Green technology innovation is essential for achieving decarbonization as well as the goals of reaching peak carbon emissions and carbon neutrality. However, market failures often lead to an inadequate supply of green technologies, which needs macroeconomic policies to provide guidance. This paper aims to investigate the effects of the carbon market on green technology innovation. A theoretical model was developed to investigate mechanisms from firms′ low-carbon innovation to economic green transition. Then, based on panel data of A-share listed companies in China from 2000 to 2019, this study identified the dynamical characteristics of firms′ early investment actions using a first-order differential generalized moment estimation model. The results found that: ① Carbon market policies not only significantly affected the dynamic adjustment schedule of firms′ early investment structure but also successively promoted the green upgrading of their production equipment and innovation of new products, thereby serving as a support for the construction of the green innovation system. ② There were inter-industry differences in firms′ investment adjustments and green innovation, where industries with low embodied carbon emissions tended to focus on production equipment upgrading, while industries with high embodied carbon emissions preferred new product innovation. ③ Regional economic development and green tax incentives had significant influences on firms′ green investment decisions under carbon market policies. ④ In the context of carbon market policies, there was no crowding-out effect of firms′ green innovation on other types of innovation but a positive incentive for the economies′ overall innovation. Consequently, this study suggests that the national carbon market should be developed steadily; simultaneously, some synergistic policies should be implemented according to local conditions and situations. These can be helpful for the carbon market to serve as a longterm mechanism promoting firms′ green innovation and economic green transition and achieving the 'dual carbon' goals. [ABSTRACT FROM AUTHOR]