Can environmental regulation synergy inhibit the differentiation of the Porter effect in carbon markets?

Zhihao Zhang and Zhi Gao

Economic Analysis and Policy, 2025, vol. 87, issue C, 2254-2278

Abstract: With the continuous advancement of China’s comprehensive green economic and social transformation, high-carbon emission enterprises are gradually differentiating into green innovation and non-green innovation enterprises. Optimizing the collaborative design of environmental regulations to promote green innovation in both types of enterprises has become a critical issue that urgently needs addressing. This paper endogenizes prospect theory and mental accounting theory within an evolutionary game model to explore the differentiation of the Porter effect in carbon markets and its formation mechanism from the perspective of asymmetric risk preferences. Our findings indicate the following: (1) Benefit-side incentives and cost-side constraints from the carbon market lead to differences in the perceived value of the carbon market due to valence and cost-risk preferences in enterprises’ mental accounts, resulting in the differentiation of the Porter effect. (2) Environmental regulation synergy leverages cumulative effects to mitigate the environmental benefit differentiation caused by asymmetric risk preferences in the carbon market, gradually increasing the total environmental benefits. Additionally, the total economic benefit transitions from negative to positive through mutual compensation mechanisms among policies. This forms a Porter effect that accommodates sustained green innovation among heterogeneous high-carbon emission enterprises.

Keywords: Prospect theory; Mental accounting theory; Environmental regulation synergy; Green innovation; Porter effect (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecanpo:v:87:y:2025:i:c:p:2254-2278

DOI: 10.1016/j.eap.2025.08.008

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