The relationship between economic growth, energy consumption, and CO₂ emissions: Empirical evidence from China

Following several decades of rapid economic growth, China has become the largest energy consumer and the greatest emitter of CO₂ in the world. Given the complex development situation faced by contemporary China, Chinese policymakers now confront the dual challenge of reducing energy use while continuing to foster economic growth. This study posits that a better understanding of the relationship between economic growth, energy consumption, and CO₂ emissions is necessary, in order for the Chinese government to develop the energy saving and emission reduction strategies for addressing the impacts of climate change. This paper investigates the cointegrating, temporally dynamic, and casual relationships that exist between economic growth, energy consumption, and CO₂ emissions in China, using data for the period 1990–2012. The study develops a comprehensive conceptual framework in order to perform this analysis. The results of cointegration tests suggest the existence of long-run cointegrating relationship among the variables, albeit with short dynamic adjustment mechanisms, indicating that the proportion of disequilibrium errors that can be adjusted in the next period will account for only a fraction of the changes. Further, impulse response analysis (which describes the reaction of any variable as a function of time in response to external shocks) found that the impact of a shock in CO₂ emissions on economic growth or energy consumption was only marginally significant. Finally, Granger casual relationships were found to exist between economic growth, energy consumption, and CO₂ emissions; specifically, a bi-directional causal relationship between economic growth and energy consumption was identified, and a unidirectional causal relationship was found to exist from energy consumption to CO₂ emissions. The findings have significant implications for both academics and practitioners, warning of the need to develop and implement long-term energy and economic policies in order to effectively address greenhouse effects in China, thereby setting the nation on a low-carbon growth path. - Highlights: • The nexus between economic growth, energy use and CO₂ emissions for China examined. • Cointegration tests suggest presence of long-run relationship among the variables. • Generalized impulse response due to the external shocks to the system examined. • Bi-directional causality between economic growth and energy consumption. • Unidirectional causality from energy consumption to CO₂ emissions.