Uncovering the mystery of financial development in mitigating CO2 emissions in China: A spatial dependence and heterogeneity perspective

Carbon dioxide (CO2) emission mitigation has recently been a critical policy-making concern in the financial area. To address this concern, we examine whether and to what extent financial development reduces CO2 emissions in China from a spatial dependence and heterogeneity perspective. The empirical results of applying a random effects eigenvector spatial filtering (RE-ESF) model and a RE-ESF with non-spatially varying coefficients (RE-ESF-SNVC) model to a provincial panel dataset over the period 1997 - 2017 indicate better goodness-of-fit due to the consideration of spatial effects. The role of financial development in mitigating CO2 emissions is confirmed at both the global level by using the RE-ESF model and the local level by using the RE-ESF-SNVC model. Moreover, the contributions of financial development display clear regional disparities, suggesting the inclusion of spatial heterogeneity when developing financial policies for CO2 emission mitigation. However, such contributions are restricted by financial constraints which increase CO2 emissions globally and locally, requiring a balance between financial development and financial constraints when expanding bank loans. Additionally, the one-way analysis of variance reveals the existence of a geographically dividing line approximately connecting the easternmost tip of Xinjiang and the easternmost tip of Fujian. It is observed that provinces above the line generally have stronger impacts of financial development on carbon emission reduction, while impacts in provinces below the line are generally weaker. These findings encourage the implementation of proactive fiscal and monetary policies to promote financial development. Considering financial constraints, cross-provincial and province-specific financial policies should be balanced when allocating more financial resources to provinces with greater contributions of financial development to CO2 emission mitigation.