To Facilitate or Curb? The Role of Financial Development in China’s Carbon Emissions Reduction Process: A Novel Approach

With the Paris Agreement coming into effect, China, as the largest CO₂ emitter in the world, will be facing greater pressure to reduce its carbon emissions. This paper discusses how to solve this issue from the perspective of financial development in China. Although many studies have analyzed its impact on carbon emissions, the conclusions are contradictory. A major criticism of the existing studies is the reasonability of the selection of appropriate indicators and panel estimation techniques. Almost all studies use only one or limited indicators to represent the financial development and ignore the cross-sectional dependence. To fulfil the gaps mentioned above, a financial development index system is built, and with the framework of the STIRPAT (Stochastic impacts by regression on population, affluence, and technology) model, this paper applies an ARDL approach to investigating the long-run relationship between financial development and carbon emissions and a dynamic panel error-corrected model to capture the short-run impact. The empirical results show that financial development can improve carbon emissions, and such impact not only shows a regional difference but also reflects the features of stage differences. Additionally, based on the discussion on seven specific aspects of financial development, our findings can be helpful for policy makers to enact corresponding policies to realize the goal of reducing carbon emissions in China.