The Green Finance Pilot Policy Suppresses Green Innovation Efficiency: Evidence from Chinese Cities

Green finance is widely promoted as a tool for supporting low-carbon development, but its effects on innovation efficiency remain unclear. This study examines the impact of China’s Green Finance Reform and Innovation Pilot Zones (GFRIPZ) on green innovation efficiency at the city level. Using the GFRIPZ policy as a quasi-natural experiment, we employ a difference-in-differences approach to identify the causal effects of the policy and explore the underlying mechanisms and contextual moderators. The results indicate that the policy significantly reduces green innovation efficiency in pilot cities, with the negative impact being more pronounced in non-central cities, provincial capitals, and cities in western China. Mechanism analysis reveals two key pathways: increased environmental costs contribute to resource lock-in, and strategic shifts toward quantity-focused innovation reduce overall efficiency. Furthermore, we find that the institutional environment plays a critical role—market integration mitigates the policy’s adverse effects by improving resource allocation, while administrative environmental pressure intensifies distortions. These findings suggest that rigid green finance regulations may unintentionally suppress innovation performance. We propose that more flexible policy design, better cross-regional coordination, and refined local governance incentives are essential for aligning green finance tools with innovation-driven sustainability goals in emerging economies.