Economic policy uncertainty (EPU) and firm carbon emissions: Evidence using a China provincial EPU index

Highlights: • A new provincial economic policy uncertainty (EPU) index is constructed. • First study to investigate the impact of EPU on carbon emission intensity at the firm level in China. • The EPU index of eastern coastal areas is higher than that of western inland areas. • The fuel mix and energy intensity channels are significant, but the innovation channel is not. • Chinese firms prefer to use cheap and dirty fossil fuels to react to the rising EPU. Although there have been numerous studies on economic policy uncertainty (EPU), its impact on firms' emissions has not often been examined. Using an unbalanced panel data of firms and a newly constructed provincial EPU index in China, this paper estimates the impact of EPU on manufacturing firms' carbon emission intensity. We further test the likely channels through which EPU can affect firm emission intensity, including the innovation channel, share of fossil fuels in the total energy consumption channel, and energy intensity channel. The findings show that China's provincial EPU imposes a significantly positive impact on firms' carbon emission intensity. The channel analysis shows that EPU influences carbon emission intensity through the share of fossil fuels in the total energy consumption and energy intensity in the short run, but not firm innovation. The results indicate that manufacturing firms prefer to use cheap and dirty fossil fuels to respond to the rising EPU. This paper suggests that policymakers should pay careful attention to the increasing effect of EPU on carbon emission intensity which could undermine China's emission reduction efforts and other sustainable development goals.