Based on the time series data of the Yangtze River Delta region from 1993 to 2015, this paper uses the state space model and the mediating effect model to investigate the time-varying effect and its mechanism of financial development (measured by two indicators: financial scale and financial efficiency), urbanization on carbon emissions. The results show a positive in the short term and negative in the long-run impact of financial scale on carbon emissions, while the impact of financial efficiency on carbon emissions is negative in the short term and positive in the long term, and the impact of urbanization on carbon emissions is always positive. Moreover, the results of mediating effect test demonstrate that urbanization is a positive partial mediating effect in the path of financial scale and financial efficiency influencing carbon emissions, and the mediating effect accounts for 71.64% and 61.69% of the total effect, respectively. The mediating effect of financial development includes chain effect and parallel effect; in the chain mediating effect, financial scale has a negative mediating effect with 27.40% of the total effect in the path of urbanization affecting carbon emissions, whereas financial efficiency plays a positive role with 2.07%; in the parallel mediating effect, the individual effect of financial scale and financial efficiency accounts for 24.39% and 1.05%, respectively.
Keywords: Carbon emissions; Financial efficiency; Financial scale; Mediating effect; State space model; Urbanization.