Economic policy uncertainty (EPU) and firm carbon emissions: Evidence using a China provincial EPU index

Abstract

Although there have been numerous studies on economic policy uncertainty (EPU), its impact on firms' emissions has not often been examined. Using an unbalanced panel data of firms and a newly constructed provincial EPU index in China, this paper estimates the impact of EPU on manufacturing firms' carbon emission intensity. We further test the likely channels through which EPU can affect firm emission intensity, including the innovation channel, share of fossil fuels in the total energy consumption channel, and energy intensity channel. The findings show that China's provincial EPU imposes a significantly positive impact on firms' carbon emission intensity. The channel analysis shows that EPU influences carbon emission intensity through the share of fossil fuels in the total energy consumption and energy intensity in the short run, but not firm innovation. The results indicate that manufacturing firms prefer to use cheap and dirty fossil fuels to respond to the rising EPU. This paper suggests that policymakers should pay careful attention to the increasing effect of EPU on carbon emission intensity which could undermine China's emission reduction efforts and other sustainable development goals.