Trade penetration, sustainable finance and carbon peak: evidence from China

Lu Wan, Yanxi Zhou, Ying Wang and Tiantian Zhao

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: Following the “dual carbon” goals in 2021, which emphasize achieving the carbon peak by 2030 and carbon neutral by 2060, China introduced a “dual circulation” strategy to connect domestic and international trade. Leveraging the quantile regression model, this study examines the impact of green total factor productivity, trade penetration, foreign direct investment, and sustainable finance on carbon emissions (CO2). Furthermore, a mediating model is established from another perspective to discover the mechanism, respectively, testing how trade, foreign direct investment, and sustainable finance affect carbon emissions via green total factor productivity. The findings indicate that green total factor productivity exerts an inverted “U-shaped” effect on carbon emissions within a certain threshold of the total CO2 volume. While the relationship between the green total factor productivity and CO2 becomes a significant “U-shaped” when the total CO2 goes beyond a certain level. Meanwhile, foreign direct investment penetration and sustainable finance contribute positively to carbon emissions reduction, whereas trade penetration notably increases carbon emissions. Transition mechanisms with international cooperation, trade penetration, foreign direct investment penetration, and sustainable finance also affect CO2 through the green total factor productivity channel. As suggested, China should tailor its low-carbon transition strategies, drawing on global insights and considering its unique national development. Broadly, efficiency in the production process and low-carbon transition are preferred (i.e. improved green total factor productivity), which will balance economic development and environmental protection. The adoption and promotion of a consistent framework for sustainable finance are crucial, as they help enterprises in developing countries access more global sustainable finance. This study also notes that participating more in international trade that embodies low-carbon concepts and introducing green foreign direct investment helps developing countries improve resource efficiency and productivity.

Keywords: carbon peak; correlation; green total factor productivity; sustainable finance; trade penetration (search for similar items in EconPapers)
JEL-codes: F18 G23 O13 Q56 (search for similar items in EconPapers)
Date: 2025-12-31
New Economics Papers: this item is included in nep-cna, nep-eff, nep-ene, nep-env and nep-sea
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Published in Sustainable Futures, 31, December, 2025, 10. ISSN: 2666-1888

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