Does financial development benefit carbon neutrality in China? Pathway analysis and empirical study

ABSTRACT

Financial development (FD) is pioneered to solve the problem of vital capital supporting for carbon neutrality. Detecting the effect of FD on carbon emissions (CE) plays an important role in accurately planning FD, and guiding carbon neutrality in China. To clarify the influence of FD on CE and the underlying pathways concerning scale effect, structural effect, and technological effect, this paper use China’s 285 city-level data spanning 2003–2016 and fixed effect (FE) models and instrumental variable (IV) methods to test the effect of FD on carbon neutrality in China. The findings show that (1) the development of financial deepening, financial interrelation ratio, and financial intermediary all prompt carbon emissions at the national level. (2) Regional heterogeneity indicates that FD benefits carbon neutrality in mid-Western cities but fails in eastern cities. (3) FD increases carbon emissions by boosting electricity consumption but decreases carbon emissions by promoting structural optimization and technological progress. (4) Environmental regulations partially curb the carbon emissions effect of FD. This paper proposes some suggestions to reduce CE and gain carbon neutrality in China by greening FD, optimizing industrial structure, promoting technological innovation and strengthening environmental regulation.

KEYWORDS:

• Financial development
• carbon emission
• environmental regulation
• carbon neutrality
• mechanism analysis

JEL CLASSIFICATION:

• E60

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

¹ It is to be noted that our regression model is a two-way fixed effects model (i.e. controlling for city- and year- fixed effects). See Table A1 in the Appendices for the determination reasons associated with our regression model..

Additional information

Funding

This work was supported by the National Natural Science Foundation of China (Grant No. 71804001, 71703073, 71974001), MOE (Ministry of Education in China) Project of Humanities and Social Sciences (Grant No. 22YJC790160), and the Project of Philosophy and Social Science Research in Colleges and Universities in Jiangsu Province (Grant No. 2021SJA0371), the Project for Cultivating Outstanding Top-notch Talents in Universities of Anhui (Grant No. gxyqZD2022042).