Exploring the impact of environmental regulation on economic growth, energy use, and CO2 emissions nexus in China

This research integrates environmental regulation into the classic nexus analysis of economic growth-energy use-CO2 emissions and explores the interaction relationships of them by using China’s time series data from 1978 to 2014. By establishing a VAR model, this paper examines the multivariate causal relationships direction in short and long term and to what extent they affect each other. A series of econometric tools are employed to build a systematic analytical framework, including cointegration test, vector error correction, impulse response function, and variance decomposition. The empirical test results show the existence of bidirectional impacts among the four variables. The findings indicate that energy use boosts economic growth; meanwhile, CO2 emissions positively relate to economic slowdown in China in recent years. Cointegration test indicates the existence of four long-term equilibrium relationships among the variables. VECM model reveals that energy use has a reverse adjusting power of 11.68 % working on shifting short-term deviation back to long-term equilibrium. Impulse response function demonstrates that environmental regulation benefits economic growth only in the long run and facilitates improving energy efficiency, and the current implementation of regulation on CO2 emissions is inconsistent. Variance decomposition shows that environmental regulation impacts energy use more greatly than economic growth. The final part concludes the new findings of the paper and proposes suggestions for China’s sustainable development.