Source Data - Y.Z.

Carbon pricing is widely regarded as a central instrument of low-carbon transition, yet its consequences for industrial efficiency remain unsettled. Here we show that the effect of carbon pricing on industrial capacity utilisation in China is fundamentally time-structured. Using 28,755 firm-year observations from Chinese A-share listed firms between 2013 and 2024, we identify firm-level policy exposure by matching staggered pilot-market launch dates with annually evolving sectoral coverage, rather than treating pilot markets as uniform regional shocks. Capacity utilisation declines by 5.29 percentage points in the first one to two years after firms enter carbon-market regulation, but reverses positive from the third year onwards, rising by 3.79 percentage points over longer horizons. Mechanism tests suggest that firms initially respond through output contraction (−0.0496), whereas longer-run adjustment is associated with greater research and development effort (0.9189) and reduced overinvestment (−0.0308). Most notably, recovery is stronger in more competitive industries, indicating that market conditions shape whether carbon constraints remain a cost burden or become a catalyst for productive restructuring. Smaller firms and lower-technology sectors, by contrast, bear larger short-run costs. Descriptive evidence from the national market further suggests that prior pilot experience may shape firms’ initial responses to broader market expansion. Together, these findings indicate that the economic consequences of carbon pricing are dynamic rather than static, and depend on both adjustment time and the institutional conditions under which firms adapt.