Three Essays on Green Policy and Green Finance

Sustainable development has become a shared objective across economies, but a persistent and widening financing gap constrains the transition from aspiration to implementation. The annual resources required for the Sustainable Development Goals by 2030 exceed available funding by several trillion dollars, without substantial financial architecture reform and stronger alignment of incentives. In this context, the core challenge to achieve green growth is mobilising and channelling capital toward projects delivering environmental benefits while maintaining macroeconomic stability and social welfare. Heading to sustainability requires the joint use of two complementary instruments. The first is the fiscal policy from a green government. Pollution taxes, targeted green subsidies, disclosure rules, and standards help internalise environmental externalities and create a stable fiscal and regulatory loop that supports green investment and innovation. The second is a market-led green finance system. Bonds, loans, equities, insurance, and public green expenditures provide vehicles and signals for the reallocation of capital at scale. However, the academic literature still lacks an integrated framework that connects green policy, green finance, economic performance, and environmental quality. The dissertation aims to fill the blank and clarify how the public green policy and green financial market channels mutually reinforce and why a combined policy market approach is essential. The first essay develops the theoretical foundation. It extends the green Solow model by distinguishing a brown sector and a green sector and by closing the fiscal loop through a pollution tax with three subsidy channels. The model establishes two core conclusions. First, introducing a pollution tax reduces pollution and lowers output relative to the no-tax economy. Second, the policy mix combining the tax with green subsidies further decreases pollution while increasing output. Numerical simulations calibrated to the Chinese economy confirm these propositions and show economic and environmental outcomes across different green subsidies. Allocating tax revenues to green finance leads to the highest steady-state green capital. Subsidising green total factor productivity maximises aggregate output, whereas abatement efficiency minimises pollution, revealing a clear economic–environmental trade-off. Overall, the analysis confirms the critical role of a green government and its subsidy instruments in shaping the transition dynamics of a sustainable economy. The second essay constructs a provincial level database and a macro index of green finance for China from 2008 to 2019. The framework defines two dimensions that capture different aspects of system development. Coverage tracks the diffusion of green instruments across provinces and markets. Intensity tracks the penetration of green capital within each instrument. Their product yields the Green Finance Index, and their separation permits decomposition of sources of change. National series display a steady rise in coverage with acceleration after establishing a formal policy framework and pilot zones. Intensity also rises with volatility in the early years and accelerates after 2016. Over the sample period, the index nearly doubles, with roughly three-fifths of the increase attributable to broader coverage and the remainder to deeper intensity. Spatial patterns reveal that provinces with high GF ranking are not located in coastal areas considered economically advanced, but also appear in regions with abundant renewable resources. This finding emphasises the role of ecological endowment in shaping financial greening, providing policy implications for countries that are developing a green financial system. The third essay examines the dual impacts of green finance on economic development and environmental degradation, utilising two-way fixed effects models and provincial panel data from China (2008–2019). The empirical results reveal that, at the initial stage of green finance development, structural frictions, investment delays, and information asymmetries constrain its positive influence on both growth and environmental quality. However, once green finance surpasses critical thresholds, it simultaneously promotes economic upgrading and ecological improvement. Building on these findings, the paper proposes the Green Finance Kuznets Curve (GFKC) concept, which characterises the nonlinear relationship between green finance, economic growth, and environmental degradation. The GFKC implies that, in the long run, green finance can foster green growth once the share of green financial capital reaches a sufficiently high level. These findings align with the predictions of the theoretical model we proposed and provide quantitative guidance on the depth of financial greening required to achieve simultaneous economic and environmental gains. The findings indicate a strategic complementarity between a capable green government and a maturing green finance market. Policy creates the rules, incentives, and public goods that enable markets to mobilise capital efficiently. Markets facilitate the restructuring and diffusion of technology that transform these incentives into measurable reductions in pollution and sustainable growth.