Modelling Economic Growth, Carbon Emissions, and Fossil Fuel Consumption in China: Cointegration and Multivariate Causality

Abstract

Most authors apply the Granger causality-VECM (vector error correction model), and Toda–Yamamoto procedures to investigate the relationships among fossil fuel consumption, CO2 emissions, and economic growth, though they ignore the group joint effects and nonlinear behaviour among the variables. In order to circumvent the limitations and bridge the gap in the literature, this paper combines cointegration and linear and nonlinear Granger causality in multivariate settings to investigate the long-run equilibrium, short-run impact, and dynamic causality relationships among economic growth, CO2 emissions, and fossil fuel consumption in China from 1965–2016. Using the combination of the newly developed econometric techniques, we obtain many novel empirical findings that are useful for policy makers. For example, cointegration and causality analysis imply that increasing CO2 emissions not only leads to immediate economic growth, but also future economic growth, both linearly and nonlinearly. In addition, the findings from cointegration and causality analysis in multivariate settings do not support the argument that reducing CO2 emissions and/or fossil fuel consumption does not lead to a slowdown in economic growth in China. The novel empirical findings are useful for policy makers in relation to fossil fuel consumption, CO2 emissions, and economic growth. Using the novel findings, governments can make better decisions regarding energy conservation and emission reductions policies without undermining the pace of economic growth in the long run.