This study explores the impact of carbon emissions trading system (ETS) on firms" industrial diversification. Based on the sample of Chinese listed firms from 2009 to 2021, using DDD estimation, we found empirical evidence that for non-SOEs, the introduction of carbon trading policy increases the industrial diversification of polluting firms in carbon trading pilot regions. However, no effect of the ETS on SOEs" diversification was found. Further research on non-SOEs suggests that the positive impact of the ETS on diversification strategy is mainly found in firms with lower levels of green innovation and R&D, and in firms with stronger financing constraints. An important implication of our findings is that the increased pressure to reduce emissions and carbon risk does increase the level of diversification of high carbon-dependent firms.