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How green growth affects carbon emissions in

China: the role of green finance

Jun Zhao, Farhad Taghizadeh-Hesary, Kangyin Dong & Xiucheng Dong

To cite this article: Jun Zhao, Farhad Taghizadeh-Hesary, Kangyin Dong & Xiucheng
Dong (2023) How green growth affects carbon emissions in China: the role of
green finance, Economic Research-Ekonomska Istraživanja, 36:1, 2090-2111, DOI:
10.1080/1331677X.2022.2095522

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ECONOMIC RESEARCH-EKONOMSKA ISTRAŽIVANJA
2023, VOL. 36, NO. 1, 2090–2111
https://doi.org/10.1080/1331677X.2022.2095522

How green growth affects carbon emissions in China:

the role of green finance
Jun Zhaoa, Farhad Taghizadeh-Hesaryb,c , Kangyin Dongd and
Xiucheng Dongd
a
The College of Economics and Management, Beijing University of Chemical Technology, Beijing,
China; bSchool of Global Studies, Tokai University, Tokyo, Japan; cTOKAI Research Institute for
Environment and Sustainability (TRIES), Tokai University, Tokyo, Japan; dSchool of International Trade
and Economics, University of International Business and Economics, Beijing, China

ABSTRACT ARTICLE HISTORY

Accelerating the green transition of the economy is an effective Received 9 April 2022
way to conserve energy and reduce emissions, and its impact on Accepted 25 June 2022
the greenhouse effect deserves in-depth discussion. Based on this,
KEYWORDS
we examine the potential effect of China’s green growth on car-
CO2 emissions; green
bon dioxide (CO2) emissions by applying provincial panel data growth; green finance;
from 2004 to 2018. The regional heterogeneity and how does regional differences;
green finance affect the green growth-CO2 nexus are also mediation effect; China
checked. The primary findings imply that: (i) China’s green growth
achieves preliminary results, and its impact on CO2 emissions is JEL CLASSIFICATIONS
significantly negative. Also, green finance can facilitate carbon C31; O13; P34; Q54; R11
emission reduction; (ii) significant regional heterogeneity exists
within various regions. Only in the central and western regions
can green growth effectively reduce CO2 emissions, and in the
eastern and central regions, green finance is conducive to promot-
ing carbon reduction; and (iii) the mediating role of green finance
is significant. In other words, China’s green growth not only miti-
gates the greenhouse effect directly, but also affects CO2 emis-
sions indirectly by accelerating the development of green finance.

1. Introduction
Since the reform and opening up proposed in 1978, China’s economy has achieved
remarkable progress, and its economic aggregate has been rising rapidly (Dong et al.,
2018). As Jiang et al. (2020a) and Ren et al. (2022) stress, huge economic aggregate
and rapid economic development are usually driven by a large amount of fossil
energy consumption, and the excessive consumption of coal and oil often emits mas-
sive carbon dioxide (CO2) emissions. However, as International Energy Agency (IEA)
stresses, the outbreak of corona virus disease 2019 (COVID-19) in 2019 severely

CONTACT Kangyin Dong [email protected]

Web: https://scholar.google.com/citations?user=Ut15iYkAAAAJ&hl=en&oi=ao or https://www.researchgate.net/profile/
Kangyin_Dong.
ß 2022 The Author(s). Published by Informa UK Limited, trading as Taylor & Francis Group.
This is an Open Access article distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/
licenses/by/4.0/), which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is
properly cited.
 ECONOMIC RESEARCH-EKONOMSKA ISTRAŽIVANJA 2091

Figure 1. Time trend chart of the average values of CO2 emissions from 2004 to 2018.
Source: Self-calculated according to the data of CEADs (2019).

restricted international trade and production activities of enterprises, significantly

reversed the trend of surging CO2 emissions (Tu & Rasoulinezhad, 2021). Following
the statistics of former British Petroleum (BP, 2021), China’s primary CO2 emissions
in 1978 were 1,418.5 million tonnes of CO2 (Mt of CO2), while in 2020, the amount
of CO2 emissions was 9,893.5 Mt of CO2, approximately seven times the CO2 emis-
sions produced 42 years earlier. In addition, we draw the time trend chart of average
values of CO2 emissions across various provinces by following the data of China
Emission Accounts and Datasets (CEADs, 2019) (see Figure 1). Obviously, China’s
CO2 emissions from 2004 to 2018 show an inverted U-shaped nexus and peak in
2014, which indicates the effectiveness of continuous carbon emission reduction.
Furthermore, Figure 2 presents the spatial distribution of per capita CO2 in 2018,
which exhibits that CO2 emissions in the eastern and northern provinces are signifi-
cantly higher than those in the central and western provinces, and a gradient weaken-
ing trend exists from east to west. Based on this, China aims to achieve its carbon
neutrality goal by reducing carbon emissions at the national level, which emphasizes
China’s determination to mitigate the greenhouse effect and alleviate the deterioration
of the ecological environment (Jiang et al., 2022).
Green growth is proposed under the framework of sustainable economic growth,
which aims to emphasize the coordinated socio-economic development, improve
social welfare, increase employment, and effectively solve the problems of resource
allocation and environmental degradation by changing consumption and production
patterns (Hao et al., 2021). Since green growth was strongly advocated, more and
more scholars began to define green growth. For instance, Hallegatte et al. (2012)
stress that green growth refers to the process of realizing a resilient, clean, and
energy-saving economic system. Hickel and Kallis (2020) define green growth as
absolute decoupling of economic growth and environmental degradation. The
2092 J. ZHAO ET AL.

Figure 2. Spatial distribution of per capita CO2 emissions in 2018.

Source: Self-calculated according to the data of CEADs (2019).

