Revisiting financial development and renewable energy electricity role in attaining China's carbon neutrality target

Abstract

During the last few decades, China's transformation from a low-income country to an emerging economy causes carbon emission to rise extensively. Being the largest carbon emitter, China's continuous economic growth may inevitably cause more carbon emissions in the future. To achieve carbon neutrality targets, the country is striving to promote cleaner technologies. However, to finance these environmentally friendly projects, a well-developed financial system is a pre-requisite. This study examines the role of financial development along with output, financial risk index, renewable energy electricity and human capital on carbon emissions. This study uses updated time series data from 1988 to 2018 for China employing novel econometric approaches, i.e., Narayan and Pop unit root test with structural breaks, Maki cointegration and frequency domain causality test for long, short and medium run causality. The empirical outcome shows that improvement in financial development, renewable energy electricity, and human capital index cause to limit carbon emissions. In contrast, gross domestic product, financial risk index and structural break of 2001 increase carbon emissions. Moreover, structural break year of 2008 and financial development index reduces carbon emissions. The negative association between financial development and carbon emissions supports the positive school of thoughts of financial development that promotes a sustainable environment. This study recommends the promotion of quality human capital and green financial development along with increasing the shares of renewable energy in electricity for achieving China 2030 climate targets of reducing pollution.

Keywords: Carbon neutrality; China; Climate targets; Financial risk index; Frequency domain causality; Renewable energy.