The dual impact of cap-and-trade policies on innovations and the moderating role of accumulated resources

While the cap-and-trade policy is a widely adopted mechanism for addressing climate change, its impact on firms' innovation portfolio remains underexplored. To balance regulatory compliance with profitability, firms must strategically allocate limited resources across different technology innovations based on their existing resource endowments. This study examines how the cap-and-trade policy alters firms' innovation resource allocation across different types of technologies with a combination of theoretical analysis and empirical validation. Our theoretical model suggests that while the policy encourages firms to invest more in green technology, it may crowd out resources from more profitable conventional innovation. This effect is less pronounced for firms with substantial stocks of green innovation resources, but stronger for those with extensive conventional innovation stocks. Using a difference-in-differences approach and firm-level patent data covering enterprises affected by China's regional cap-and-trade pilots, we find that the policy reduces the share of conventional patents by 5.951 percentage points on average, confirming the crowding-out effect. Our moderating analysis further reveals that each additional accumulated green patent mitigates this negative impact by 0.018 percentage points, whereas each additional accumulated conventional patent amplifies it by 0.002 percentage points. Additional significant heterogeneity is also observed, conditional on industry characteristics (pollution intensity, competition intensity, and SOE dominance) and firm-level attributes (R&D intensity, profitability, and governance structure). These findings underscore the importance of guiding highly regulation-sensitive firms toward a balanced innovation transition while encouraging less regulation-sensitive firms to engage more actively via well-targeted and supportive policies that foster both green and conventional innovation.