Organization for Economic Co-operation and Development (OECD) has put forward
an authoritative definition: green growth refers to the promotion of economic growth
while ensuring that natural assets can continue to provide various resources and
environmental services for humans’ well-being. With the vigorous advocacy of the
concept of green growth, all walks of life accelerate transformation and upgrading
under the guidance of national policies and directions, decrease dependence on trad-
itional high-polluting energy, and actively carry out the research and development
(R&D) of low-carbon technologies. Among them, the financial industry provides suf-
ficient capital support for green transition and is a strong guarantee for enterprises to
optimize and upgrade (Taghizadeh-Hesary & Yoshino, 2019). With the continuous
advancement of green finance, the support of financial institutions for environmental
protection enterprises can effectively guide the transfer of resources from high-carbon
industries to low-carbon industries, which can help reduce CO2 emissions.
Considering the above background, whether the current development of green
growth in China can help alleviate the greenhouse effect deserves in-depth exploring;
this is particularly useful for effectively identifying and assessing China’s green growth
process. Furthermore, as Figure 2 shows, due to the differences in economic driving
forces, the distribution of CO2 emissions in each province is obviously heterogeneous,
testing whether regional heterogeneity exists in the impact of China’s green growth
on CO2 emissions is imperative. In addition, with the rapid growth of green finance,
exploring the role of green finance in adjusting the green growth-CO2 nexus is crucial
for seeking for the specific influence channels of green growth in affecting CO2 emis-
sions. Thus, this study applies a provincial sample dataset covering the period
2004–2018 to explore whether green growth can help facilitate the reduction of
 ECONOMIC RESEARCH-EKONOMSKA ISTRAŽIVANJA 2093

carbon emissions in China, and further discusses the regional heterogeneous impact
of China’s green growth on CO2 emissions by dividing the full sample into three
regions: the eastern, central, and western regions. In addition, whether green finance
will stimulate the effect of green growth on CO2 emissions is investigated.
Consequently, the study contributes to the current literature on green growth and
CO2 emissions in the following three aspects: (1) It creatively assesses the reduction
of carbon emissions in the process of China’s green growth by constructing a green
growth composite index. This not only helps identify the specific actuality of China’s
green growth, but also effectively evaluates the potential effect of China’s green
growth on carbon neutrality; (2) due to the significant difference of carbon emissions
in various provinces, the regional heterogeneous impact of green growth on CO2
emissions across different regions is discussed; this exploration can effectively help
local governments to develop specific and practical strategies for accelerating carbon
emission reduction and achieving green growth according to local conditions; and (3)
the mediation role of green finance in affecting the green growth-CO2 nexus is
empirically explored in the study. This discussion is of great value for policymakers
and governments to leverage the role of financial institutions in capital regulation of
green growth and CO2 emissions and adjust the effect of green growth on greenhouse
effect from accelerating green growth of financial industry.
The remaining framework of this study is structured as follows. The related litera-
ture on green growth and CO2 emissions is provided in the next section. Section 3
analyzes the theoretical mechanism between green growth and CO2 emissions.
Section 4 constructs the model and presents the data sources, followed by the esti-
mated results in Section 5. Section 6 further explores whether improved green finance
can affect the role of green growth in reducing CO2 emissions. Section 7 concludes
our study and develops a series of policy implications.

2. Literature review
2.1. An overview of green growth
Whether countries with limited resources can find a way to develop their economy
and at the same time mitigate environmental damage through green growth is a ques-
tion that has occupied the minds of numerous scholars, environmentalists, and econ-
omists. To explore a sustainable low-carbon development model, the United Nations
Economic and Social Commission for Asia and the Pacific (UNESCAP) first proposed
the concept of green growth (ESCAP, 2005). This sustainable approach to develop-
ment has aroused considerable interest among scholars globally, and discussions on
green growth are growing. In addition, the OECD defines green growth as a develop-
ment method in which economic growth is coordinated with the ecological environ-
ment to achieve sustainable economic development (OECD., 2011). This definition is
also reached by Xu et al. (2020). Green growth is widely supported and recognized as
a sustainable development model (Zhao et al., 2022b).
Scholars have advanced different views on the measurement of green growth. The
growth rate of green total factor productivity (GTFP) obtained by the Malmquist-
Luenberger (ML) index is often used to reflect green growth, and has been optimized
2094 J. ZHAO ET AL.

by later scholars using data envelopment analysis (DEA) and directional distance
function (DDF) (Zhu et al., 2022). Furthermore, Kim et al. (2014) develop indicators
for assessing green growth using the OECD framework. In addition, the inequality-
adjusted human development index (HDI), inclusive wealth index (IWI), and sustain-
ability window analysis are used to measure green growth. In addition, Zhao et al.
(2022b) creatively build an indicator system including three aspects (i.e., economic
growth, people’s livelihood, and environment) to gauge a composite index of green
growth based on the improved entropy method. Obviously, there is no uniform meas-
ure of green growth, especially in China.

2.2. The green growth-CO2 nexus

To meet the needs of economic development, human beings have consumed a large
amount of fossil energy (e.g., coal and oil) and released massive CO2 emissions into
the atmosphere, leading to a series of adverse consequences, such as global warming
and rising sea levels (Dong et al., 2017; Ozturk et al., 2021; Zhao et al., 2022a). The
serious harm of the greenhouse effect has attracted global attention, and carbon emis-
sion reduction has become a worldwide problem. Countries have begun to seek devel-
opment methods to achieve a win-win situation for economic growth, and carbon
emission reduction through green growth is considered a feasible solution.
The research on green growth and carbon emissions can be traced back to the dis-
cussion of the causal relationship between economic growth and CO2 emissions. In
this context, some scholars confirm that rapid economic growth has a significant
impact on CO2 emissions (Acheampong, 2018; Chen et al., 2016; Mikayilov et al.,
2018; Ozturk & Salah Uddin, 2012; Shahbaz et al., 2018; Wang et al., 2018); con-
versely, Gorus and Aydin (2019) and Salahuddin et al. (2016) support the finding
that no causal relationship exists between economic growth and the greenhouse effect.
Based on this, increasing numbers of scholars have begun to investigate the impact of
green growth on the greenhouse effect. In this regard, Hao et al. (2021) used the
Cross-Sectionally Augmented Auto-regressive Distributive lag (CS-ARDL) model and
found that green growth can significantly reduce CO2 emissions. In addition, by
applying the quantile autoregressive distributed lag approach, Chien et al. (2021) sug-
gest that green growth has a significant negative impact on the greenhouse effect.
They believe green growth is an environment-friendly development mode with lim-
ited resources. This finding is basically consistent with the conclusion of Alper and
Oguz (2016) and Guo et al. (2017): green growth is negatively associated with the
greenhouse effect. The specific descriptions of these literatures related to growth-CO2
nexus are presented in Table A1 of Appendix. However, notably, there is currently
less relevant literature on China’s green growth-CO2 emissions nexus, which is crucial
for China’s carbon peak and carbon neutrality.

