The Impact of Green Municipal Bond Issuance on Sustainable Development

ABSTRACT Green municipal bonds offer a promising solution for addressing air pollution in China, yet there is limited empirical research on their role in improving local environmental outcomes. This study investigates the impact of green municipal bond issuance on air quality in China, using a staggered difference‐in‐differences (DID) approach with data from 2014 to 2023. This study demonstrates that green municipal bond issuance significantly improves local air quality, with a 32%–36% reduction in the number of extremely polluted days. Further analysis indicates that this effect operates through investments in infrastructure development and signalling effects. Our findings provide insights into how green bonds can be used to address environmental challenges. Local governments should strengthen fiscal capacity and accountability mechanisms in environmental governance, optimise capital allocation for sustainable infrastructure and leverage the signalling effect of green municipal bonds.