Nonlinear dynamics and threshold effects of green finance on carbon emissions: A complex systems analysis in the Asia-Pacific region

This research reveals that the impact of green finance on carbon emissions is fundamentally nonlinear, exhibiting a critical investment threshold of 2.5 % of GDP, below which its effect is negligible. Using a panel threshold regression model on data from 20 Asia-Pacific countries (2000−2023), we analyze the direct, spatial and threshold dynamics governing this complex relationship. The Asia-Pacific region faces escalating carbon emissions due to rapid industrialization and urbanization necessitating effective financial mechanisms for mitigation. Green finance has emerged as a strategic tool, yet its effectiveness remains inconsistent across countries due to policy misalignments, governance disparities and economic structures. Existing studies have explored green finance role in emission reductions, but fail to account for spatial spillover effects, threshold dynamics and governance interactions, limiting their policy applicability. We integrate foreign direct investment (FDI), governance quality and energy structure as key moderating variables while incorporating renewable energy as a mediation factor. The analysis identifies investment thresholds beyond which green finance becomes significantly effective and investigates cross-border spillover effects that influence emission reductions in neighboring economies. The panel threshold regression model (PTR) further establishes critical investment breakpoints enhancing our understanding of nonlinear financial impacts on sustainability. Findings reveal that green finance investments below 2.5 % of GDP yield negligible emission reductions, while investments above this threshold lead to significant declines in CO₂ levels. Governance quality strengthens financial effectiveness whereas fossil fuel-dependent economies exhibit weaker green finance impacts. The results highlight the necessity for tailored financial strategies, regional coordination and regulatory frameworks to optimize green finance role in carbon mitigation. This research provides empirical evidence for policymakers, financial institutions and environmental stakeholders, aiding in the development of data-driven sustainable finance strategies for the Asia-Pacific economic landscape.