2.3. Literature gaps

Although some scholars have investigated the impact of green growth on CO2 emis-
sions, several research gaps still exist. First, although some indexes such as the ML,
 ECONOMIC RESEARCH-EKONOMSKA ISTRAŽIVANJA 2095

HDI, and IWI indexes are employed to measure green growth, and some scholars
have effectively and comprehensively assessed green growth for the case of China
(Zhao et al., 2022b), the effect of green growth on carbon emission reduction has not
received much attention. Second, the spatial distribution of CO2 emissions implies
regional heterogeneity across various provinces; however, few studies have examined
the differential impact of China’s green growth on carbon emissions. Third, while vig-
orously advocating green growth, the green development of the financial industry has
also received much attention from the academic community. However, whether green
finance is an effective channel for China’s green growth to mitigate the greenhouse
effect has not been comprehensively discussed.

3. Theoretical mechanism
To the best of our knowledge, green growth mainly underscores the greening and
intensification of the economy (Zhao et al., 2022b). Although the concept of green
growth has different emphasizes from circular economy, low-carbon economy, and
ecological economy, its core is the same, and it mainly advocates the concept of com-
prehensive coordination and sustainable development between economy, society, eco-
logical environment, and natural resources. To accelerate the harmonious
development of the economic growth and environment, on the one hand, local gov-
ernments will successively issue relevant policies and regulations on carbon emission
reduction and green innovation to create a policy environment for green growth (Xu
et al., 2020). In addition, national agencies will allocate funds to local governments
and environmental protection enterprises for the R&D of green technologies, creating
a capital base for enterprises to carry out technological expansion and innovation
(Dong et al., 2021). On the other hand, enterprises, especially energy and high-pollut-
ing enterprises, will actively respond to the goal of achieving carbon neutrality by
phasing out outdated capacity and accelerating corporate transformation and techno-
logical innovation. These measures play a decisive role in alleviating the green-
house effect.
In addition to the direct role of the government and enterprises mentioned above,
financial institutions will gradually play their role of capital regulation under the pol-
icy advocacy of green growth, and increasingly become the effective driving force of
energy transition and environmental improvement. More importantly, the financial
sector regards environmental protection as a basic policy, considers potential environ-
mental effects in the process of investment and financing, and actively provides finan-
cial services such as risk management, investment and financing, and project
operation for projects related to clean energy, green buildings, and green transporta-
tion (Tran, 2021). Furthermore, green finance pays attention to the protection of eco-
logical environment in financial operation activities, and alleviates the greenhouse
effect by guiding the transfer of limited resources of economy and society from high-
polluting areas to low-energy areas. Based on the above analysis, we propose the fol-
lowing hypotheses:
Hypothesis 1: Accelerating green growth can help reduce CO2 emissions.
2096 J. ZHAO ET AL.

Hypothesis 2: Green growth can mitigate the greenhouse effect by facilitating the
greening of financial institutions.

4. Empirical model and data sources

4.1. Empirical model
To empirically investigate the underlying impact of China’s green growth on CO2
emissions, we construct an econometric model with green growth and green
finance as the core explanatory variables and CO2 emissions as the explained vari-
able by referring to the three effects (i.e., economy, technology, and structure) pro-
posed by Copeland and Taylor (1994), which are represented by Pgdp, EE, and
ISU, respectively. In addition, we also introduce the variables of trade openness
and income inequality to reflect the impacts of trade flows and residents’ income,
which increases the accuracy of assessing the relationship between green growth
and carbon emissions. The specific estimated model is presented in the following
equation:

lnCO2it ¼ a0 þ a1 lnGGI it þ a2 lnGFI it þ a3 lnPgdpit þ a4 lnEEit þ a5 lnISU it

(1)
þa6 lnTrait þ a7 lnGapit þ vi þ lt þ eit

where subscript i refers to China’s 30 provinces within the sample data, and t means
the sample period, 2004–2018. a0 represents the constant term, and ak ðk ¼
1, 2, . . . , 7Þ indicates the coefficients of the variables to be estimated. ln stands for the
natural logarithm of each variable. CO2 refers to the carbon emissions of each prov-
ince, and GGI represents green growth. GFI, Pgdp, EE, ISU, Tra, and Gap indicate
green finance, economic growth, energy efficiency, industrial structure upgrading,
trade openness, and income inequality, respectively. vi refers to province-specific
effect, lt denotes time-specific effect, and eit means error term.
Notably, China’s green growth goal aims to facilitate the coexistence of rapid
socio-economic development and a sound environment; thus, the estimated coeffi-
cient of green growth (i.e., a1 ) may be negative. In addition, the coefficients of lnGFI,
lnPgdp, lnEE, lnISU, and lnTra are expected to be negative, and the coefficient of
lnGap (i.e., a7 ) is expected to be positive.

4.2. Variables and data sources

Annual data covering the period 2004–2018 of China’s 30 provinces are employed in
this study to investigate whether China’s green growth process can help accelerate the
realization of the goal of mitigating greenhouse effect. It is worth noting that data
from other years are not included in this study, as environment-related data in the
China Environment Statistical Yearbook (CESY, 2019) were only updated to 2018.
Other provinces are not considered due to missing data.
As the main research variables of our study, we first propose the specific steps of
gauging green growth and green finance, as follows:
 ECONOMIC RESEARCH-EKONOMSKA ISTRAŽIVANJA 2097

