Digital Finance and Reduction of Pollution and Carbon Emissions: A Case Study of China by Considering the Mediating, Moderating and Spatial Spillover Effects

ABSTRACT In the digital age, using digital tools to promote environmental governance has gained significant attention. Digital finance (DF) integrates financial systems with digital technologies, offering a new financing channel and mechanism for collaboratively reducing pollutants and carbon emissions (RPCEs). This paper explores the multifaceted impact of DF on RPCE, using China as a case study. Utilising panel data from 30 provinces in China from 2011 to 2021, the study applies benchmark regression, mediation, moderation and spatial econometric models to empirically analyse DF's effects and mechanisms on RPCE. The findings revealed that: (1) DF positively influences RPCE, with industrial structure upgrading playing a key role in this process. (2) DF's impact on RPCE varies across regions and e‐government demonstration zones in China, showing stronger effects in central China and e‐government zones. (3) DF's impact on RPCE can be strengthened by increasing green fiscal expenditure. (4) The negative spillover effect of DF on RPCE in neighbouring areas was witnessed, where local DF development inhibited DF growth in adjacent areas through a ‘siphon effect’. As a result, the modern financial system should be tailored to regional characteristics while accelerating industrial structure upgrading. By leveraging green fiscal expenditure regulations, DF's potential can be fully realised, creating a synergistic effect on RPCE.