This　study　aims　to　examine　the　green　innovation　effect　of　the　carbon　emissions　pilot　policy　in　China.　First,　using　the　difference-in-differences　method　and　regressions　of　instrumental　variables　using　the　data　from　Chinese　listed　firms,　we　verify　that　the　policy　promotes　green　innovation　among　regulated　firms　and　is　more　pronounced　among　state-owned　enterprises,　firms　in　the　eastern　region,　and　those　with　lower　financing　constraints.　Furthermore,　this　positive　effect　spreads　downstream　relative　to　the　regulated　firms　through　input-output　linkages,　but　reduces　green　innovation　to　upstream　firms.　Accordingly,　such　diffusion　of　innovation　is　achieved　through　the　price　mechanism.　The　results　necessitate　the　introduction　of　various　derivatives　to　mobilize　the　market　to　reduce　the　speculative　volatility　of　carbon　prices.　In　addition,　relevant　supporting　policies　must　be　established　to　encourage　corporate　innovation　to　reduce　the　crowding-out　effect　owing　to　emission　reduction　and　the　nonmarket　factors.