1. Introduction
The Chinese economy has made rapid progress since the reform and open-up in 1978. However, the extensive development mode of high consumption, high emissions, and low efficiency has caused the relentless rise of carbon dioxide and other greenhouse gas emissions, which has brought great damages to the ecological environment [
1,
2]. At present, China is facing severe downward economic pressure, and the new development philosophy featuring “innovative, coordinated, green, open and shared development” has been put forward to accommodate to the “economic new normal” and “supply-side structural reform”, which indicate that China’s economy will change to the direction of intensive and sustainable development [
3,
4]. At both the 75th and 76th Session of the UN General Assembly in 2020 and 2021, President Xi pledged that China will hit emissions peak before 2030 and achieve carbon neutrality before 2060. In the 14th Five-Year Plan, China will resolutely give priority to ecological development, promote low-carbon green growth, and continuously improve the ecological civilization system, with the aim of contributing to the global response to climate change. The 2021 Chinese Government Work Report also clearly states “achieving carbon emissions peak and carbon neutrality” is one of the key tasks for governments. To fulfill the “Double Carbon” goal, China must cut down its carbon emissions and develop a low-carbon economy. The financial market plays an essential role in helping ensure carbon reduction. Therefore, this paper investigates the influence of financial development on emission reductions and explores the impact mechanism of the relationship both theoretically and empirically. The findings in this article are enlightening to both China and other countries that are trying to cut down carbon emissions.
The earliest literature on carbon emission dates from the academic research on the association between environment and economy, i.e., the theoretical and empirical analysis of environmental Kuznets curve (EKC), which verifies whether there is an “inverted U-shaped” relationship between environmental pollution and economic growth. Some studies confirmed the validness of the EKC hypothesis [
5,
6], but others hold a different view [
7,
8]. Then, in the late 1980s, research on carbon emissions began. Japanese scholar Kaya [
9] quantified the relationship between economy, population, energy factors, and carbon emissions. Hereafter, a large number of time series analyses, focusing on the determinants of carbon dioxide emissions, demonstrated that economic growth, trade openness, energy consumption, industrial structure, and government financial expenditure are all important factors affecting carbon emissions [
10,
11,
12].
Extant studies drew different conclusions about the impact of financial development on carbon emissions. First, financial development can reduce carbon emissions and assist the development of a low-carbon economy. Since regions with a higher level of financial development are capable of attracting foreign direct investment (FDI) and enjoying a series of induced effects brought by FDI, accordingly, they can cut down emissions and improve environmental quality [
13,
14]. Second, there is an inverted U-shaped relationship between financial development and carbon emissions [
15,
16]. This means that, while financial development boosts economic growth, it also induces more energy consumption and emissions [
17,
18]. Nevertheless, after a certain level, the advancement of financial development propels the progress of technology, which consequently lowers carbon emissions [
19,
20]. Third, there is a threshold effect between financial development and carbon emissions. In other words, finance only stimulates emission reduction in the later stage of economic development. In an emerging market with low financial development, finance is not virtually effective against carbon emissions from industries, therefore the influence of financial development on carbon reduction is not apparent [
21,
22].
Likewise, studies specifically focusing on China showed inconsistent outcomes. Some have shown that China’s financial development can improve environmental quality [
23,
24], but others believe that financial development causes the increase in household energy consumption, thereby leading to lower environmental quality [
25]. In addition, Yin, et al. [
26] believe that financial development in China creates more environmental benefits in financially developed areas, but not in financially backward areas.
In terms of the measurement of financial development, the vast majority of current studies adopt a single indicator method, for instance, bank’s assets/GDP [
27], M2/GDP [
28], or banks’ credit/GDP [
29,
30], etc. Most of these indicators only reflect the development of the banking sector in the financial market. With continuous development, banking, insurance, and securities all become the key sectors of the financial industry, which has gradually become the “blood” of the modern economy.
