The mediating effect of financial development on CO2 emissions: An empirical study based on provincial panel data in China

Abstract

Global climate change has become the greatest threat to humanity, and China is developing policies among various industries to peak CO2 emissions as soon as possible and expects the reduction of CO2 emissions through financial development. Based on the panel data of 30 provinces in China from 2000 to 2017, this paper uses fixed effect model and mediating effect model to explore the mechanism and effective pathway of financial development on CO2 emissions per capita among different regions in China. Empirical results consistently indicate that financial development has the significantly positive effect on CO2 emissions per capita, but the impact is inverted U-shaped. It means that only when the financial development in China gradually increased to 4.21 can achieve the goal of reducing CO2 emissions per capita. These results provide new explanatory ideas for the inconsistent direction of the impact of financial development on carbon emissions in existing studies. Then, the technological innovation and industrial structure are intermediaries for financial development to reduce CO2 emissions per capita, while the economic scale is the opposite. And it illustrates not only theoretical but also empirical results on the mediating pathways of financial development driven CO2 emission reduction. Under the theory of “natural resource curse”, in regions with high fossil energy dependence, the mediating effect of the economic scale is greater than that in regions with low fossil energy dependence. But the mediating effects of technological innovation and industrial structure from financial development on CO2 emissions per capita are all negative and more powerful than that in regions with low fossil energy dependence. This provides an important practical basis for the development of differentiated carbon reduction policies through finance in different fossil energy dependent regions.