ISETS Working Papers

ISETS Working Paper No. 22-0003

Local finance-carbon neutrality nexus: A quasi-natural experiment of city commercial banks in China

Xiaoxiao Zhou, Junjie Lin, Hua Zhang

Abstract: The Chinese government indicated that financial policies are important for sustainable development and that green finance should be developed to achieve carbon peaks by 2030 and carbon neutrality by 2060. This study aimed to detect the nexus of local finance and carbon neutrality by constructing a two-sector (clean and dirty sectors) model to capture the channels from financial development (FD) to energy consumption and carbon emissions (CEs) and by analyzing the scale, structural, and technological effects of the changes in the financial scale, structure, and efficiency. By establishing city commercial banks (CCBs) for a quasi-natural experiment, we used difference-in-differences (DID), instrument variable (IV), and spatial DID methods to test the effects of FD on CEs in China during 2003–2018. The construction of CCBs had a positive effect on the CEs of cities. This was mainly because of the expansion of electricity consumption (scale effect) and reindustrialization (structure effect) caused by establishing CCBs despite the technological effects of stimulating patent creation. Moreover, the nexus varied across different regions with different geographical locations, resource endowments, financial correlation ratios, and environmental regulations. In addition, CCBs construction showed a positive spatial spillover effect on the CEs of neighboring regions. Finally, the study proposed some suggestions for carbon neutrality from the perspective of CCBs management, related policies and regulations, and local carbon reduction efforts.