Guiding capital to carbon neutrality pressure: Comparing market-driven green finance and government-led fiscal policy

Countries around the world are facing carbon neutrality pressure (CNP), necessitating the prioritization of more efficient, green-oriented policy instruments. Among them, capital guidance policies, which can be categorized into green finance and fiscal policies, hold particular importance. An examination of the actual effectiveness of these two policy types in advancing carbon neutrality is therefore essential. To provide relevant insights supporting this goal, we quantify CNP at the Chinese prefecture-level city scale and take China’s green finance and fiscal policies as quasi-natural experiments. We further compare the impacts of green finance and fiscal policies on CNP using the multi-period difference-in-differences model. We find that green fiscal policy is more efficient for alleviating CNP, in contrast to green finance policy. Attention is also been given to the selection of green tools tailored to regional heterogeneity. Results show that the positive impact of green fiscal policy is more significant for nonresource-based and western cities. Detailed impact mechanisms from the perspectives of technological and structural effects are explored. Our analyses reveal that green fiscal policies significantly boost regional preferences for green technologies and promote structural optimization, while green finance shows no such effect. Specifically, green fiscal policies exert more significant impacts on energy-saving, carbon capture, and new energy technologies and effectively reshape the production structure at its source. The selection of green finance and green fiscal policies can be rationally prioritized based on this work under carbon neutrality goals.