Alternative Energy and CO2 Emission in China: Evidence from Bounds Testing and Vector Error Correction Model Approach

Abstract

This empirical study investigates the dynamic interconnection between fossil fuel consumption, alternative energy consumption, economic growth and carbon emissions in China over the 1981 to 2020 time period within a multivariate framework. The long-term relationships between the sequences are determined through the application of the Autoregressive Distributed Lag (ARDL) bounds test and augmented by the Johansen maximum likelihood procedure. The causal relationships between the variables are tested with the Granger causality technique based on the Vector Error Correction Model (VECM). Empirical results reveal the existence of a statistically significant negative relationship between alternative energy consumption and carbon emissions in the long-term equilibrium. Furthermore, the VECM results demonstrate that both carbon emissions and fossil fuel consumption have unidirectional effects on economic growth. Additionally, the study highlights a short-term unidirectional causal relationship from economic growth to alternative energy consumption. These findings suggest that a reduction in fossil fuel consumption in the short run may indirectly impede the development of alternative energy. The study proposes that China should expedite the development of alternative energy and control the expansion of fossil fuel consumption to attain its carbon reduction target without hindering economic growth.