Exploring the moderating effects of regulatory quality on the relationship between green finance and climate change

This study analyses the effectiveness of green finance as a climate change mitigation instrument and tests the hypothesis that the environmental effect of green finance varies based on national regulatory quality. Using panel data of 83 countries for the period of 2006–2024, and employing fixed effects regression with Driscoll Kraay standard errors, we test whether regulatory quality (RQ) moderated the link between green finance, proxies by green bond issuance and carbon dioxide (CO2) emissions. Three robust results emerge. First, green bonds are associated with lower CO₂ emissions, consistent with the view that earmarked financing scales low-carbon investment. Second, contrary to conventional expectations, the interaction term ln (GB)×RQ is positive and significant: on average, stronger regulatory environments weaken the marginal emissions-reducing effect of green bonds. Third, heterogeneity is material: in upper-middle-income economies, RQ amplifies the impact of green bonds, while in high-income and lower-middle-income groups the weakening effect persists. This study outlines effective policies and practical implications that would boost green finance which in turn will help to lessen the effects of climate change.