Nonlinear Relationship between Financial Development and CO₂ Emissions-Based on a PSTR Model

Area of Science:

• Environmental Economics
• Financial Economics
• Regional Economics

Background:

• Economic development often exacerbates environmental pollution, creating a critical contradiction.
• Understanding the financial development-carbon dioxide emissions nexus is crucial for sustainable solutions.

Purpose of the Study:

• To investigate the nonlinear relationship between financial development and carbon dioxide emissions in China.
• To identify the mechanisms through which financial development influences carbon emissions.

Main Methods:

• Utilized a panel smooth transition regression (PSTR) model.
• Analyzed panel data from 28 Chinese provinces (2005-2021).
• Addressed model endogeneity, heterogeneity, and potential outliers for robust findings.

Main Results:

• Financial development exhibits a nonlinear impact on carbon dioxide emissions.
• Positive effects are driven by scale and structural changes; negative effects by technological improvements.
• Financial added value and scale show smooth transitions; financial efficiency and FDI have positive influences.

Conclusions:

• Financial development's influence on carbon emissions is complex and context-dependent.
• Policy interventions should consider the distinct pathways (scale, structure, technology) of financial development's impact.
• Targeted financial strategies can promote emission reduction alongside economic growth.