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Taking China’s recent SO₂ Emissions Trading Pilot as a quasi-natural experiment on changing regulatory stringency and using large panel data of Chinese industrial enterprises for 1998–2007, this study identifies the productivity effects of this market-based environmental regulation by employing a difference-in-difference-in-differences design. Our results suggest that the market-based environmental regulation has exerted significant productivity-enhancing effects across all types of industrial enterprises, with stronger effects associated with privately owned, more productive, and less pollution-intensive enterprises. We also identify a dynamic productivity-enhancing effect that tends to decay slowly over time. The SO₂ Emissions Trading Pilot, as a market-based environmental regulation, allows more flexible mechanisms for production adjustment and innovation than do conventional command-and-control …