Abstract
Based on a two-sector (clean energy and dirty energy) model of directed technical change, we examine the relationship between carbon emissions, clean energy consumption, and financial development in China using the ARDL method. The results show that clean energy consumption reduces carbon emissions effectively but the effect of financial development is opposite, suggesting that financial development increases carbon emissions, contradicting the findings of many existing studies. Then, we decompose financial development on carbon emissions into two different effects: substitution and income effects. The substitution effect reflects more dirty energy consumption as a result of directed technological change promoted by financial development, leading to more carbon emissions. The income effect results in a decline in carbon emissions because financial development enables firms to use more clean energy. The empirical results indicate that the net effect of financial development has caused more carbon emissions and a 1% increase in financial development results in a 0.45-0.79% increase in carbon emissions. The policy implication is also discussed.
Highlights
Global CO2 emissions has been increasing rapidly since the beginning of the twentieth century
Based on a two-sector model from a directed technical change perspective, this paper examines the relationship between carbon emissions, clean energy and financial sector development in China during
1965-2017 using the autoregressive distributed lag (ARDL) and the dynamic cointegration models. It tests the impacts of clean energy consumption, financial sector development, and economic growth on carbon emissions controlling the main related factors such as industrial structure and international trade
Summary
Abstract:Based on a two-sector (clean energy and dirty energy) model of directed technical change, we examine the relationship between carbon emissions, clean energy consumption and financial development in China using the ARDL method. Clean energy consumption reduces carbon emissions effectively but the effect of financial development is opposite, suggesting that financial development increases carbon emissions, contradicting the findings of many existing studies. We decompose financial sector development on carbon emissions into two different effects: the substitution and income effects. The substitution effect reflects more dirty energy consumption as a result of directed technical change promoted by financial development, leading to more carbon emissions. The income effect results in a decline of carbon emissions because financial development enables firms to use more clean energy. The empirical results indicate that the net effect of financial development has caused more carbon emissions.
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