Towards carbon neutrality: the impact of innovative city pilot policy on corporate carbon intensity in China

As part of an effort to explore and incentivize the development of innovation-driven, green and low-carbon cities, China implemented the innovative city pilot policy (ICPP) in 2008. Using the ICPP as a quasi-natural experiment, we investigate whether and through which channels the ICPP reduces corporate carbon intensity. To do this, we employ a staggered difference-in-differences (DID) econometric method and find that the ICPP indeed mitigates corporate carbon intensity. This relationship is shown to be quite robust using various alternative specifications of the DID analysis. The reduction effect on corporate carbon intensity is more pronounced for private firms, polluting firms, and capital-intensive firms, showing a convergence trend towards technology-intensive and clean firms. We find the ICPP reduces corporate intensity by enhancing corporate innovation and increasing the value-added rate (i.e. corporate upgrading). Based on these novel findings, we draw out policy implications for carbon neutrality, shedding light on pathways for addressing climate change and achieving sustainable development. Key policy insights Carbon neutrality is a long-term and ambitious target. Achieving this target requires the coordination and integration of multiple climate instruments. Among these, technological progress (e.g. renewable energy substitution and improved carbon efficiency) determines the overall cost of carbon neutrality. And innovation support policies should be included in the optimal climate policy package. Innovation policy can promote knowledge spillovers and long-term economic growth, as well as address environmental externalities of greenhouse gas (GHG) emissions, thereby providing a cost-effective way of combating climate change. Empirical evidence suggests that the ICPP implemented in China significantly reduces corporate carbon intensity and thus has promising prospects for the carbon-neutral target. The policy help firms enhance their innovation activities and facilitate corporate upgrading. As other emerging economies also face the sharp trade-off between climate change mitigation and economic growth, they can learn from this centrally-planned and locally-led innovation policy and lead their development mode onto a cleaner and decarbonized path.