1. Green growth (denoted as GGI). To effectively and comprehensively assess green

growth in China, we construct a composite index of green growth with three
dimensions (i.e., economic growth, people’s welfare, and ecological environment);
the specific indicators and measurement method of the composite index can refer
to the relevant research of Zhao et al. (2022b). In addition, we further measure
the sub-indexes of green growth: the economic growth index (denoted as
GGI_1), the people’s welfare index (denoted as GGI_2), and the ecological envir-
onment index (denoted as GGI_3). The relevant data were collected from several
publicly available yearbooks in China.
2. Green finance (denoted as GFI). Similar to green growth, there is currently no
unified indicator for measuring green finance in China. Accordingly, referring to
Jiang et al. (2020b) research, we construct a composite index of green growth
that includes economy, finance, and the environment based on the improved
entropy method. Given the length of the article, the specific measurement steps
of this method can refer to the work of Zhao et al. (2022b). To be more specific,
economy includes three indicators (i.e., per capita gross domestic product (GDP),
per capita disposable income, and unemployment rate); finance consists of eight
indicators (i.e., number of banks per area, number of bank staff per area, number
of banks per capita, number of bank staff per capita, deposits, loans, the density
of insurance, and the depth of insurance); and six indicators are included in
environment (i.e., the rate of wastewater, the rate of sulfur dioxide, the rate of
solid waste, the rate of energy consumption, the rate of nature reserves, and the
rate of forests). The specific measures and properties of the indicators are
reported in Table A2. The data on economy are from the China Statistical
Yearbook (CSY, 2019), the environmental data were obtained from the CESY
(2019), and the China Regional Financial Operation Report (CRFOR) provides
the data on finance.

After calculating the composite index of green growth and green finance of each
province, we plot the time trend chart of the annual average values of green growth
and green finance from 2004-2018 (see Figure 3). Obviously, during the sample
period, green growth generally shows a U-shaped trend, while green finance presents
an inverted U-shaped characteristic. In addition, we present a table including the
symbols, definitions, and data sources of variables in Table A3, and the descriptive
statistics of all the used variables are presented in Table 1.

5. Empirical findings
5.1. Pre-benchmark analysis
Prior to the benchmark estimate, this study examines the multicollinearity between
the explanatory variables (see the first column of Table 2). It is clear that the values
of the variance inflation factor (VIF) of each explanatory variable and the mean VIF
are all less than 10. This implies that there is no multicollinearity among the explana-
tory variables selected in this study. Table 2 also lists the correlation coefficients
between variables. Obviously, the correlation coefficient between green growth (i.e.,
2098 J. ZHAO ET AL.

Figure 3. Time trend chart of the average values of green growth and green finance from 2004 to
2018, respectively.
Source: Self-calculated according to the data gauged in Section 4.2.

Table 1. Definitions and descriptive statistics of the selected variables.

Variable Definitions Obs. Mean Std. dev. Minimum Maximum
lnCO2 CO2 emissions 450 5.408042 0.8125148 1.757858 7.348459
lnGGI Green growth 450 1.241189 0.262392 1.787667 0.4596898
lnGFI Green finance 450 1.347638 0.367188 2.031035 0.1971542
lnPgdp Economic growth 450 10.35204 0.6851362 8.370316 11.8509
lnEE Energy efficiency 450 0.0777888 0.5395829 1.463981 1.428051
lnISU Industrial structure upgrading 450 0.060077 0.3731148 0.6990584 1.469621
lnTra Trade openness 450 1.662734 0.97987 4.085905 0.5679131
lnGap Income inequality 450 1.032355 0.1843939 0.6125599 1.560063
Note: Std. Dev. refers to standard deviation.
Source: Self-calculated.

Table 2. Test results for multicollinearity and correlation checks.

VIF lnCO2 lnGGI lnGFI lnEE lnISU lnPgdp lnTra lnGap
lnCO2 – 1.0000
lnGGI 2.99 0.1463 1.0000
(0.0019)
lnGFI 3.37 0.1973 0.7330 1.0000
(0.0000) (0.0000)
lnEE 2.82 0.1370 0.4369 0.3981 1.0000
(0.0036) (0.0000) (0.0000)
lnISU 1.87 0.3259 0.4958 0.6043 0.4090 1.0000
(0.0000) (0.0000) (0.0000) (0.0000)
lnPgdp 3.82 0.3220 0.5196 0.5548 0.7279 0.3732 1.0000
(0.0000) (0.0000) (0.0000) (0.0000) (0.0000)
lnTra 2.96 0.0105 0.6944 0.6302 0.4986 0.3044 0.4160 1.0000
(0.8242) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000)
lnGap 2.36 0.2417 0.3601 0.4019 0.6058 0.2408 0.6999 0.4941 1.0000
(0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000)
Mean VIF 2.88
Note:  refers to p < 0.1, and the data in parentheses denote the p-value of the correlation test.
Source: Self-calculated.
 ECONOMIC RESEARCH-EKONOMSKA ISTRAŽIVANJA 2099

Figure 4. Trend chart of the correlation between green growth and CO2 emissions.
Source: Self-calculated.

lnGGI) and carbon emissions (i.e., lnCO2) is 0.1463; in other words, green growth
and carbon emissions exhibit a significant negative relationship. Based on this, we
draw the scatter plot between green growth and carbon emissions (see Figure 4).
Both correlation check and scatter plot verify a preliminary conclusion: China’s green
growth can help mitigate the greenhouse effect.

5.2. Benchmark estimates

In this section, various empirical strategies are employed to discuss the specific
impact of green growth on the greenhouse effect in China. The first two columns of
Table 3 present the results in the green growth-CO2 nexus based on the pooled
ordinary least squares (OLS) and feasible generalized least squares (FGLS) techniques.
Considering that the panel sample may have potential heteroscedasticity and sequence
correlation, the estimated results of FGLS strategy are applied as the benchmark esti-
mates. We can find that the results of the inter-group heteroscedasticity test (i.e.,
Wald test), intra-group autocorrelation test (i.e., Wooldridge test), and inter-group
contemporaneous correlation test (i.e., BP LM test) all reject the null hypothesis at
the 1% significance level, which implies that the findings of the FGLS estimate are
accurate and effective. The coefficient of green growth (i.e., lnGGI) is 0.216; an
increase in green growth by 1% can mitigate the greenhouse effect by 0.216%. This
finding suggests that continuing to advocate green growth and strengthening the evo-
lution of the green economy play an important role in reducing CO2 emissions.
2100 J. ZHAO ET AL.

Table 3. Estimated results of the impact of green growth on CO2 emissions.

