The effect of the policy mix of green credit and government subsidy on environmental innovation

Abstract

We examine to what extent ‘policy mix’ of green credit policy and government subsidy affects high-quality environmental innovation of high-polluting firms. The green credit policy is a special environmental regulation that guides the distribution of credit from banks. Using the difference-in-difference method, we find that Green Credit Guidelines (GCGs) have a negative impact on the high-quality environmental innovation of high-polluting firms in China. However, the negative relationship between GCGs and high-quality environmental innovation depends on the level of government subsidy. Subsidies can effectively correct the negative impact of GCGs. The mechanism analysis shows that GCGs hinder high-quality environmental innovation through two channels: (1) increase in compliance costs and (2) lack of long-term bank credit that supports environmental innovation. Government subsidies can play a moderating role in the second channel.