*5.2. Innovative Activities*

Implementing the CET policy has brought flexible arrangements to achieve carbon emission reductions for relevant listed companies. Companies can maintain their carbon emissions within the designated limits by installing abatement equipment or purchasing carbon permits. However, the cost of such emission reduction will increase with the increase in the carbon price and the reduction of carbon permits, which will reduce companies' profits [65,66]. In this regard, if the cost of investing in cleaner technology is relatively low for some competitive companies, these will choose to invest in innovative activities to minimize carbon emission reduction costs [67]. Implementing the CET policy is conducive to incentivizing companies to increase their innovative activities in cleaner technologies or low-carbon technologies, thereby enhancing companies' market value. Thus, we should investigate the influential mechanism by which innovation affects the CET policy's effect on companies' market value. The empirical model used in the mechanism analysis is as follows:

$$innovation\_{it} = \beta\_0 + \beta\_1 treated\_i \times time\_l + \beta\_2 \times X\_{it} + \mu\_i + \gamma\_t + \varepsilon\_{it} \tag{5}$$

$$Ln(MV)\_{it} = \beta\_0 + \beta\_1 treated\_i \times time\_l + \beta\_2 \times X\_{it} + imnovation\_{it} + \mu\_i + \gamma\_t + \varepsilon\_{it} \tag{6}$$

where the mediation variable *innovation* represents the number of green patent applications (denoted as *innovation*1) and green patents granted (denoted as *innovation*2). It is used to measure the innovative activities of companies.

The regression results are shown in Table 7. The results indicate that ETS has significantly promoted green innovation, and the improvement of green innovation can significantly increase companies' market value. The CET policy could enhance the market value of listed companies by promoting green innovation. These results are in line with those of previous studies, such as those of Weber and Neuhoff (2010), Brauneis et al. (2013), and Gersbach and Riekhof (2021), who found that the carbon price signal creates incentives to invest in cleaner, low-carbon, or green technologies under the CET policy, thus enhancing companies' stock market value or returns [30,32,43].


**Table 7.** Regression results of mediation mechanism analysis based on technological innovation.


**Table 7.** *Cont.*

Note: Standard errors are in parentheses, and they are clustered at firm level. \*, \*\*, \*\*\* indicate statistical significance at the 10%, 5%, and 1% levels, respectively. Columns (1) and (2) show the results of the mediation mechanism analysis based on green patent applications (*innovation*1). Columns (3) and (4) show the results of the mediation mechanism analysis based on green patents granted (*innovation*2).
