Nonnegligible transition risks towards net-zero economy: Lessons from green finance initiatives in China

Owing to critical policy significance, a growing body of literature has been predominantly concentrating on the social welfare benefits brought by green finance (GF) initiatives. However, there is a paucity of research that quantifies the economic costs of GF initiatives on carbon reduction, raising the increasing concerns about the irreconcilable climate-economy trade-offs. To end this, the present study systematically investigates the influence of GF initiatives on the carbon-related marginal abatement cost (MAC) using two competing hypotheses: regulatory versus technical effects. We first utilize an improved non-radial slacks-based measure analysis approach to determine the shadow price of CO₂ emissions, and then identify the real impact of GF initiatives on the MAC of CO₂ emissions using the progressive implementation of GF pilot programs as a quasi-natural design. To avoid non-parallel trends in pre-treatment periods and biased inference caused by the small number of units exposed, we utilize the newly developed synthetic DID approach to establish the causality. We find robust evidence that GF initiatives significantly increase the MAC of CO₂ emissions by about 310 yuan per ton in affected pilots compared to the counterparts. We further uncover that GF initiatives have tenuous effects on decreasing the carbon abatement costs via the green innovation channel, the technical effect is largely overpowered by the regulatory effect, which substantially pushes up the carbon abatement costs, ultimately leading to a total rise in the carbon abatement costs. Overall, our study offers new insights into the previously under-explored cost side of GF initiatives on the real economy. In particular, we argue that GF regulation is one of the nonnegligible channels by which transition risks get embedded in net-zero economy.