A study on the promoting effect of environmental penalties on climate-friendly technological innovation in China

Little exploration of the impact of environmental penalties on climate-friendly technology innovation (CFTI). This paper explores the impact of environmental penalties, set within an institutional context, on the promotion of climate-friendly technological innovation. Employing a qualitative analysis grounded in signaling theory and challenge/threat theory, this study utilizes data from various Chinese cities and applies city- and year-specific two-way fixed effects models to assess the effects of environmental penalties on climate-friendly technological innovations. The findings reveal that environmental penalties have an inverted 'U-shaped' nonlinear effect on such innovations. There is a critical inflection point where environmental penalties shift from promoting to inhibiting these innovations. Additionally, the study finds that environmental penalties also impact the development levels of the digital economy and financial technology, both of which support climate-friendly technological innovation. Therefore, it can be inferred that environmental penalties indirectly influence climate-friendly technological innovation through their effects on the digital economy and financial technology.