CO2 emissions Per capita CO2 emissions
Variable Pooled OLS FGLS Pooled OLS FGLS
lnGGI 0.804 0.216 0.701 0.278
(2.73) (5.96) (6.71) (7.01)
lnGFI 0.901 0.238 0.147 0.004
(6.10) (6.11) (2.29) (0.13)
lnEE 0.335 0.468 1.187 1.149
(3.42) (9.26) (28.56) (35.61)
lnISU 0.563 0.402 0.119 0.157
(5.05) (13.04) (2.60) (5.82)
lnPgdp 1.006 0.832 1.210 1.151
(10.34) (28.29) (29.60) (46.80)
lnTra 0.256 0.016 0.010 0.019
(4.03) (1.32) (0.43) (1.77)
lnGap 0.222 0.353 0.100 0.209
(0.98) (3.78) (1.05) (4.12)
_Cons 7.025 3.387 15.994 14.752
(5.65) (11.06) (31.23) (51.97)
R2 0.4362 0.8212
Wald test 4757.90 4619.32
Wooldridge test 35.811 38.068
BP LM test 2281.18 752.86
Obs. 450 450 450 450
Note: , , and  refer to statistical significance at the 1%, 5%, and 10% levels, respectively; the values in paren-
theses for pooled OLS represent the t-statistics, while the values in parentheses of FGLS estimates indicate the
z-statistics.
Source: Self-calculated.

As the goal of carbon neutrality continues to be advocated, the government, the

market, and the public are attaching increasing importance to ecological environmen-
tal protection and green evolution. More specifically, the government actively formu-
lates relevant laws and regulations to enforce environmental protection activities from
the perspective of policy, and restrain the polluting behaviors of enterprises and the
public (Zhao et al., 2020). For instance, policies and strategies such as forcibly shut-
ting down high-polluting chemical or manufacturing enterprises and restricting traffic
with odd and even numbers have effectively improved greenhouse gas emissions.
Moreover, local governments will provide financial support and technical guidance
for enterprises’ green innovation activities, thus motivating the whole society to grad-
ually shift from focusing on the economy to the coordinated development of the
economy and the environment. The national government will also provide corre-
sponding infrastructure for the green transition of the national economy, such as
‘coal to gas’ and ‘coal to electricity,’ which effectively addresses massive pollution
emissions (Xu & Ge, 2020).
As Wang and Shao (2019) stress, in addition to the joint action of the government
and the market, improving public awareness of environmental protection is also an
effective means of accelerating green economic development in China. In recent
years, with the widespread popularization of the concept of environmental protection
and the increasing level of public education, residents have gradually realized the
harm caused by the deterioration of the ecological environment and will contribute
to China’s goal of carbon neutrality by restricting their behavior and using green
energy such as electricity, especially in rural areas. Through joint cooperation between
the government, enterprises, and the public, China’s green economic growth has
 ECONOMIC RESEARCH-EKONOMSKA ISTRAŽIVANJA 2101

achieved initial results, which can effectively contribute to the realization of the vision
of carbon neutrality.
It is notable that the coefficient of green finance is 0.238, which suggests that
China’s green finance is negatively associated with the greenhouse effect, which is
also reached by Rasoulinezhad and Taghizadeh-Hesary (2022). Green finance refers
to the gradual change of financial institutions from profit-oriented to providing funds
to support energy saving and pollution reduction projects. This can not only guide
the flow of resources from highly polluting industries to technologically advanced sec-
tors, but also provide sufficient capital support for green technological innovation,
thereby mitigating the greenhouse effect (Taghizadeh-Hesary et al., 2020).

5.3. Robustness tests

5.3.1. Robustness test 1: Alternative measure of explained variable
In this section, we proceed to check the robustness of the estimated results by using
per capita CO2 emissions (denoted as PCO2) as explained variable for regression (see
the last two columns of Table 3). Obviously, the coefficient values and symbols of the
variables are basically consistent with the benchmark regression results. This verifies
the reliability of the regression conclusion — the negative green growth-CO2 nexus.

5.3.2. Robustness test 2: Alternative estimated method

In the last robustness check, we adopted the alternative estimated method — the
instrumental variable (IV) approach developed by Lewbel (2012) — to verify the reli-
ability of the carbon-reduction effect of green growth. This method constructs an
instrumental variable based on the heteroscedasticity in the error term. The estima-
tion results of Lewbel’s (2012) model are reported in Table 4. In this table, the coeffi-
cients of green growth (i.e., lnGGI) and the ecological environment index (i.e.,
lnGGI_3) are significantly negative, which indicates the robustness and reliability of
the benchmark results.

Table 4. Robustness check 2: Alternative estimated method.

Explained variable: lnCO2
Variable Model (1) Model (2) Model (3) Model (4)
lnGGI 0.804
(2.73)
lnGGI_1 0.292
(1.75)
lnGGI_2 0.144
(0.81)
lnGGI_3 0.926
(7.21)
Control variables Yes Yes Yes Yes
Unc_R2 0.9876 0.9872 0.9871 0.9890
Hansen J 0.000 0.000 0.000 0.000
Obs. 450 450 450 450
Note:  
and indicate statistical significance at the 1% and 10% levels, respectively; the values in parentheses
indicate t-statistics.
Source: Self-calculated.
2102 J. ZHAO ET AL.

