Carbon emission trading policy and firm's environmental investment

•This paper evaluates the effect of carbon emission trading policy on firm's environmental investment.•The establishment of a carbon emission trading system imposes a negative effect on corporate environmental investment.•The effect is particularly pronounced in NonSOEs and large firms.•Potential mechanisms is that productive investment crowds out the green investment. This paper evaluates the effect of carbon emission trading policy on firm's environmental investment based on the Difference-in-Differences method. The result shows that the establishment of a carbon emission trading system imposes a negative effect on corporate environmental investment. Furthermore, our findings reveal that the reduction in environmental investment arising from carbon emission trading policy is particularly pronounced in non-state-owned enterprises and mature enterprises with large-size. The analysis of potential mechanisms implies that productive investment crowds out the green investment due to the carbon emission regulation. Overall, this study is conducive to the current environmental policy debates by informing policymakers about the implications of investment decision-making behavior of microcosmic enterprises in response to the carbon emission trading policy.