The Impact of Financial Development on Pollution Reduction Evidence from Provinces in China

Abstract

This paper examines the impact of financial development on pollution reduction at the enterprise level using statistical data from 30 provinces in China from the period 2018 to 2022. The effect of financial development on pollution reduction is examined separately from the perspectives of scale effect and technology effect. Although there are significant regional differences in the impact of the increased use of financial instruments on pollution reduction in different provinces of China, on balance the greater use of financial tools decreases pollution, reflecting the technological effect of utilizing financial tools exceeds the scale effect. Heterogeneity analysis shows that the impact of financial development on pollution reduction of private enterprises is higher than that of state-owned enterprises. The paper also discusses the implications for China in achieving carbon peak and carbon neutrality and promoting high-quality economic development and an economic green transformation. Since improvement in the financial system is a key to improving the environment, the increased efficiency of financial tools enhances this improvement.