5.4. Regional heterogeneous analysis

Due to the differences in population agglomeration, economic development level,
resource endowment, and geographical location among China’s various provinces,
exploring the regional heterogeneity of green growth on CO2 emissions is necessary.
In doing so, following the standard of China’s National Bureau of Statistics, we divide
the full sample into three regions, i.e., the eastern, central, and western regions; the
specific provinces of the three regions are illustrated in Table A4.
Table 5 presents the econometric results of the three regions, which show that
only in the central and western regions can green growth affect CO2 emissions nega-
tively. In eastern region, green growth is not effective in mitigating the greenhouse
effect. In Figure 2, the CO2 emissions in the eastern region are significantly higher
than those in the central and western regions. It is difficult for green growth to
reduce a large amount of carbon emissions in a short time in areas characterized by
rapid economic growth and a high concentration of population and resources.
However, in the central and western regions, the economic level is relatively back-
ward, especially in the western region. Under the premise of relatively low carbon
emissions, when green growth is vigorously advocated, the constraints of corporate
polluting emissions and green technical innovation can effectively alleviate the green-
house effect.
In contrast to green growth, green finance is negatively associated with carbon
emissions in the eastern and central regions, while in the western region, green
finance is not conducive to alleviating the greenhouse effect. This finding correlates
significantly with the level of financial development between regions. The coefficients
of green finance in the eastern and central regions are 1.511 and 0.239, respect-
ively, which suggests that the mitigation effect of green finance development in the
Table 5. Estimated results of regional heterogeneity.
Explained variable: lnCO2
Variable Eastern region Central region Western region
lnGGI 1.451 0.169 0.761
(13.67) (2.10) (11.31)
lnGFI 1.511 0.239 0.121
(25.43) (4.17) (1.77)
lnEE 0.977 0.751 0.042
(12.27) (10.13) (0.79)
lnISU 0.786 0.093 0.188
(15.44) (1.95) (3.48)
lnPgdp 1.522 0.988 0.564
(23.80) (21.34) (11.81)
lnTra 0.199 0.002 0.067
(5.00) (0.08) (3.67)
lnGap 1.087 0.289 0.352
(7.34) (1.62) (2.95)
_Cons 11.694 5.263 0.781
(17.11) (10.58) (1.35)
Wald test 278.05 1668.25 89.33
Wooldridge test 3.987 166.277 154.02
BP LM test 302.94 2283.34 825.71
Obs. 165 120 165
Note: , , and  indicate statistical significance at the 1%, 5%, and 10% levels, respectively; the values in paren-
theses indicate z-statistics.
Source: Self-calculated.
 ECONOMIC RESEARCH-EKONOMSKA ISTRAŽIVANJA 2103

eastern region on carbon emissions is significantly better than that in the central
region. Due to the limitation of the level of economic growth, the completeness of
financial institutions and systems and the development of financial inclusion show a
significant weakening trend from east to west.

6. Further discussion on the mediating role of green finance

6.1. Empirical model
In the benchmark regression, we can find that, at present, the development of green
finance plays an important role in reducing CO2 emissions. In this regard, an inter-
esting question ignites our consideration: Will green finance have an impact on the
linkage between green growth and CO2 emissions? In other words, is green finance
an effective mediating variable in the green growth-carbon emissions nexus? To solve
this issue, we apply the mediation effect model to discuss the direct and indirect
effect of green growth on CO2 emissions; the specific estimated equations of this
model are presented as follows:

X
6
lnCO2it ¼ u0 þ u1 lnGGI it þ uk lnZit þ vi þ lt þ eit (2)
k¼2

X
6
lnGFI it ¼ n0 þ n1 lnGGI it þ nk lnZit þ vi þ lt þ eit (3)
k¼2

X
7
lnCO2it ¼ a0 þ a1 lnGGI it þ a2 lnGFI it þ ak lnZit þ vi þ lt þ eit (4)
k¼3

where u0 and n0 refer to the constant terms, and uk ðk ¼ 1, 2, . . . , 6Þ and nk ðk ¼

1, 2, . . . , 6Þ represent the estimated parameters. Z denotes lnPgdp, lnEE, lnISU, lnTra,
and lnGap. Other variables and parameters are consistent with Eq. (1). In these three
equations, the coefficient of green growth in Eq. (2) (i.e., u1 ) indicates the total effect
of green growth on CO2 emissions. Only when u1 is significant can we further check
the direct and indirect effects in the green growth-CO2 nexus. The coefficient of
green growth in Eq. (4) (i.e., a1 ) represents the direct effect of green growth on CO2
emissions. Furthermore, if the coefficients of green growth in Eq. (3) (i.e., n1 ) and
green finance in Eq. (4) (i.e., a2 ) are both significant, an indirect effect exists; in other
words, green growth can have an impact on carbon emissions by affecting
green finance.

6.2. Empirical findings and discussion

The empirical results of estimating Eqs. (2)–(4) based on the FGLS and pooled OLS
strategies are presented in Table 6 simultaneously. Models (1)–(3) correspond with
the estimation results of Eqs. (2)–(4), respectively. To be more specific, in Model (1),
2104 J. ZHAO ET AL.

Table 6. Estimated results of the mediation analysis.

FGLS estimation Pooled OLS estimation
Variable Model (1) Model (2) Model (3) Model (1) Model (2) Model (3)
lnGGI 0.277 0.202 0.216 1.128 0.360 0.804
(5.62) (5.48) (5.96) (3.94) (7.21) (2.73)
lnGFI 0.238 0.901
(6.11) (6.10)
lnEE 0.397 0.085 0.468 0.161 0.194 0.335
(9.23) (2.64) (9.26) (1.73) (6.66) (3.42)
lnISU 0.356 0.183 0.402 0.878 0.350 0.563
(9.45) (6.53) (13.04) (7.51) (13.46) (5.05)
lnPgdp 0.741 0.169 0.832 0.822 0.204 1.006
(24.08) (4.44) (28.29) (8.66) (7.32) (10.34)
lnTra 0.005 0.073 0.016 0.139 0.130 0.256
(0.26) (6.78) (1.32) (2.17) (9.11) (4.03)
lnGap 0.341 0.077 0.353 0.146 0.084 0.222
(3.07) (1.18) (3.78) (0.65) (1.08) (0.98)
_Cons 2.256 2.772 3.387 4.461 2.845 7.025
(6.11) (6.41) (11.06) (3.76) (8.00) (5.65)
Wald test 4873.75 1327.77 4757.90
Wooldridge test 35.973 47.293 35.811
BP LM test 2271.46 1409.09 2281.18
R2 0.3870 0.7033 0.4362
Obs. 450 450 450 450 450 450
Note: , , and  refer to statistical significance at the 1%, 5%, and 10% levels, respectively; the values in paren-
theses for pooled OLS represent the t-statistics, while the values in parentheses of FGLS estimates indicate the
z-statistics.
Source: Self-calculated.

