Can Green Finance Mitigate China’s Carbon Emissions and Air Pollution? An Analysis of Spatial Spillover and Mediation Pathways

Abstract

China faces a multi-objective environmental governance dilemma involving achieving fundamental ecological environment improvement, carbon peaking, and carbon neutrality. In this study, we constructed indicators of the level of green finance development through the entropy-weighted TOPSIS evaluation model, and adopted the two-way fixed-effect spatial Durbin model (SDM) and the multiple spatial mediation effect model to explore the impacts and paths of green finance as a policy tool to promote environmental sustainability in carbon emissions and environmental pollution using panel data from 30 provinces in China between 2007 and 2019. The research results show that green finance (GF) can significantly reduce carbon emission intensity (CEI) and air pollution (AP). Moreover, the role of GF in reducing AP becomes weaker due to increased levels of green finance in neighboring regions negatively affecting local air quality. Mediation path analysis shows that GF reduces CEI and AP mainly by promoting the optimization of energy structures and technological progress. The results of regional heterogeneity analysis show that there is variability in the pathway of the impact of GF on CEI and AP in different regions, and the Western region is more sensitive to GF policies. Therefore, policymakers should give their full attention to the functions of GF to mitigate China’s carbon emissions and environmental pollution.