Credit Allocation, Pollution, and Sustainable Growth: Theory and Evidence from China

Abstract

ABSTRACT This article studies how credit decisions made by banks affect environmental pollution and the sustainable growth path. Our model suggests that with credit discrimination, the economy may experience a high output and heavy pollution steady state, but there will be welfare losses. Based on the model, we perform an empirical study using panel data from 30 provinces in China. The study results show that credit preference toward highly polluting sectors has an adverse impact on the environment. Arguably, encouraging sustainable banking may help developing countries like China to address environmental challenges.