the coefficient of green growth is 0.277, which implies the total effect of green
growth on CO2 emissions and emphasizes the effectiveness of China’s advocacy for a
green economy. The green transformation and growth of China’s economy have
stimulated the green technological innovation process of enterprises and accelerated
the optimization and upgrading of industries. Also, the popularity of the green con-
cept has improved the public’s demand for favorable living condition and reduced
dependence on high-polluting energy, which can facilitate the reduction of car-
bon emissions.
The results of estimating Eq. (3) (i.e., Model (2)) indicate that the coefficient of
green growth is 0.202, and a 1% increase of green growth accelerates the development
of green finance by 0.202%. The active publicity and vigorous advocacy of the green
economy by the local government has triggered the response of the whole society to
the green concept, and all walks of life have accelerated their transformation to cope
with the impact of national policies. Obviously, the financial industry is no exception.
Financial institutions gradually incorporate environmental assessment in the process
and attach importance to the favorable ecological environment and the development
of green industry in investment and financing.
Regarding the third column, the coefficient of green growth (i.e., lnGGI) is 0.216.
This implies the direct effect of green growth on CO2 emissions. In addition, the par-
ameter of green finance (i.e., lnGFI) is significant. Notably, the significance of n1 and
a2 imply the mediating effect in the green growth-CO2 nexus. The coefficients of
green growth in the second column and green finance in the third column are 0.202
and 0.238, respectively, therefore, n1  a2 ¼ 0:202  ð0:238Þ ¼ 0:048076, and the
contribution of the indirect effect in the total effect is (-0.048076)/(-0.277)¼17.36%.
 ECONOMIC RESEARCH-EKONOMSKA ISTRAŽIVANJA 2105

Figure 5. The influence mechanism between green growth and CO2 emissions.
Source: Self-calculated.

Hence, as an important channel, green finance plays an effective mediating role in

the green growth-CO2 nexus.
In summary, we can conclude that the evolution of green growth not only directly
mitigates the greenhouse effect, but also weakens China’s carbon emissions by accel-
erating the development of green finance. The specific influence mechanism on the
green growth-CO2 emissions is presented in Figure 5.

7. Conclusions and policy implications

7.1. Conclusions
To empirically check the actual situation of China’s advocacy of green growth on the
greenhouse effect, we examine the potential role of green growth in China based on
provincial sample data from 2004 to 2018. The regional heterogeneity and how green
finance affect the green growth-CO2 nexus are also discussed in this study. The main
findings are illustrated as follows:

1. The primary finding of our study is related to the green growth-CO2 nexus. The
estimated results illustrate that China’s current green growth is negatively associ-
ated with CO2 emissions; in other words, the evolution of China’s green growth
can facilitate carbon emission reduction. From the estimated results of the sub-
indexes, we can find that the negative green growth-CO2 emissions nexus is
mainly due to the improvement of the ecological environment.
2. Significant regional heterogeneity exists between China’s green growth and car-
bon emissions. Specifically, only in the central and western regions can green
growth effectively facilitate carbon emission reduction, while in the eastern
region, a positive link exists between green growth and CO2 emissions. In add-
ition, green finance can reduce CO2 emissions in the eastern and central regions,
while in the western region, green finance is not conducive to mitigating the
greenhouse effect.
3. The findings of the mediating effect model show that the evolution of China’s
green growth not only alleviates the greenhouse effect directly, but also can facili-
tate carbon reduction by accelerating the development of green finance.
2106 J. ZHAO ET AL.

7.2. Policy implications

Following the above-discussed estimation findings, this study proposes a series of
policy implications. First, regarding the negative green growth-CO2 nexus, it is
crucial to continue to strengthen the green transition of China’s current economic
structure. Local governments should strengthen green and low-carbon develop-
ment planning, fully integrate the carbon emissions-reduction goal into long-term
planning for socio-economic development by formulating relevant laws and regu-
lations, and incorporate green economic development into top-level design from a
policy perspective. This measure is applicable to any country in the world, and the
vigorous advocacy of national policies is an effective guarantee for enterprises and
residents to improve environmental awareness. Moreover, optimizing the regional
layout of green and low-carbon transition is an effective means of promoting
green growth. Local governments should strengthen the guidance and task require-
ments of green development in the implementation of major regional strategies
such as the coordinated development of Beijing-Tianjin-Hebei, the integrated
development of the Yangtze River Delta, and the development of the Yangtze
River Economic Belt.
Second, the estimated findings underscore the negative impact of green finance on
CO2 emissions; thus, accelerating the development of green finance is crucial, which
is also applicable to other countries. On the one hand, financial institutions such as
commercial banks should pay more attention to green finance, fully recognize the
importance of green finance development, and speed up the construction of support-
ing a green finance policy system. Local governments should introduce corresponding
policies as soon as possible and clarify the binding indicators for the development of
green finance, such as social responsibility and industry standards. On the other
hand, continuous innovation of new financial instruments in line with the develop-
ment of green finance, such as green bonds, green credit, and green insurance, can
provide diversified and flexible financing channels that will facilitate the development
of green finance and accelerate the mitigation of the greenhouse effect. Vigorously
supporting the greening of financial institutions is an effect means for any country to
save energy and reduce emissions, which will not only significantly curb the outbreak
of financial crisis, but also help achieve the goal of carbon neutrality.
Third, the existence of regional heterogeneity implies that formulating strategies
suitable for green growth according to local conditions is key to comprehensively
enhancing the green transition of China’s economy. For instance, in the economically
developed eastern region, green growth cannot effectively alleviate the greenhouse
effect due to the large amount of carbon emissions, while green finance is an effective
measure; accordingly, provinces in the eastern region should continue to improve
green financial institutions and systems, and strengthen the green technological
innovation of enterprises. On the contrary, in the central and western regions whose
economic development is relatively backward, the carbon emission-reduction effect of
green growth has achieved initial results. It is necessary to continue to strengthen
green investment and provide financial support for environmental protection
technologies.
 ECONOMIC RESEARCH-EKONOMSKA ISTRAŽIVANJA 2107

Acknowledgements
The article is sponsored by the National Social Science Foundation of China (Grant No.
20VGQ003). Farhad Taghizadeh-Hesary acknowledges the financial support from the Grant-
in-Aid for the Excellent Young Researcher of the Ministry of Education, Culture, Sports,
Science and Technology of Japan (MEXT); Grant-in-Aid for Young Scientists (No. 22K13432)
of the Japan Society for the Promotion of Science (JSPS) and the Grant-in-Aid for Scientific
Research (B) (No. 22H03816) of the JSPS. The authors gratefully acknowledge the helpful
reviews and comments from the editors and anonymous reviewers, which improved this
manuscript considerably. Certainly, all remaining errors are our own.

