The role of financial development and economic growth in reducing co2 emissions: evidence from china

Abstract

Based on the dynamic panel data from 29 administrative regions in China over the period of 2003-2013, we applied GMM system method to the analysis of the relationship between financial development, economic growth and CO2 emissions. Empirical analysis indicates that economic growth is usually accompanied by higher CO2 emissions, while the increasing level of final development is associated with a reduction in CO2 emissions. Further analysis shows that the relationship between financial development and CO2 emissions presents an inverted-U shape pattern. Only after the economic development has reached a threshold value will the promoting effect of financial development to the reduction of CO2 emissions manifest. Moreover, industrial structure optimization and upgrading contribute to the reduction of CO2 emissions. In other words, the increasing proportion of the secondary sector will weaken the promoting effect of financial development to the reduction of CO2 emissions and intensify the negative impact of economic growth on CO2 emissions. On the contrary, the increasing proportion of the tertiary sector will greatly facilitate the reduction of CO2 emissions and mitigate the increase of CO2 emissions due to economic growth. For less financially developed countries, market-oriented reform can reduce carbon emissions by promoting financial development. Moreover, industrial structure optimization and upgrading will contribute significantly to the reduction of CO2 emissions.