Can sustainable finance improve carbon emission efficiency: evidence from China’s prefecture-level cities

Abstract Sustainable finance can provide financial assistance to address environmental challenges. Nevertheless, whether sustainable finance can help facilitate low-carbon urban advancement remains an unaddressed topic. Using panel data from 271 cities in China from 2011 to 2019, we investigate the impact of sustainable finance on carbon emission efficiency and draw the following conclusions. First, sustainable finance may considerably strengthen the efficiency of carbon emissions via three transmission channels: economic growth, industrial upgrading, and technical innovation. Second, from two viewpoints, the “dual-carbon” aim and digital empowerment, our findings demonstrate the beneficial moderating impact of environmental and low-carbon regulations, the digital economy, and digital technology in the process of sustainable finance to increase carbon emissions efficiency. Furthermore, the heterogeneity analysis reveals that the favorable influence of sustainable finance on carbon emission efficiency is more visible in nonresource-based cities, high-level cities, low-carbon cities, pilot cities with carbon trading rights, two control zones, and cities with environmental legislation. Further analysis reveals a nonlinear link between the influence of sustainable finance and carbon emission efficiency. The findings provide new ideas for accelerating the realization of China’s “dual-carbon” goal as well as lessons for policymaking in developing countries.