Comprehensive governance in hybrid regulation and knowledge: How different types of environmental regulatory strategies promote the development of transition finance

Amid increasingly stringent global climate policies and rising carbon emissions, coupled with the heavy dependence of many emerging economies on high-carbon industries, understanding how different environmental regulations affect the development of transition finance is crucial for balancing economic growth and deep decarbonisation. Using China’s carbon emissions trading pilots and low-carbon city pilots as representative cases, this study systematically examines how market-driven environmental regulatory strategies (MERS) and government-led environmental regulatory strategies (GERS) affect the development level of transition finance (DLTF), how their joint implementation within an environmental hybrid governance framework (EHGF) reshapes these relationships, and the underlying mechanisms and spatial spillover effects. Drawing on the G20 Sustainable Finance Report 2022 , we construct a city-level DLTF index covering both the ‘investment’ and ‘benefits’ dimensions and employ a multi-period difference-in-differences model with panel data for 243 prefecture-level cities from 2009 to 2021. The results show that the joint implementation of the MERS (coefficient=0.016) and GERS (coefficient=0.006) within the EHGF framework raises the estimated coefficient of DLTF to 0.018, and all the core coefficients are significant at the 1% level. This indicates that the governance synergy generated by hybrid regulation clearly outperforms any single policy instrument. Mechanism tests suggest that MERS promotes transition finance primarily by strengthening environmental incentives, fostering green innovation, and improving resource allocation, whereas GERS exerts a more pronounced influence through green innovation and resource allocation. Spatial econometric analysis further reveals that MERS generate significant positive spillover effects on neighbouring cities, whereas the impact of GERS is more localised within administrative boundaries. Overall, these findings indicate that scientifically combining market-driven and government-led environmental regulatory tools and aligning them with the development trajectory of transition finance is a key governance strategy for supporting the orderly transition of high-carbon sectors and advancing long-term carbon reduction goals and sustainable economic transformation.