is debated in the literature. The potential endogeneity of environmental regulation is the major empirical challenge for identifying the causal effect of environmental regulation on green technology innovations. To address this issue, we use the quasi-natural experiment of China's Total Emission Control Policy as exogenous shocks of environmental regulation. Specifically, we construct a new dataset of the city-level emission reduction mandates and employ the difference-in-difference-in-differences estimation to explore how stringency of environmental regulation affects green technology innovations. The empirical results show that environmental regulation promotes green innovations. Further mechanism analysis shows environmental regulation can attract “new entrants” to join the green technology market and launch more green innovations. This paper further explores the significance of environmental regulation in narrowing the gap between green and non-green technologies.