The existing literature provides us with the fundamental theoretical support and empirical evidence in the related research, but there are still some areas for improvement: first, the selection of a single financial development indicator does not fully capture the characteristics of financial development, which may affect the robustness of empirical results; second, most research methods do not consider the impact of the geographical environment on carbon emissions; third, the impact mechanism between financial development and carbon emissions has rarely been explained and tested.
Given the limitations in the extant literature, this paper may have the following contributions. First, rather than using a single factor, we consider the development of the banking, insurance, and securities sectors together and adopt the entropy method to weigh and calculate the financial development index from multiple indicators. Second, in view of the influence of carbon dioxide on the neighboring areas, the spatial interactive effects of financial development on the carbon intensity are analyzed, which enriches the research on the relationship between financial development and environmental pollution. Third, considering the endogeneity of the IPAT framework [
31], the mediating effect of industrial upgrading and technological innovation on the relationship between financial development and carbon intensity is investigated, which provides more insights into the role of the financial market.
The rest of this paper is organized as follows:
Section 2 is the theoretical analysis on the impact mechanism of financial development on carbon emissions.
Section 3 explains the construction of the financial development index system, the measurement of carbon intensity, the definition of mediating and other control variables, as well as data sources.
Section 4 illustrates the methodologies, including the setting of spatial weight matrix and spatial lag model.
Section 5 analyses the empirical results of spatial autocorrelation test, spatial lag effect estimation, and mediating effect. The last part comprises the conclusions and policy implications.
5. Empirical Analysis
5.1. Spatial Autocorrelation Analysis
The statistical test results of Moran’s I and Geary’s C are shown in
Table 3. Both values are significantly positive from 2006 to 2019, indicating that carbon intensity exhibits strong positive spatial autocorrelation between provinces in China. Therefore, one province’s carbon intensity is influenced by its neighboring provinces. The spatial distribution of emission intensity is not random but shows a clustering phenomenon in geographical space. The values of Moran’s I and Geary’s C show small fluctuations in each year but remain stable.
Furthermore, the Moran scatterplots of carbon intensity in 2006, 2010, 2015, and 2019 are drawn, respectively, based on the geographical spatial weight (The number of 1–30 in Moran scatterplot represents the 30 provinces in China, respectively: Anhui, Beijing, Chongqing, Fujian, Gansu, Guangdong, Guangxi, Guizhou, Hainan, Hebei, Heilongjiang, Henan, Hubei, Hunan, Jiangsu, Jiangxi, Jilin, Liaoning, Inner Mongolia, Ningxia, Qinghai, Shaanxi, Shanxi, Sichuan, Shandong, Shanghai, Tianjin, Xinjiang, Yunnan, Zhejiang.), as shown in
Figure 5.
The first and third quadrants denote a positive spatial correlation, that is, provinces with high (low) carbon intensity are surrounded by neighboring provinces with the same attributes, which can be seen as the agglomeration areas of carbon emissions. The second and fourth quadrants represent a negative spatial correlation of high and low carbon emission provinces, that is, provinces with high (low) carbon intensity have low (high) carbon intensity in their neighboring provinces, which can be regarded as the dispersion area of carbon emission. Over the years, the quadrant and position of each province have not changed significantly, indicating that there is a relatively stable spatial dependence of provincial carbon intensity in China.
5.2. Spatial Lag Effect Analysis
5.2.1. Full Sample Analysis
Table 4 reports the test results of the spatial lag model (SLM) for 30 provinces in China, and the heterogeneous estimations for sub-regions. Column (1) in
Table 4 shows the results of SLM using the full sample dataset. The coefficient of
FD is significantly negative at −0.2909, suggesting that for every 1% increase of the financial development level, carbon intensity will be reduced by about 0.29%.
