The impact of shadow banking activities on carbon dioxide emissions: empirical evidence from China

Abstract

Financial activity plays an important role in the analysis of environmental and ecological implications. Previous research shows that shadow banking activities, informal and less regulated financial activities, have become an important part of financial systems after the 2008 financial crisis. However, the impact of shadow banking activities on carbon dioxide emissions has been ignored in previous research. In this paper, we use the panel annual data of 30 Chinese provinces over the period 2013-2020 to study the effect of shadow banking activities on carbon dioxide emissions. The result shows that shadow banking activities have a positive impact on carbon dioxide emissions, and the result is still robust by using dynamic panel regression with general method of moments (GMM) method. Heterogeneity analysis shows that the impact of shadow banking activities on carbon emissions is more pronounced for the secondary industry, which proves that shadow banking activities support more for environmentally unfriendly businesses. Furthermore, by using difference-in-difference (DiD) method, we examine the causal effect of shadow banking regulation policy on carbon dioxide emission reduction and demonstrate that the shadow banking regulation can reduce carbon dioxide emissions. Our research contributes to environment protection and achieving the goal of low-carbon economy by exploring the role of shadow banking activities and financial regulation in carbon dioxide reduction.

Keywords: Carbon dioxide emissions; Climate change; Difference-in-Difference (DiD) method; Financial development; Financial regulation policy; Shadow banking.