Does green finance policy help to improve carbon reduction welfare performance? Evidence from China

Evaluating whether the green finance policy helps to enhance welfare performance in the context of carbon reduction is significantly important to low-carbon economic development transformation, while few studies have explored its environmental effects from the perspective of welfare. This paper theoretically analyzes the impact and corresponding mechanism of the green finance policy on carbon reduction welfare performance(CWP) by introducing green financial policy into endogenous economic growth model with environmental constraints. Treating the establishment of National Green Finance Reform and Innovation Pilot Zone (GFPZ) as a quasi-natural experiment, the difference-in-differences(DID) model is applied to empirically investigate the impact of green finance policy on CWP based on the panel data of cities and listed companies of A-share market in China during 2005-2019. The results show that the GFPZ policy significantly improves the CWP of pilot cities, compared with that of non-pilot cities, especially in the areas with advanced external conditions in financial development and innovation. Regarding the mechanisms, there are both "high-carbon contraction" and "green expansion" in capital allocation, but there is a differentiated effect among industries, which shows that the "high-carbon contraction" affects the scale and cost of financing simultaneously, while the "green expansion" only affects the financing cost. A squeezing-out effect rather than a forcing effect is characterized by the innovation compensation effect in high-carbon industries, which reflects that green finance policy has not yet exceeded the "optimal ratio" and "minimum intensity". In addition, the green finance policy has a positive spillover effect on the surrounding 200-700 km radius, but agglomerate shadowing is also observed. Overall, these results provide valuable insights into effective ways for green finance to support regional low-carbon economic transformation.