W × CI has a significant positive influence on CI, with a coefficient of 0.4612, showing that for every 1% increase in the carbon intensity in other provinces, the carbon intensity of the local area will increase by about 0.46%. It reveals a positive spatial spillover effect of the carbon intensity among areas. Specifically, if in one province is higher, carbon intensity in the surrounding provinces is also higher, which is consistent with the spatial autocorrelation test results.
Of the control variables, the coefficients of Open, FDI, and Reg are not significant, indicating that China’s import and export, foreign investment contribution, and environmental regulation do not exhibit influence on China’s carbon emission reduction. The coefficient of Gov is significantly positive, indicating that government intervention has pushed up the carbon intensity in provinces to a certain extent.
5.2.2. Sub-Regional Analysis
Columns (2)–(4) in
Table 4 show the estimation results of eastern, central, and western regions in China, respectively (the eastern region includes Beijing, Fujian, Guangdong, Hainan, Hebei, Jiangsu, Liaoning, Shandong, Shanghai, Tianjin, Zhejiang. Central region includes Anhui, Henan, Heilongjiang, Hubei, Hunan, Jilin, Jiangxi, Shanxi. Western region in-cludes Gansu, Guangxi, Guizhou, Inner Mongolia, Ningxia, Qinghai, Shaanxi, Sichuan, Xinjiang, Yunnan, Chongqing.). The direction and significance of the coefficients of FD are consistent with the results of the full-sample estimation, indicating that the improvement of financial development contributes to the reduction of regional carbon intensity. However, the coefficient values of FD are slightly different across regions. Financial development in the central region has the greatest negative impact on carbon intensity, followed by the western and eastern regions.
The coefficients of W × CI in all sub-regions are consistent with the full sample analysis, that is, carbon intensity in neighboring provinces has a positive spillover effect on the local province. The estimated results of the control variables in eastern are not consistent with those in central and western regions: both import-export trade and environmental regulation in eastern region can significantly influence the intensity of emissions; but foreign investment and government intervention in eastern China have no significant impact on it. In the central region, the effect of government intervention is statistically positive. In the western region, both government intervention and environmental regulation intensify carbon emissions. These results imply that central and western regions in China may get trapped in a repetitive circle of “pollution-control-re-pollution”.
5.2.3. Non-Linearity Analysis
Considering that there may be a non-linear relationship between financial development and carbon intensity, the quadratic term of financial development FD
2 is introduced into the model as Equation (16):
Table 5 reports the estimation results in non-linear spatial econometric models. The coefficient of FD in Column (1) is statistically negative. The coefficient of FD
2 of the full sample is −0.0178, significantly negative at the level of 10%, indicating an inverted U-shaped relationship between financial development and carbon intensity. However, the inflection point is
, as shown in
Figure 6.
According to the indexes of FD, of the 30 provinces from 2006 to 2019, the minimum value of FD is 0.0424 at Qinghai in 2006, greater than the inflection point . It suggests the level of financial development at provinces in China completely lies in the right-half of the “inverted U”, therefore the impact of financial development on carbon intensity is still negative. The estimation result of the non-linear model is consistent with the linear model, indicating that the improvement of financial development in China is conducive to the reduction of carbon emissions intensity at the present stage.
Columns (2)–(4) in
Table 4 show the sub-regional estimation results in the non-linear models. The coefficient value of FD
2 in the eastern region is not significant, but statistically negative in the central and western regions. The overall results of the sub-regional analysis are still robust.
5.2.4. Robustness Tests
Considering that different model settings may affect the estimation results of financial development on carbon emission intensity, this paper sets up three other types of spatial econometric models, which are spatial lag of X model (SLX), spatial error model (SEM), and spatial Durbin model (SDM). The test results of the above three models are shown in Columns (1)–(6) in
Table 6. The impact of financial development on carbon emission intensity is still significantly negative, which further proves the robustness of the benchmark regression.