Disclosure statement
No potential conflict of interest was reported by the authors.

Funding
National Social Science Fund of China (Grant No. 20VGQ003).

ORCID
Farhad Taghizadeh-Hesary http://orcid.org/0000-0001-5446-7093
Kangyin Dong http://orcid.org/0000-0002-5776-1498

Data availability statement

The data that support the findings of this study are available from the corresponding author
upon reasonable request.

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2110 J. ZHAO ET AL.

Appendix A
Table A1. The specific descriptions of the literatures related to growth-CO2 nexus.
Literature Relationship Country Method Sample data Conclusion
Acheampong Economic growth 116 countries Panel vector 1990-2014 Bidirectional
(2018) and CO2 autoregression (PVAR) relationship
and Sys-GMM
Chen et al. (2016) Economic growth 170 countries Vector Error-Correction 1980-2011 Positive effect
and CO2 Model (VECM)
Mikayilov Economic growth Azerbaijan Johansen, ARDLBT, DOLS, 1992-2013 Positive effect
et al. (2018) and CO2 FMOLS, and
CCR methods
Shahbaz Economic growth Japan ARDL model 1970-2014 Positive effect
et al. (2018) and CO2
Wang Economic growth BRICS Partial least square 1996-2015 Positive effect
et al. (2018) and CO2 countries regression model
Gorus and Economic growth Eight oil-rich Single- and multi-country 1975-2014 No causal
Aydin (2019) and CO2 MENA Granger causality test relationship
countries
Salahuddin Economic growth OECD Pedroni panel 1991-2012 No causal
et al. (2016) and CO2 countries cointegration and relationship
pooled mean
group (PMG)
Hao et al. (2021) Green growth G7 countries Cross-Sectionally 1991-2017 Negative effect
and CO2 Augmented Auto-
regressive Distributive
lag (CS-ARDL
Chien Green growth United States Quantile autoregressive 1970-2015 Negative effect
et al. (2021) and CO2 distributed lag
(QARDL) method
Alper and Green growth EU member Asymmetric causality test 1990-2009 Negative effect
Oguz (2016) and CO2 countries and autoregressive
distributed lag
(ARDL) methods
Guo et al. (2017) Green growth China Structural equation 2011-2012 Negative effect
and CO2 modeling (SEM)
Source: Self-summarized according to the literatures.

Table A2. The indicator system of green finance in China.

Dimension Specific indicators Measure Code Property
Economy Per capita GDP GDP/population x1 þ
Per capita disposable income Disposable income/population x2 þ
Unemployment rate Unemployed/total labor force x3 
Finance Per area banks Amount of banks/areas x4 þ
Per area bank staff Amount of bank staff/areas x5 þ
Per capita banks Amount of banks/population x6 þ
Per capita bank staff Amount of bank staff/population x7 þ
Deposits Deposits/GDP x8 þ
Loans Loan/GDP x9 þ
Density of insurance Premium/population x10 þ
Depth of insurance Premium/GDP x11 þ
Environment The rate of wastewater Wastewater/(deposit þ loan) x12 
The rate of sulfur dioxide Amount of sulfur dioxide/(deposit þ loan) x13 
The rate of solid waste Amount of solid waste/(deposit þ loan) x14 
The rate of energy consumption Amount of energy consumption/(deposit þ loan) x15 
The rate of nature reserve Amount of nature reserve/(deposit þ loan) x16 þ
The rate of forest Amount of forest/(deposit þ loan) x17 þ
Source: Self-summarized according to the Section 4.2.
 ECONOMIC RESEARCH-EKONOMSKA ISTRAŽIVANJA 2111

Table A3. The descriptions and data sources of variables used.

Variable Symbols Definitions Sources
CO2 emissions CO2 The amount of CO2 emissions of CEADs (2019)
each province
Green growth GGI Green growth composite index CSY (2019), and CESY (2019)
Green finance GFI Green finance composite index CSY (2019), CESY (2019), and
China Regional Financial
Operation Report (CRFOR)
Economic growth Pgdp Per capita GDP CSY (2019)
Energy efficiency EE The output value per unit of energy CSY (2019)
consumption, i.e., the reciprocal of
energy intensity
Industrial structure ISU The ratio of the output value of tertiary CSY (2019)
upgrading industry to the output value of
secondary industry
Trade openness Tra The proportion of total import and export CSY (2019)
trade in GDP in each province
Income inequality Gap The proportion of urban per capita CSY (2019)
disposable income to rural per capita
disposable income
Source: Self-summarized according to the selected variables.

Table A4. The specific provinces of the three regions.

Region Provinces
Eastern region (11 provinces) Beijing, Tianjin, Hebei, Liaoning, Shanghai, Jiangsu,
Zhejiang, Fujian, Shandong, Guangdong, and Hainan
Central region (8 provinces) Shanxi, Jilin, Heilongjiang, Anhui, Jiangxi, Henan,
Hubei, and Hunan
Western region (11 provinces) Inner Mongolia, Guangxi, Chongqing, Sichuan, Guizhou,
Yunnan, Shaanxi, Gansu, Qinghai, Ningxia, and Xinjiang
Source: Self-summarized according to the National Bureau of Statistics of China.

Table A5. Abbreviation list.

Abbreviations
BP British Petroleum GTFP Green total factor productivity
CEADs China Emission Accounts and Datasets HDI Human development index
CESY China Environment Statistical Yearbook IEA International Energy Agency
CO2 Carbon dioxide IV Instrumental variable
COVID-19 Corona virus disease 2019 IWI Inclusive wealth index
CRFOR China Regional Financial Operation Report ML Malmquist-Luenberger
CS-ARDL Cross-Sectionally Augmented Mt of CO2 Million tonnes of CO2
Auto-regressive Distributive lag
CSY China Statistical Yearbook OECD Organization for Economic Cooperation
and Development
DDF Directional distance function OLS Ordinary least squares
DEA Data envelopment analysis R&D Research and development
FGLS Feasible generalized least squares UNESCAP United Nations Economic and Social
Commission for Asia and the Pacific
GDP Gross domestic product VIF Variance inflation factor