The carbon reduction channel through which financing methods affect total factor productivity: mediating effect tests from 23 major carbon-emitting countries

The development of modern finance has played a catalytic role in the economic transition to renewable and clean energy, which in turn has an impact on total factor productivity (TFP). However, existing studies have not together addressed financing methods, carbon emissions, and TFP. We analyse how different financing methods affect TFP through the carbon reduction channel. Using data from 1995 to 2019 for 23 major carbon emitters, we adopt a mediation effect model with Stata 17.0. We draw three conclusions. First, financing methods have a differentiated impact on TFP. For every unit increase in debt financing relative to equity financing, TFP decreases by 0.058 units (overall level) or 0.056 units (welfare level). Second, financing has a mediating effect on TFP through carbon emissions. Debt financing reduces TFP through the carbon emission reduction mechanism. The greater the scale of debt financing relative to equity financing, the greater the negative impact on TFP through the carbon emission reduction mechanism, while equity financing plays a positive role on TFP through the carbon emission reduction mechanism. Third, a heterogeneity test demonstrates that the mediating effect is most significant in developed countries and weakest in developing countries. The difference-in-difference framework based on the Equator Principles demonstrates that the marginal contribution to TFP of debt financing aimed at carbon reduction is 0.02 (overall level) and 0.012 (welfare level). From the perspective of financing methods, this study provides enlightenment for promoting carbon emission reduction and improving TFP. First, countries should strengthen the development of the green debt financing market, strengthen the disclosure of information on environmental benefits, and reverse the negative effect of debt financing. Second, they should develop the equity market to activate the role of carbon reduction channel, promote the Equator Principles in the banking industry, and encourage more banks to pay attention to environmental risks. All these financial measures can raise TFP.