Toward Clean Air in the City: Does Financial Inclusion Matter?

ABSTRACT With the swift pace of urbanization and industrialization, air pollution has emerged as a critical issue, severely impacting public health and impeding the progress toward sustainable development. This study delves into the nexus between Financial Inclusion (FI) and Air Pollution Reduction (APR), employing a balanced panel dataset that encompasses 255 Chinese prefecture‐level cities from 2011 to 2022. Through the application of econometric models and a series of robustness tests, we uncover an inverse U‐shaped dynamic between the advancement of FI and APR. Our findings indicate that during the nascent stages of FI, there is a positive impact on APR. However, this beneficial effect plateaus and potentially reverses when FI progresses beyond an optimal threshold. Further analysis elucidates three primary economic channels through which FI may influence APR: alleviation of energy poverty, stimulation of innovation, and household consumption. Notably, these mechanisms exhibit distinct patterns of influence across cities with varying levels of economic development and geographical locations. The findings hold significant implications for policy‐making, suggesting that the Chinese government must balance the acceleration of FI with a keen awareness of its regional impacts. Tailored environmental policies and innovative financial instruments can foster green growth and sustainable development.