Abstract/Summary

Environmental pollution has become a global issue attracting ever-increasing attention. Green technology innovation (GTI) is considered an effective strategy in countering this problem and helping achieve sustainability goals. However, the market failure suggests that intervention from the government is necessary to promote the effectiveness of technological innovation and hence, its positive social impacts on emissions reduction. This study investigates how the environmental regulation (ER) influences the relationship between green innovation and CO2 emissions reduction in China. Employing data from 30 provinces from the period 2003 to 2019, the Panel Fixed-effect model, the Spatial Durbin Model (SDM), the System Generalised Method of Moments (SYS-GMM) and the Difference-In-Difference (DID) models are applied to take issues relating to endogeneity and spatial impact into consideration. The results indicate that environmental regulations positively moderate the impact of green knowledge innovation (GKI) on CO2 emissions reduction but have a much weaker moderation effect when green process innovation (GPI) is considered. Among different types of regulatory instruments, investment-based regulation (IER) is the most effective in promoting the relationship between green innovation and emissions reduction, followed by command-and-control-based regulation (CER). Expenditure-based regulation (EER) is less effective and can encourage short-termism and opportunistic behaviour among firms, who can accept the paying of fines as a cheaper cost over the short-term than investment in green innovation. Moreover, the spatial spillover effect of green technological innovation on carbon emissions in neighbouring regions is confirmed, in particular when IER and CER are implemented. Lastly, the heterogeneity issue is further examined by considering differences in the economic development and the industrial structure across different regions, and the conclusions reached remain robust. This study identifies that the market-based regulatory instrument, IER, works best in promoting green innovation and emissions reduction among Chinese firms. It also encourages GKI which may assist firms in achieving long-term sustained growth. The study recommends further development of the green finance system to maximise the positive impact of this policy instrument.