How does green finance achieve urban carbon unlocking? Evidence from China

Abstract

Carbon lock-in has emerged as a pressing environmental issue in Chinese cities. With the excellent phenotype of green finance in reducing greenhouse gas emissions and improving the environment, there is reason to believe that green finance has the potential to mitigate the carbon lock-in problem in these cities. However, empirical test of this linkage is lacking. Therefore, this empirical study aims to examine the role of green finance in mitigating urban carbon lock-in in China. Using balanced panel data from 285 cities between 2003 and 2019, we also explore the mechanisms and heterogeneity associated with this relationship. Our findings highlight the significant contribution of green finance in addressing urban carbon lock-in, supported by robustness tests. We uncover that green finance not only directly alleviates carbon lock-in but also indirectly mitigates it by promoting green technological innovation. However, foreign investment inhibits the mitigating effect of green finance. Moreover, the mitigating effect of green finance varies across regions, with the strongest impact observed in the eastern region. Additionally, the effect varies across different carbon lock-in quantiles, with a greater effect at higher quantile levels. These findings offer valuable insights for different stakeholders and underscore the importance of promoting green finance to tackle carbon lock-in challenges in urban areas.