The Effect of Green Finance on Urban Ecological Economy: Evidence from the Huai River Basin

Abstract

Against the backdrop of the coordinated advancement of the dual carbon strategy and high quality development of river basins, uncovering the mechanisms through which green finance enables the transition to an ecological economy carries substantial theoretical and practical significance. Taking the Huai River Basin, covering four provinces (and province-level municipalities and autonomous regions), as the study area and using data from 2000 to 2023, this paper innovatively constructs a comprehensive green finance index for prefecture level cities from a multidimensional perspective that includes credit, investment, insurance, bonds, funds, and carbon rights trading. Urban ecological economic efficiency is then measured via the entropy weight method within a three dimensional framework encompassing economic, ecological, and social dimensions. Employing a panel two way fixed effects model and a stepwise mediation testing procedure, the study empirically examines the impact of green finance on ecological economic development and identifies the underlying mechanisms. The results show that green finance significantly enhances the overall level of urban ecological economic performance in the Huai River Basin. This finding remains highly robust after a series of endogeneity and robustness checks, including a one period lag of the dependent variable, 1% winsorization, and the replacement of subcomponents of the dependent variable. Mechanism analysis reveals that the transmission of ecological dividends through technological innovation and industrial structure upgrading remains obstructed. The innovation channel is constrained by the long cycle of green technology research and development and delays in commercialization, while the structural channel is limited by the rigidity and path dependence of the basin’s industrial structure. Heterogeneity analysis further indicates that the promoting effect is significantly stronger in cities with higher levels of environmental regulation, urbanization, and economic development.