The impacts of different environmental regulations on firm’s performance in China based on R&D investment, environmental innovation and non-environmental innovation

Emission standard, as a kind of mandatory environmental regulation, stipulates the emission standard of pollutants. The emission trading system (ETS) is regarded as a typical market-based environmental regulation. This study examines the impacts of mandatory environmental regulation (SO2 emission standard) and market-based environmental regulation (SO2 ETS) on firm performance in China. Listed firms in China are selected as research samples and a difference-in-differences (DID) model is employed as an assessment method. The results indicate that mandatory environmental regulation only has a significantly positive impact on environmental performance. However, the ETS improves environmental performance and economic performance simultaneously. This study further explores the effect mechanisms between two environmental regulations and firm performance that R&D investment, environmental innovation and non-environmental innovation are selected as different effect mechanisms. There are no impacts of mandatory environmental regulation on R&D investment and environmental innovation. However, it finds that the ETS can effectively decrease the crowding-out effect of R&D and thus trigger environmental innovation of the firm. According to heterogeneity analysis, the effect of market-based environmental regulation is significant in those regions with higher intensity of environmental regulation. It does not find significant effects of mandatory environmental regulation and market-based environmental regulation in regions with lower regulatory intensity.