The growing concern about environmental change brings out many environmental regulations. To combat this issue, we need to frame the right incentive structure which induces more carbon abatement technologies. However, it remains largely unexplored how the spillover effect of regulations affects firms' innovating behavior. We use a quasi-natural experiment in Beijing which inflicted bystander firms with heavy policy uncertainty. Our DID design reveals that policy uncertainty stimulates firms to improve their innovation performance, which effect is more pronounced in young and private firms. Our study contributes to literature by providing causal evidence on the innovation-boosting effect of environmental regulations.