A nexus study of carbon emissions and financial development in China using the decoupling analysis

Investigating the linkage between financial development (FD) and carbon emissions is important for mitigating climate change. Nevertheless, there is a scarcity of studies investigating how carbon emissions decouple from FD. Here, we investigate the relationship between FD and carbon emissions by using the decoupling model based on cross-province data of China during 2000-2019. Then, we use the decomposition method to analyze the nine drivers of decoupling elasticity of FD and CO₂ emissions. We found that China experienced weak decoupling and strong negative decoupling in most years. Only the finance develops at a very high level; the FD had spare capacities to promote the reduction in the carbon emissions. For example, several developed provinces (e.g., Tianjin, Zhejiang, Guangdong) realized strong decoupling after 2012. The reduction in energy intensity and the increase of foreign direct investment promoted the decoupling of FD from carbon emissions. During the financial recession period, developing a bank-based financial market helped the emissions reduction. Once financial crisis is overcome, developing a market-based financial market promoted the decoupling of FD from emissions. This is because that with the fast FD, the development of stock market contributed to emission reductions through technological improvement, while the bank loans inhibited the decoupling process through the expansion of capital-labor inputs. Overall, these results help in the assessment of the emissions impacts of FD and in addressing climate change problems.