Does financial development influence CO₂ emissions? A Chinese province-level study

As the greatest CO₂ emitter, downgrading the CO₂ emissions in China is urgent. The main purpose of this study is to explore the relation of financial development to CO₂ emissions at the provincial level in China by static and dynamic analysis, which is rarely investigated. The Principal Component Analysis is applied to avoid the indicator correlation problem that usually exited in prior studies, and generate a provincial financial development index in China since 2001. Through the static panel analysis, it is found that one standard increment in provincial financial development level will reduce CO₂ emissions by 4%–5% on average, nevertheless, it increases the CO₂ emissions of Zhejiang, Fujian, Sichuan, Yunnan, Shaanxi and Xinjiang. In the long term, it exists that the two-way causality between regional financial development and CO₂ emissions, whereas it's not true for the short term. The dynamic analysis results demonstrate that the regional financial development has significantly lagged inhibitory effects on CO₂ emissions. Examining the effects of financial development on CO₂ emissions at reginal level in China yields strong recommendation that China should put far focus on developing her financial sector, and also may provide some references for the provincial policymaker regarding CO₂ emissions reduction.