Financial Development and Carbon Emissions: Analyzing the Role of Financial Risk, Renewable Energy Electricity, and Human Capital for China

Yiping Guo,Ahmed Farouk

doi:10.1155/2021/1025669

Abstract

This study introduces the role of financial risk index and renewable energy electricity output along with financial development and human capital as new determinants of carbon emissions and uses updated time-series data from 1988–2018 for China, employing novel econometric approaches, i.e., Narayan and Popp unit root test with structural breaks, Maki cointegration, and frequency domain causality test for long, short, and medium run causality. The empirical outcome shows that improvement in human capital index and rising shares of renewable energy in electricity output help to limit carbon emissions. In contrast, gross domestic product, financial risk index, and structural break of 2001 increase carbon emissions. Moreover, structural break year of 2008 and financial development index reduces carbon emissions. The negative association between financial development and carbon emissions supports the positive school of thoughts of financial development which promotes sustainable environment. This study recommends promotion of quality human capital and green financial development along with increasing the shares of renewable energy in electricity for achieving China 2030 climate targets of reducing pollution.

Highlights

One of the most severe challenges the contemporary world is facing over the years is climate change, which has affected the sustainability of life on Earth. e increasing trend in global atmosphere has created unprecedented problems for the human lives and other lives on Earth
Renewable energy electricity (REE) is calculated by renewable electricity as a percent of total electricity generation. e data on REE is taken from World Bank [45]. e data of human capital index is taken from Penn World. e basic model to estimate the impact of financial development, GDP, financial risk, renewable energy electricity, and human capital on CO2 emissions is given as
After taking first difference, the data are stationary and the condition probability distribution for variables does not change over time. is suggests that all variables, i.e., foreign direct investment (FDI), CO2, REE, HCI, and GDP, are stationary at I (1). e Narayan and Popp [47] test detects possible structural breaks in the data. e key structural breaks are 2001 and 2008. e structural break year 2001 is linked with China inclusion into the world trade organization (WTO) [8]

Summary

Introduction

One of the most severe challenges the contemporary world is facing over the years is climate change, which has affected the sustainability of life on Earth. e increasing trend in global atmosphere has created unprecedented problems for the human lives and other lives on Earth. It is widely recognized that due to rapid industrialization, emissions of CO2 in the recent decades has increased to an unprecedented high level, which has caused the global temperature on rise. The rapid growth in economic activities, along with population growth and globalization, has caused an increase in CO2 and other greenhouse gas emissions, posing a severe threat to the ecosystem [2]. Continuous rise in global economy with a 3 to 4 percent annual growth rate poses a severe risk to the environmental sustainability due to high-energy demand. Despite several global negotiations and accords, the level of greenhouse gases is on the rise In this pursuit, countries are implementing strategies to restrict the emission level [4]. In line with Paris Climate Agreement, the country is expected to control its CO2 emissions by switching the industrial structure to more sustainable energies

Methods

Results

Conclusion