The impact of financial development on carbon emissions: An empirical analysis in China

Given the complexity between China's financial development and carbon emissions, this paper uses some econometric techniques, including cointegration theory, Granger causality test, variance decomposition, etc., to explore the influence of financial development on carbon emissions. Results indicate that, first, China's financial development acts as an important driver for carbon emissions increase, which should be taken into account when carbon emissions demand is projected. Second, the influence of financial intermediation scale on carbon emissions outweighs that of other financial development indicators but its efficiency's influence appears by far weaker although it may cause the change of carbon emissions statistically. Third, China's stock market scale has relatively larger influence on carbon emissions but the influence of its efficiency is very limited. This to some extent reflects the relatively lower liquidity in China's stock markets. Finally, among financial development indicators, China's FDI exerts the least influence on the change of carbon emissions, due to its relatively smaller volume compared with GDP; but it is mainly utilized in carbon intensive sectors now, therefore, with the increase of China's FDI in the future, many efforts should be made to adapt its utilizing directions and play its positive role in promoting low-carbon development.

Research Highlights
► This paper explores the influence of financial development on carbon emissions.
► China's financial development appears to be an important driver for carbon emissions increase.
► The influence of financial intermediation scale on carbon emissions outweighs that of other indicators.
► China's stock market scale has relatively larger influence on carbon emissions but the influence of its efficiency is very limited.
► China's FDI exerts the least influence on carbon emissions change, due to its relatively smaller volume compared with China's GDP.