Obscuring effect of income inequality and moderating role of financial literacy in the relationship between digital finance and China's household carbon emissions

Abstract

Households have emerged as one of the primary sources for carbon emissions in China, thus posing challenges to the “dual carbon” objectives. Digital finance, an emergent form of industry that fused advanced technology with financial services, had a pronounced impact on household carbon emissions stemming from daily consumption. However, the mechanisms driving this impact have not been adequately examined. Based on micro-level household survey data across 25 Chinese provinces from 2012, 2014, 2016, and 2018, the study identified the chief channels via which digital finance affected household carbon emissions, deriving several key findings. First, digital finance augmented household carbon emissions, presenting a significant negative impact on the climate. Second, due to the existence of “digital divide” between rural and urban areas, the impact of digital finance was more subdued in rural areas. Additionally, the effects of digital finance were more pronounced in the affluent eastern provinces. Third, income mobility obscured the positive relationship between digital finance and household carbon emissions. This is primarily attributed to the urban-rural divide in China; taking into account that urban-to-rural transfers make income distribution more equitable, there is a counterintuitive drop in per capita consumption, thereby suppressing consumption-related carbon emissions. This presented the conundrum of “income distribution equality—consumption negativity”. Finally, financial literacy was identified as a crucial positive moderating role, enabling households with high financial literacy to harness the dividends of digital finance, thereby engaging in more diversified consumption activities and intensifying the negative impact of digital finance on carbon emissions. The findings reinforced the pivotal role of digital finance in bolstering efforts to combat climate change and ensuring environmentally-responsible economic advancements.