Revealing long- and short-run empirical interactions among foreign direct investment, renewable power generation, and CO2 emissions in China

Abstract

This work systematically examines the empirical interactions among foreign direct investment (FDI), renewable power generation (RPG), hydropower generation (HPG), non-hydropower generation (NHPG), and CO₂ emissions in the long run and short run. To test the existence of long-run equilibrium association among those variables, Bayer-Hanck combined cointegration and autoregressive distributed lag (ARDL) model have been employed on time series of China for the period 1991-2017. The vector error correction model-based short-run impacts among the variables of interest are also estimated. Besides, Toda-Yamamoto causality and Granger causality are employed to confirm the direction of causal links. The existence of a long-run equilibrium relationship is revealed in case of all types of specification. The expansion of both FDI and CO₂ emissions boosted RPG, HPG, and NHPG in the short run and long run, with greater intensity of impacts in the long run. To reflect comparisons, it is found that the renewables generation driving the impact of CO₂ emissions and FDI on NHPG is greater than RPG, which further exceeds HPG. In turn, the RPG, HPG, and NHPG mitigated CO₂ emissions both in the long run and short run, with stronger impacts in the long run. Moreover, the CO₂ emissions inhibition impact of HPG dominated NHPG, which further exceeded that of RPG. The FDI boosted CO₂ emissions in a way that the long-run pollution haven impact is revealed to be powerful than that of the short run. A unidirectional causality has been observed running from FDI to CO₂ emissions, RPG, HPG, and NHPG. A bidirectional causality is found operative between CO₂ emissions and RPG/HPG/NHPG. Interestingly, the long-run and short-run impacts remained homogeneous in terms of directionality. Nevertheless, strict heterogeneity is observed in terms of the degree of impacts. Based on empirics, both long-term and short-term policies on FDI, renewables generation, and CO₂ emissions are vital for decision-makers in China. Graphical abstract.

Keywords: CO2 emissions; China; Foreign direct investment; Hydropower generation; Non-hydropower generation; Renewable power generation.