In this paper, we combine insights from environmental economics and evolutionary approaches to develop an integrated research framework for studying the impact of market-based environmental policy (MBEP) on technological change. By concurrently analysing research and development (R&D) and the adoption activities of heterogeneous firms affected by MBEP, we assess the policy-triggered impacts on technological change at three levels: the firm, the technological regime and the sectoral regime. By including socio-technical contextual factors in our framework, we explicitly address the simultaneous existence of different policy instruments and also highlight the potential importance of market factors and the public’s acceptance of technologies for determining technological change. We introduce the cognitive element of the firms’ self-perception of the business environment in order to explain the relative role of MBEP for firms’ decisions on environmental innovations. To test our research framework, we investigated the recently introduced EU emission trading system (EU ETS) by conducting a business survey based on multiple case study findings on the European power sector. We find that the perception of the EU ETS and long-term greenhouse gas (GHG) reduction targets is correlated with the technology portfolio of the firms. Furthermore, we show that the EU ETS has limited effect on the innovation activities (adoption and R&D) of both users and producers of power generation technologies. However, the perception of long-term GHG reduction targets has a significant influence on all innovation dimensions. In sum, by improving the theory about the impact of market-based environmental policy on technological change and delivering empirical insights into the effects of the EU ETS in particular, this research lays the basis both for improved policy-making and future research aiming to better understand how to bring about system transitions towards sustainability.