The price of carbon pricing: climate policies, financial constraints, and green innovation

I show that carbon pricing can hurt green technology innovation due to firm financial con- straints. I identify green technologies from patent filings through textual analysis of patent claims and construct a novel dataset that links firm green patenting to ownership of carbon- emitting plants. Focusing on firms with high emissions in California, I show that the California cap-and-trade program exacerbates financial difficulties in already constrained firms, forcing them to reduce R&D and, subsequently, green innovation. These effects offset the positive im- pact of cap-and-trade on green innovation in unconstrained firms, rendering the program less effective in stimulating much-needed green innovation. The results suggest that carbon pricing forces constrained firms to value their short-term cash flows more than the long-term cash flows from transitioning to green technology. © 2026 City University of Hong Kong and National Taiwan University.