The short- and long-run causal correlation between green finance, renewable energy consumption, and economic growth

Abstract

We propose a vector error correction model to explore the causal correlation between green finance, economic growth, and renewable energy consumption from both short- and long-run perspectives to empirically evaluate the efficacy of green finance policies. Based on time-series data from 2000 to 2020, we use the unit root test method to examine time-varying trends and cointegration for time-series data. We find that renewable energy consumption has a negative relationship with emissions but green finance is positively correlated with economic growth. Green finance is the driving factor behind the increasing utilization of renewable energy in China. CO2 emissions per unit of GDP decreased by 1.077% for every 1% increase in green finance development. Although the share of renewable energy consumption increased by 1%, CO2 emissions per unit of GDP decreased by 0.55%. Therefore, green finance is significant in decreasing CO2 emissions; it has a negative impact on CO2 emissions and the renewable energy sector and must be addressed by financial policy, stability, and long-run sustainability. We categorized green finance, which refers to carbon finance innovations such as trusteeship, to improve market demand and eventually develop industries to expand the number of emission-control industries.