Can Green Finance Mitigate China’s Carbon Emissions and Air Pollution? An Analysis of Spatial Spillover and Mediation Pathways
1. Introduction
Climate change and air pollution (AP) are urgent issues in most countries [1,2]. As the world’s largest developing country, China’s manufacturing sector contributes significantly to economic development, and these major industries, such as thermal power, iron and steel, and cement, bring high levels of carbon emissions and air pollutants. Therefore, China faces serious air pollution and high carbon emission problems following 40 years of rapid economic growth [3,4]. Green finance (GF), which promotes economic transformation and sustainable social development oriented towards environmental protection, low-carbon development, and sustainable development [5], has been emphasized and supported by the Chinese government. The Chinese government has issued a series of normative and guidance documents to improve the green financial system, such as Opinions on the Implementation of Environmental Policies and Regulations (2007) and Guidelines for Establishing the Green Financial System (2016). Additionally, the Chinese government made commitments that China will strive to reach its carbon peak by 2030 and achieve carbon neutrality by 2060 at the 75th UN General Assembly in 2020. Green finance is strongly promoted and developed as it helps to facilitate the flow of funds to green industries and projects, promotes low-carbon and sustainable development, and plays an important role in achieving the dual carbon goals. China has gradually formed a multilevel green financial product and market system that includes green credit, bonds, insurance, funds, trusts, and carbon financial products.
In theory, GF can significantly reduce carbon emissions and AP. First, GF provides financial support for green projects, including forest and grassland carbon sinks, environmental infrastructure, pollution control, and biodiversity conservation [6]. Second, heavily polluting enterprises must carry out industrial upgrading and transformation owing to strict constraints on financing scales [7] and financing costs [8] caused by GF. Third, GF promotes renewable energy [9]. The consumption of fossil fuels, particularly coal, generates large amounts of carbon and pollutants, and replacing fossil fuels with renewable energy is very effective in reducing levels of carbon emissions and air pollutants. Finally, GF promotes technological progress through lower-cost finance. On the one hand, technological progress improves the efficiency of energy utilization and decreases energy intensity [10]. On the other hand, the development of technologies related to renewable energy, such as solar energy, wind energy, and energy storage technology [11], can reduce the cost of renewable energy utilization and the consumption of fossil energy.
In the related literature, GF, as a type of environmental supervision, has typical policy spillover effects. First, the development of GF provides companies with clear policy directions that high-emission enterprises will be restricted [12], which facilitates surrounding regional enterprises to undergo a green and low-carbon transition for long-term development. Second, the development of GF enhances public awareness of environmental protection [13], which continuously spreads to neighboring areas with population migration. Finally, the development of GF promotes green technological progress, which has a strong spillover effect [14]. Advances in technology that reduce carbon emissions and pollution will reduce the economic and legal risks that businesses are exposed to due to environmental protection issues. Once an enterprise adopts an advanced green process or technology, surrounding enterprises will compete to adopt it as soon as possible.
For a long period, the development of GF in China has been highly unbalanced. China’s economic development is characterized by significant disparities between regions, with the Eastern coastal region having a high level of economic development and a well-developed financial industry. As the economy grows, people focus on environmental protection and are eager to improve environmental quality [15], and GF is usually at a high level. The Western region is sparsely populated and rich in natural resources but lacks economic development. Rich natural resources attract continued relocation of energy-intensive enterprises, generating large amounts of carbon emissions and pollution. However, local governments have been unable to formulate strict environmental regulations to restrict these high-emission enterprises because of raising income levels and developing the economy they bring. Consequently, GF in these areas is at a low level. Against this background, can GF promote reductions in AP and carbon emissions? How does GF affect AP and carbon emissions? How does GF affect AP and carbon emissions in different regions of China? These questions require further investigation.
To address these issues, we constructed a GF development level index and carried out an in-depth analysis using a spatial econometric model with panel data from 30 Chinese provinces from 2007 to 2019. The main contributions of this study are as follows: First, we built indicators to measure the development level of GF through the entropy-weighted TOPSIS method from the three aspects of green credit, green investment, and green support, which is a more comprehensive approach compared to those of some studies that use green credit to indicate the level of green finance development [16], and is a useful supplement to the existing research. Second, after providing an overview and summary of the existing literature, we explored the mechanisms and effects of GF on carbon emissions and AP by region and from multiple perspectives to provide references and support for green development practices in countries where there are regional differences in the development of green finance, such as China.
