Modeling Causal Interactions Between Energy Investment, Pollutant Emissions, and Economic Growth: China Study

Abstract

This study is an empirical investigation of dynamic causal interactions among energy investment, pollutant emissions, and economic growth in China. Three simultaneous equation models have been estimated by employing ‘one-step system’ as well as ‘one-step difference’ generalized method of moments (GMM) estimator for 30 Chinese provinces from 2005 to 2014. This study contributes by developing a hybrid model of economic growth to incorporate energy investment and pollutant emissions. First, the empirical investigation found bilateral positive causal relationship between energy investment and economic growth. Second, bilateral causality between energy investment and economic growth is found to be existent. Third, bilateral causality has been found between pollutant emissions and energy investment. The results are consistent across all the four study samples. Based on empirics, following implications are extracted, among others. The negative bidirectional causal linkage between energy investment and pollutant emissions implicated that investment in fuel-based energy directed to improve the quality of fuels and energy industry technology is likely to curb pollutant emissions. In turn, high level of pollutant emissions may stimulate policies to reduce investment in fuel-based energy industry. Finally, the positive bidirectional causal linkage between energy investment and economic growth implied that energy investment and economic growth tend to promote each other in China. The prominence of this relationship in eastern economic zone further suggested that energy investment is likely to become strongest driver of economic growth and vice versa in this region, which is followed by intermediate economic zone and western economic zone.