Research on the policy effect and mechanism of green finance to reduce environmental pollution: micro evidence from 285 cities in China

Based on panel data from 285 Chinese prefecture-level cities from 2003 to 2020, this paper uses the difference-in-difference (DID) method to investigate the policy effect, mechanism, and heterogeneity of green finance (GF) to reduce environmental pollution. (1) Green finance has significant effect on reducing environmental pollution. The parallel trend test demonstrates that DID test results are valid. (2) Following a battery of robustness tests including instrumental variable, propensity score matching (PSM), variable substitution, and changing time-bandwidth, the conclusions are still valid. (3) Mechanism analysis reveals that green finance can reduce environmental pollution by increasing energy efficiency, adjusting industrial structure, and transforming green consumption. (4) Heterogeneity analysis proves that green finance has a substantial impact on reducing the environmental pollution in eastern and western cities, but not in central China. (5) In the “two-control zone” and “low-carbon pilot cities,” the results of applying green finance policies are better, and a policy superposition effect exists. To be able to promote environmental pollution control, and green and sustainable development, this paper provides useful enlightenment for environmental pollution control for China and other similar countries.