IS CHINA REALLY A “POLLUTION HAVEN”: HOW FOREIGN DIRECT INVESTMENT SHAPE CARBON EMISSION IN CHINA? EVIDENCE FROM 265 CHINESE PREFECTURE-LEVEL CITIES

Abstract

This paper explores the applicability of the well-known “Pollution Haven” hypothesis and “Pollution Halo” hypothesis at the city-level in contemporary China. The fixed effect model and the threshold effect model are employed to investigate the relationship between foreign direct investment (FDI) and carbon emission in 265 Chinese prefecture-level cites. Based on the entire sample, the results of fixed effect model support the applicability of “Pollution Haven” hypothesis, while the hypothesis is substantiated primarily in eastern and western China. In contrast, the central part of China does not conform to either hypothesis, suggesting that the emergence of a distinct “Pollution Haven Basin” within the country. Unlike the inverted “U-shaped” curve commonly posited in the existing literature, the threshold effect model unveils a “U-shaped” connection between FDI and carbon emission. Specifically, we find that the turning point is at around $52.93 million, which implies that FDI needs to surpass a certain threshold to actively drive carbon emission in the presence of a “Pollution Haven Engine”. Accordingly, in the context of more in-depth international trade and China’s carbon neutralization commitment, it would be wise for the Chinese local governments to control the FDI scale, and encourage FDI to tilt toward the clean sectors.