Green Finance and Carbon Emissions: A Nonlinear and Interaction Analysis Using Bayesian Additive Regression Trees

TL;DR

This paper uses Bayesian Additive Regression Trees to analyze how green finance impacts carbon emissions in China, revealing nonlinear effects and regional differences, and highlighting green finance's role in reducing carbon intensity in energy-heavy areas.

Contribution

It introduces a nonlinear, interaction-based analysis of green finance's effect on carbon emissions using BART, incorporating regional heterogeneity and the CPRI index.

Findings

Green finance has an inverted U-shaped effect on carbon emission intensity.

CPRI does not significantly influence carbon emissions.

Green finance reduces CEI in high energy consumption regions.

Abstract

As a core policy tool for China in addressing climate risks, green finance plays a strategically important role in shaping carbon mitigation outcomes. This study investigates the nonlinear and interaction effects of green finance on carbon emission intensity (CEI) using Chinese provincial panel data from 2000 to 2022. The Climate Physical Risk Index (CPRI) is incorporated into the analytical framework to assess its potential role in shaping carbon outcomes. We employ Bayesian Additive Regression Trees (BART) to capture complex nonlinear relationships and interaction pathways, and use SHapley Additive exPlanations values to enhance model interpretability. Results show that the Green Finance Index (GFI) has a statistically significant inverted U-shaped effect on CEI, with notable regional heterogeneity. Contrary to expectations, CPRI does not show a significant impact on carbon emissions. Further analysis reveals that in high energy consumption scenarios, stronger green finance development contributes to lower CEI. These findings highlight the potential of green finance as an effective instrument for carbon intensity reduction, especially in energy-intensive contexts, and underscore the importance of accounting for nonlinear effects and regional disparities when designing and implementing green financial policies.