This project was initially conceived to investigate the impact of Emissions Trading Systems (ETSs) on innovation and economic activities in both Japan and India. As the study progressed, it became evident that the ETS in India was implemented only for a limited period, and crucial data necessary for a comprehensive analysis was not available. This unforeseen constraint compelled a strategic recalibration of the research focus. Consequently, the project's scope was refined to concentrate exclusively on Japan's ETS. This pivot allowed for a more in-depth exploration within the Japanese context, leveraging the availability of robust and comprehensive data.

  The study explores the impact of regional ETSs on different types of innovation activities including green (non-green) patenting and R&D activities in the case of Japan. By employing a heterogeneity analysis, the study also investigates the interplay between ETS-induced innovation and firms' competitiveness. A doubly robust difference-in-difference analysis, supplemented by unique firm-level survey data, forms the methodological robust of this study. Additionally, the study conducts several robustness tests, including dynamic DiD analysis, tests for violations of the Stable Unit Treatment Value Assumption (SUTVA), and placebo tests, to ensure the reliability of the empirical results.

  This study's key findings and contributions are as follows. First, we find that Japan's regional ETSs enhance targeted firms' engagement in both patent applications and R&D activities. Specifically, patenting activities show improvement during the initial stage, while R&D activities are enhanced during the compliance period covered by this study. It indicates that the process innovation is improved rather than product innovation under Japan's regional ETSs, which is consistent with existing literature. However, this study does not find evidence that Japan's regional ETSs specifically encourage green innovation within the study period. Targeted firms seem to prefer purchasing high-efficiency equipment or prioritizing immediately applicable technologies, which may not be captured in the count of green patents. Second, this study finds that the Japan's regional ETSs increase the competitiveness of targeted firms, particularly those that are innovation-intensive. This finding supports the Porter Hypothesis in the Japanese context, indicating that ETS-induced innovation improves firms' competitiveness.

  The study, while robust in its current form, acknowledges the intrinsic challenges in fully delineating the causal repercussions of ETS through the employed doubly robust DiD estimation technique. Moving forward, the research intends to rigorously revisit and refine the estimation methodology to fortify the reliability of the findings.