Financial development and the energy net-zero transformation potential

Abstract

Climate change urgently requires a transition from fossil fuels to clean energy. However, this energy transition demands a dynamic balance between the energy system and the economy and climate, in which adequate financing is a key factor. This study analyzed data from 285 cities in China from 2004 to 2020 empirically to assess the energy net-zero transformation potential (ENTP) and the relationship between financial development (FD) and ENTP. The findings demonstrate that FD can improve urban ENTP, but this depends on the scale of the city, level of economic development, and resource endowment. Moreover, a nonlinear relationship exists between FD and ENTP. After FD reaches a certain level, it needs to shift to green finance, which should not be unilaterally emphasized in underdeveloped financial markets. Finally, FD has a spatial effect on ENTP, and the FD of neighboring regions can improve regional ENTP, which provides the possibility for regional cooperation. The results also provide insights into the financial instruments that can facilitate ENTP implementation.