Assessing the role of financial tool in China's low-carbon transition: Evidence from traditional credit and green credit

Achieving carbon neutrality goals necessitates substantial financial support. The financial sector is poised to assume an increasingly pivotal role in the process of carbon reduction. Existing literature frequently examines the relationship between financial credit and carbon emission reduction from a linear perspective, thereby overlooking the genuine presence of a nonlinear nexus. Unlike existing literature, this paper constructs a nonparametric additive model and uses it to simulate the complex nonlinear effects of green credit and traditional credit on CO2 emissions. Empirical results show that: (1) green credit and traditional credit exert an inverted U-shaped nonlinear impact on CO2 emissions. This finding suggests that the carbon reduction effects of these two types of credit become increasingly prominent over time. (2) Heterogeneity analysis indicates that traditional credit exerts an inverted U-shaped effect on provinces with low to medium financial levels, whereas it demonstrates a positive U-shaped effect in provinces characterized by high financial levels. Conversely, green credit exhibits an inverted U-shaped impact on both low- and high-financial level provinces, while producing a positive U-shaped influence in those with medium financial levels. (3) Mechanisms analysis indicates that both green technology innovation and industrial agglomeration generate an inverted U-shaped effect on CO2 emissions. This suggests that the carbon reduction impact of these two mediating variables has transitioned from being negligible in the early stages to becoming outstanding in the later stages.