In addition, Beijing, Tianjin, Shanghai, and Chongqing have relatively concentrated financial resources, demographic dividend from a large population, strong economic vitality, and high achievements in economic development, which may cause the empirical results to be driven by the four municipalities. Therefore, to ensure the robustness of the findings, the samples of Beijing, Tianjin, Shanghai, and Chongqing are dropped out from the benchmark regression, and the results are shown in Columns (7) and (8) in
Table 6, which again verifies the robustness of the results.
5.3. Mediating Effect Analysis
Table 7 shows the estimation results of the mediating effect models. Columns (1)–(4) and Columns (5) and (6) take industrial upgrading (Stru) and technological innovation (Tech) as the mediating variable, respectively.
The impact of financial development on industrial upgrading and technological innovation are reported in Columns (1), (3), (5), and (7). The coefficients of , the effect of FD on Stru and Tech, are all significant and positive, suggesting that if the financial development level increases by an average of 1%, the degree of industrial upgrading will increase by 0.56–0.71% on average, and the regional innovative capability will increase by 0.76–0.8% on average. Therefore, financial development stimulates the rapid upgrading of regional industrial structure and the fast improvement of technological innovation. In addition, the upgrading of the industrial structure and technological innovation of the surrounding area also positively influence the local area. As can be seen, an average increase of 1% in the industrial upgrading and technological innovation of the neighboring provinces will lead to an increase of more than 0.4% and 0.5% in the local province and thus both industrial upgrading and technological innovation generate spillover effects.
The impact of financial development, industrial upgrading, and technological innovation on carbon intensity is reported in Columns (2), (4), (6), and (8). The coefficients of and the effect of FD on CI are all significant and negative, suggesting that financial development reduces emission magnitude when considering the influence of industrial upgrading and technological innovation. As both and are significant, a partial mediating effect occurs between financial development and carbon intensity. Therefore, the estimated results indicate that financial development can reduce carbon intensity partly through the upgrading of industrial structure and the improvement of technological innovation capacity.
6. Conclusions and Policy Implications
Based on the theoretical analysis of the impact of financial development on carbon intensity in China, we constructed the index of financial development, and employed a spatial lag model to estimate the spatial interaction between financial development and carbon intensity. Furthermore, we tested whether industrial upgrading and technological innovation mediate the relationship between the two. The conclusions are as follows. First, carbon intensity generates strong spatial spillover effects between provinces in China. Second, financial development in China significantly reduces carbon intensity. Even though the relationship presents an inverted-U relationship, as the level of provincial financial development in China currently lies in the right part of the “inverted U”, the overall effect of financial development on carbon intensity remains negative. In addition, sub-regional analysis shows the heterogeneity across regions: financial development has the greatest negative impact on carbon intensity in the central region, followed by the western and eastern regions. Third, the mediating effect test shows that financial development can reduce carbon intensity partly through industrial upgrading and technological innovation. Both of the mediating variables produce positive spatial spillover effects. All in all, financial development could effectively mitigate carbon intensity.
With the change of climate and the ongoing growth of China’s economy, China’s carbon dioxide emissions will continue to increase, but the intensity of carbon emissions is likely to decrease. China should make the best of financial development to alleviate carbon intensity and thus achieve the carbon peak goal. We put forward the following policy suggestions: first, inter-regional cooperation and communication on carbon emission reduction should be strengthened. As there exist big disparities across central, western and eastern China in financial development and carbon emission intensity, each region shall choose a proper direction and develop a leading industry based on its own conditions. The western and eastern regions may complement with the central region in both energy and financial development. Giving full attention to comparative advantages would jointly activate the synergistic effect of emission reduction. Second, financial institutions could actively develop environmentally friendly financial services and products, as well as broaden the funding channels and modes for emission reduction projects. Moreover, financial institutions could formulate green credit policies to help energy-intensive industries fulfill green transformation and development. Third, the government should coordinate industrial strategies and financial market policies to better promote the integration of industry, science technology, and finance.
The conclusions and policy implications in this article could provide a good reference as the world is seeking green and sustainable economy.