The green promise of digital finance: Exploring its effects and mechanisms on carbon reduction

In the digital era, whether digital finance contributes to carbon reduction is crucial for achieving global sustainable development goals. This study explores the effects and mechanisms of digital finance on carbon emissions using panel data from Chinese counties during 2014–2022. Findings show that digital finance has a positive impact on carbon reduction at the county level in China. Mechanism analysis reveals that digital finance promotes corporate green technology innovation, accelerates the market exit and clean transformation of enterprises with high pollution, high energy consumption, and high emissions (“three-high”), limits government land concessions for “three-high” industries, and improves local fiscal autonomy. These mechanisms act as important channels for reducing carbon emissions. Heterogeneity analysis indicates that digital finance has a stronger impact on carbon reduction in counties with a high level of fintech, a high degree of carbon lock-in, and low climate risk. Additionally, digital finance facilitates regional synergistic carbon reduction and the synergy between pollution and carbon reduction while enhancing ecological environment quality. Our work contributes to the literature on digital finance and green transition, and provides important implications for China and the world in tapping the potential of carbon reduction from the perspective of digital finance.