How does digital financial inclusion affect households’ CO2? Micro-evidence from an emerging country

Abstract

This paper examines, at the micro-level, the relationship between digital financial inclusion and households’ CO₂ emissions, aiming to investigate the connection between financial inclusion and the environment. Exploiting a unique survey panel dataset of 13,624 Chinese households, I find that digital financial inclusion can increase households’ CO₂ emissions, and this result is applicable to other emerging countries. Further analysis based on the mediation model sheds light on how digital financial inclusion influences direct and indirect households’ CO₂ emissions, respectively. Specifically, digital financial inclusion encourages non-renewable energy consumption, thereby increasing households’ direct CO₂ emissions. Simultaneously, it promotes subsistence and development consumption upgrades, contributing to increased households’ indirect CO₂ emissions. Moreover, the study reveals that the impact of digital financial inclusion is heterogeneous. The environmental deterioration effect of digital financial inclusion is mainly driven by the actual uses of different services. As digital financial inclusion develops, its environmental detriment intensifies. Also, in cities where the Carbon Trade Policy (CTP) is implemented, digital financial inclusion can significantly reduce CO₂ emissions. Overall, the findings have several implications for addressing environmental problems in developing countries.