Do financial development, urbanization and trade affect environmental quality? Evidence from China

Abstract

It is of great significance to study the impact of financial development on carbon emissions for the development of low-carbon economy. Although many empirical studies reveal significant correlations between financial development and various environmental pollution variables, few studies differentiate financial scale and efficiency from other factors, and pay attention to the impact of securities capital market on carbon emissions. In view of the complexity of financial development impact mechanism on carbon emissions in China, this paper classifies financial development into two dimensions: financial scale and securities size. We establish a broader autoregressive distributed lag-error correction model (ARDL-ECM), which is used to measure the dynamic relationship among financial scale, securities size, urbanization, economic development, trade openness and China’s carbon emission intensity. The study indicates that there is positive short-run and long-run relationship among financial scale, economic growth and carbon emission intensity. This reflects that the current development of financial scale has stimulated the development of China’s economy, but brought carbon emissions. The size of securities has a relatively small impact on carbon emission intensity both in the short run and long run. This shows that China’s current securities market mechanism of regulating carbon emissions needs further improvement. The above conclusions are convinced by the robustness tests. This paper provides empirical evidence for policy makers to support the implementation of financial and low carbon economy growth.