5. Conclusions and Policy Recommendations
According to the previous literature, especially given the regional heterogeneity of China, the impacts of GF on CEI and AP and mechanisms of effects are certain and deserve further investigation. Therefore, we adopted the two-way fixed-effects spatial Durbin model and the spatial mediation effect model to explore the impact of GF on CEI and AP by exploiting panel data from 30 provinces in China between 2007 and 2019. Then, we further used a multiple spatial mediation effect model to discuss the specific path by which GF impacts CEI and AP, including the ES, T, and IS paths. Moreover, we analyzed the pathways of the impacts of GF on CEI and AP in the Eastern, Central, and Western regions of China. The conclusions of this study are as follows.
First, the results of the benchmark OLS regression, fixed-effects SDM, and robustness test prove that GF reduces CE while reducing AP. These results are consistent with most studies. This indicates that the continuous improvement and development of GF can reduce AP and CEI.
Second, the results of the indirect effects show that the spillover effect of GF cannot significantly reduce AP but can significantly reduce CEI. This is somewhat different from the results of the existing literature. According to a study by Zhou et al. [46], strict financing constraints on high-polluting enterprises lead to their transfer to regions with low GF development levels, resulting in GF in the surrounding regions playing an insignificant role in reducing local AP. This suggests that policymakers should focus on how green finance policies can comprehensively promote industrial reform and technological innovation, while strengthening environmental regulation and enforcement to avoid causing pollution transfer.
Third, the results of the mechanism analysis show that GF reduces AP and CEI mainly by promoting technological progress and ES optimization. This reveals that the government should guide and promote the development of GF to provide more financial capital for green technology and to increase the financing support for solar photovoltaic, wind, geothermal energy, and other clean renewable energy industries. However, the influence of GF on CEI and AP through IS is not significant, which is different from some results in the literature [28]. When studying the mechanism of GF’s effects on CEI and AP by region (see Figure 6), it was found that the impact of GF on IS in the Eastern region is significant, which implies that the effect of GF may be affected by the level of economic development [47]. The reason that it is not significant at the national level is likely to be that the adjustment of China’s industrial structure is more in favor of inter-regional transfer. This suggests that the government should encourage more capital to enter the green field, promote green transformation and upgrading of industrial structures, and try to maintain regional policy consistency to minimize green development due to the transfer of enterprises.
Finally, from a regional perspective, GF mainly reduces pollution and carbon through direct effects in the Western region of China and indirect effects in the Eastern region. This suggests that Western China is more sensitive to GF policies, which is different to what is suggested in other studies. The level of economic development in the Western region is relatively low, and many areas are dominated by more seriously polluting industries such as the chemical, mining, electric power, iron and steel industries, etc., which have relatively greater room for emission reduction; thus, by promoting the development of green finance, the provision of funds to promote the green transformation and upgrading of enterprises can effectively achieve pollution and carbon reduction. Policymakers should focus on supporting the development of GF in the Western region to directly reduce CEI and AP. From the perspective of the mechanism of GFs effects, the scope for reducing CEI and AP is relatively limited and can mainly be achieved by improving ES. Only in the Eastern region has it been found that GF also supports technological progress well. In the future, GF-supported areas should be more diversified, especially in the Central and Western regions.
This study also has some shortcomings. First, due to data limitations, the time period studied is 2007–2019, and more recent years are not analyzed. The data are also province-level, which cannot reflect the regional differences in a more detailed and adequate way. In recent years, especially after China’s double carbon goals were put forward, GF has increased dramatically in both scale and type, and its impact on environmental quality may also be increasing. In the next step, the research team will further obtain newer and more detailed data to study the effect of GF. Second, from a broader perspective, we have studied the effects of GF on pollution reduction and carbon mitigation separately, but academics and policymakers are more concerned about the co-benefits of affecting both. Although our research is helpful in understanding the co-benefits of pollution reduction and carbon mitigation, it is not specific enough to guide policymakers. Therefore, one of the directions of future research should be to explore the effect of GF on the co-benefits of pollution reduction and carbon mitigation.
