Air pollution is a major global problem, significantly impacting human health, biodiversity, and ecosystems. In China, air pollution, particularly particulate matter (PM), presents a severe public health challenge, causing millions of deaths and billions of dollars in economic losses annually. Industrial sources are primary contributors to PM2.5 pollution in many Chinese cities. China has implemented various policies to combat air pollution, including the National Air Quality Action Plan and the "winning the defense of the blue sky" initiative. Digital finance policy is a key instrument in these efforts, facilitating the transition to cleaner energy practices through improved transparency and efficiency in allocating funds towards renewable energy projects and pollution control measures. Digital finance enhances transparency and accountability in environmental management by leveraging technologies like blockchain, AI, and big data analytics, while promoting sustainable literacy through access to information and resources on environmentally friendly practices. However, limitations exist due to regional disparities in digital infrastructure and literacy, and variations in HDI levels. This paper investigates how digital finance policy can effectively control and reduce air pollution in China, hypothesizing that incorporating digital finance mechanisms into environmental policy frameworks will improve the efficiency and effectiveness of air pollution mitigation efforts. This study offers several novelties, including a detailed examination of how digital finance specifically aids in pollution reduction, analysis of factors influencing the relationship between digital finance and air quality, and the use of advanced methodologies like econometric modeling and machine learning for more accurate impact quantification.

The literature review covers three main areas: air pollution and sustainability, digital finance policy, and China's environmental quality and sustainability. Research highlights the severe health impacts of air pollution, the link between air pollution and climate change, and frameworks for sustainable development. Studies on digital finance policy explore its potential to expand financial access, promote entrepreneurship, and facilitate investment in sustainable projects. Literature on China's environmental quality examines the challenges of rapid industrialization and urbanization while highlighting the effectiveness of environmental policies and regulations. The review identifies gaps in existing research, calling for more integrated studies that consider socio-economic factors, the impact on marginalized groups, and the empirical evaluation of digital finance strategies in achieving environmental improvements.

This study uses annual data from 1990 to 2022 to investigate the impact of digital finance on air quality in China. The dependent variable is the Air Quality Index (AQI), with digital finance (internet banking and ATM banking) as the key explanatory variable. Control variables include coal consumption, urban population, and inflation rate. The Augmented Dickey-Fuller (ADF) test assesses variable integration levels, followed by a boundary co-integration test to determine the long-term relationship among variables. The Augmented Distributed Lag (ARDL) method, including Error Correction Term methods, examines both short-term and long-term impacts. The study employs a rigorous econometric approach to establish causality and quantify the effects. Diagnostic tests (Breusch-Godfrey, White, Jarque-Bera, Ramsey RESET) are conducted to ensure model validity. A robustness test is performed by changing the dependent variable to annual average PM2.5 concentration.

The empirical analysis reveals a significant negative correlation between internet banking usage and the AQI in both the short and long term, suggesting that increased internet banking leads to reduced vehicular emissions and improved financial operational efficiency. ATM banking also shows a negative correlation with AQI, but to a lesser extent. Conversely, coal consumption, urban population growth, and inflation rate are positively associated with AQI. A 1% increase in internet banking usage is associated with a 0.38% reduction in the AQI in the long term and a 0.43% reduction in the short term. A 1% increase in ATM banking is linked to a 0.21% reduction in the long term and a 0.13% reduction in the short term. A 1% increase in coal consumption results in a 0.54% increase in AQI in the long term and a 0.23% increase in the short term. Diagnostic tests confirm the model's validity, and a robustness test, using PM2.5 as the dependent variable, supports the findings. The results of both the short-term and long-term analyses underscore the significant role of digital finance in reducing air pollution in China, with internet banking exhibiting a more substantial effect compared to ATM banking.

The findings demonstrate that digital finance, particularly internet banking, plays a significant role in mitigating air pollution in China. The negative correlation between digital finance adoption and AQI supports the hypothesis that integrating digital finance mechanisms into environmental policies enhances the efficiency and effectiveness of air pollution control. The results highlight the potential of digital finance to reduce vehicular emissions by enabling remote transactions and streamlining financial operations. The positive correlation between coal consumption, urban population growth, and inflation with AQI underscores the need for policies promoting sustainable urban development and energy transitions. These findings contribute to the understanding of the interplay between financial innovation, environmental policy, and air quality improvement. The study's implications extend beyond China, suggesting that digital finance can be a valuable tool for addressing air pollution in other countries facing similar challenges.

This study demonstrates the significant potential of digital finance, especially internet banking, in mitigating air pollution in China. The findings highlight the need for policies that promote digital finance adoption, sustainable urban planning, and a transition to cleaner energy sources. Future research could investigate the impact of specific digital finance initiatives, explore regional variations in the effects of digital finance on air quality, and assess the effectiveness of integrating AI and big data in pollution control strategies. Further research should focus on smart cities, sustainable education, and the implementation of circular economic systems in China to further advance sustainable development and environmental protection.

While this study provides valuable insights into the impact of digital finance on air quality in China, several limitations should be acknowledged. The analysis relies on aggregate data, which may mask variations at the regional or local level. The study's time frame (1990-2022) might not fully capture the long-term effects of digital finance policies. Omitted variable bias is always a possibility, even with the inclusion of relevant control variables. Further research with more granular data and a longer time horizon is needed to address these limitations and provide a more comprehensive understanding of the issue.