Can green credit policy improve environmental quality? Evidence from China

There is significant interest among policymakers and academics about whether or not green credit, which is a market-oriented environmental policy tool, has achieved its intended effect in improving the environment in China. This paper addresses this question from both theoretical and empirical perspectives. Using panel data from 30 provincial administrative regions of China from 2007 to 2016, we apply the fixed effect model and the gray correlation analysis method to examine the influence and its mechanism of green credit on China's environmental quality. The results show that green credit does improve China's environmental quality overall. Green credit can reduce environmental pollution through three mechanisms: improving enterprise performance, motivating enterprise innovation, and upgrading industrial structure. However, there are regional differences in the emission-reduction effect of green credit. Green credit improves the environmental quality in resource-based regions more than non-resource-based regions; the emission-reduction effect is significant in regions with developed financial markets, but not significant elsewhere. The results indicate that green credit policies should be regionally differentiated to more effectively achieve emission-reduction targets.