Environmental cost of energy consumption and economic growth: can China shift some burden through financial development? An asymmetric analysis

Abstract

The link between CO2 emission and its possible determinant, namely financial development, foreign direct investment, economic growth, and energy consumption, gives a significant environmental research place. This study attempts to determine the nonlinear link between CO2 emissions and its determinants in China for the period 1985-2019. Based on the theoretic links and foundation, we develop an asymmetric autoregressive distributed lag (ARDL) model using annual data in this study. The findings of the nonlinear ARDL suggest that domestic credit from the banks (DCB) has a negative effect on environmental pollution in the short and long run, while domestic credit to the private sector (DCP) has an insignificant negative role in environmental pollution in China. The results show that positive change in DCB causes a decrease in CO2 emissions, while negative change increases it in the short and long term. The coefficient for a positive shock in DCP is a negative, and negative shock in DCP has a significant positive impact on environmental pollution in the short and long run. This means that nonlinear ARDL financial development effects on environmental pollution have deviated from the linear ARDL estimates. Empirical findings also support the presence of asymmetric long-run cointegration among the indicators. The findings also show that energy consumption and real GDP have a significant positive impact on CO2 emissions in the long-run, while foreign direct investment (FDI) improves the environment. Based on the empirical findings, the study endorses the suitable channelization of the finance market towards clean energy projects without compromising economic growth.