Green innovation through trade: The impact of European Union emissions trading scheme on Chinese exporters

Abstract

This paper investigates the international diffusion of green innovation through trade, focusing on the impact of the European Union Emissions Trading Scheme (EU ETS) on Chinese exporters. Using a difference-in-differences approach with firm-level data from 2000 to 2013, we find that the EU ETS significantly increased green patent applications among China-to-EU exporters. The likelihood of green patent applications increased by 0.2%, effectively doubling the pre-policy rate. Our mechanism analyses indicate that the increase is driven by the learning-by-exporting effect, rather than market size effects or the anticipation of regulatory and market condition changes. These results highlight the role of international trade in disseminating green technology and demonstrate how environmental regulations can foster innovation across global markets.