2.1 Finance and carbon mitigation
The existing literature is rich on the factors affecting carbon emissions, and some of the driving factors identified are economic growth, technological innovation, urbanization, industrial structure, and financial development. However, few discussions on how digital finance development mitigates Chinese urban carbon emissions in academia. Some scholars believe that financial products can reduce carbon emissions by promoting technological innovation and enhancing environmental awareness (Shahbaz et al. 2013). Tamazian et al. (2009) and Jalil (2011) found that financial development had an inhibitory effect on carbon emissions in various countries. Other scholars believe that financial products will accelerate economic growth, increase energy consumption, and increase carbon emissions, and there is an inverted u-shaped relationship between the two (Salahuddin et al. 2015; Dogan and Seker 2016; Charfeddine and Khediri 2016). One possible reason for the discrepancy is the dimensions used to measure financial development.
With the improvement of green finance, academic research on green finance has gradually deepened. In the early stage, scholars paid more attention to green finance's connotations, functions, and paths. Green finance development can help bank risk control and transform the Chinese economy (Li and Hu 2014). It is also believed that the legal environment builds a foundation for green finance and green credits (Duan and Niu 2011). With the development of green finance, many scholars began to pay attention to measuring the development level of green finance (Aizawa and Yang 2010; Li and Hu 2014). They study the impact of green finance policies on enterprise investment, energy conservation, and emission reduction. Liu et al. (2017) constructed a theoretical CGE model and found that green credit policies are effective in restraining investment in energy-intensive industries. Xiu et al. (2015) also found in theory that green credit regulatory measures are conducive to energy conservation and emission reduction under the constraints of industrial growth, with a nonlinear dynamic panel model. Wan et al. (2022) used a dynamic spatial econometric model and proved that digital finance reduces pollution emissions through innovation, structural change, and capital allocation. Our research contributes to this stream of literature by further investigating how digital finance affects industrial carbon emissions with empirical evidence.
Lacking digital finance data in the early years, existing empirical studies on emission mitigation mainly theoretically explain green credits policy effects. Other more recent research on digital credit primarily focuses on its impact on innovation activities (Arqué-Castells 2012; Grilli and Murtinu 2014), and innovation is an essential driver of carbon emission reduction (Albino et al. 2014; Li et al. 2017). Therefore, there is little empirical literature on whether digital finance directly causes greener emissions.
2.2 The mechanism of digital finance
The Chinese financial system is still under development, which negatively influences the nation’s sustainable economic growth (Huang and Wang 2011). The shortage of traditional financial supply has dramatically restricted pollution reduction activities (Aghion et al. 2007). However, digital finance, a new economic model, is different from conventional finance and has flourished in China in recent years. Digital finance has reduced financial transaction costs, expanded service scope, and increased finance capacity. Electronic payment platforms, such as Alipay, greatly expanded finance services by making financial services more accessible to individual investors, providing selling platforms to funds, and promoting small-scale-friendly personal finance. Alipay further increases individuals’ environmental awareness through green finance (Appendix) and green credits such as Sesame Credits (Zhi Ma Xin Yong in Chinese) and Ant Forests (Ma Yi Sen Lin in Chinese).
First, digital finance inclusion increases green personal finance, and green finance reduces industrial emissions. Digital payment platforms can provide user-friendly personal finance opportunities through finger clicking on personal smartphones, which traditional banking cannot. Alipay is the leading private finance platform with the most individual investors in China, and according to the China Securities Journal’s news, Alipay reached over 248.2 billion RMB in 2010. The more digital finance service is delivered to cities, the more green finance projects are funded. As a result, green finance mitigates industrial pollution emissions. Some of the mitigation effects come from green innovation (Falcone and Sica 2019; Li et al. 2021; Liu et al. 2022). For instance, Falcone and Sica (2019) find empirically that green finance helps sustainable innovation for specific industries in Italy. Some of the mitigation effects come from financial incentives to enterprises. To be financially invested, firms have the motivation to engage in economic activities for resource-saving and efficient use. Thus, digital finance mitigates polluted industrial emissions through green personal finance.
Second, the spread of digital finance increases awareness of the environment and thus leads to less industrial pollution emission. The Sesame Credits in Alipay phone applications provides high-credit-score users benefits including cash-back, online and offline shopping with discounts, pay-later for online shopping and shipping charges, deposit-free for checking-in hotels, and rentals, and free insurance extension and lease extension. Sesame Credits can also be used as financial support for apply visas from Thailand, South Korea, Canada, Latvia, and Argentina. To enjoy all the Sesame benefits, users have to increase their credit scores above 750 points, while the original credit score starts at 653 points. The Sesame credit score consists of five dimensions: personal relationship, honor records, financial assets, personal identity, and behavioral records. Honor and behavioral records are the two most important factors defining a person’s credit score. These rewards increase individuals’ environmental awareness, and individual users are motivated to boost their credit scores by accumulating environmental-friendly behaviors (Appendix). Therefore, digital finance provides essential support for developing a green economy.
To sum up, we believe that the spread of digital finance in urban China can reduce pollution emissions. The mechanisms are that digital finance inclusion reduces industrial emissions through green projects and that digital finance promotes individual awareness. We will test these mechanisms empirically below.
 IiMedia Research on internet users where to invest: https://www.iimedia.cn/c460/77872.html