Conference Programme

How environmental regulation affects firms’ international competitiveness remains a central and contested question in strategy and economics. While carbon pricing is often criticized for imposing cost burdens that undermine export performance, alternative perspectives argue that regulation can spur innovation and enhance competitiveness. We examine this tension by studying the export consequences of California’s cap-and-trade program. Using a state–industry–year panel of manufacturing exports from US Census data, we implement a difference-in-differences design that compares California industries to otherwise similar industries in other U.S. states before and after the program’s implementation. We find that carbon pricing increases export performance, with effects concentrated in fuel- and electricity-intensive industries most exposed to the regulation. Mechanism analyses show that export gains operate through both supply-side innovation—reflected in higher export unit values—and demand-side sustainability preferences, as effects are strongest in environmentally stringent destination markets. These findings challenge the view that unilateral environmental regulation necessarily erodes competitiveness and instead suggest that carbon pricing can reconfigure comparative advantage by inducing innovation and enabling green differentiation in global markets.