Influence mechanism of financial development on carbon emissions from multiple perspectives

Abstract

Financial systems are believed to be an effective means of influencing carbon emissions through efficient resource allocation. Our study aims to investigate the impact of financial development on carbon emissions in China from multiple perspectives. Using a sample of 30 provinces in China during 2000–2019, we analyze the short- and long-term effects of financial development on carbon emissions using the Pooled Mean Group estimator. We also explore the intermediary mechanisms and spatial spillover effects. In particular, we examine the nonlinear relationship between financial development and carbon emissions, taking into account the poverty threshold effect. Our findings show that financial development significantly reduces carbon emissions in the long term, but no significant short-term relationship is observed. We identify three mechanisms: (1) the emission reduction effect of financial development is stronger when poverty levels are lower, (2) the structural effect partially explains the negative relationship between financial development and carbon emissions, while the scale and technology effects weaken it, and (3) financial development reduces carbon emissions at the regional level but increases them in neighboring regions through spatial spillover effects. Based on our results, we recommend promoting the development of financial systems in China as an effective means of mitigating climate change over the long term.