Economic Growth vs. Environmental Impact: Lessons from China

Environmental issues were typically overlooked until the late 1980s, but they have secured great interest among economists over the last few decades. In this paper, we explored the impact of the multilevel financial development index (FDINX) along with foreign direct investment (FDI), gross domestic product (GDP), gross domestic product squared (GDP square), and total natural resources (TNRSTN) on the environmental sustainability of China for the period 1991–2022 by using a dynamic autoregressive distributed lag model. We took China as our sample country because it has committed to achieving its net zero emission targets by 2060. The findings reveal that there is a statistically significant relationship between economic growth and carbon emissions (CO2e) both in the short and long term. The EKC hypothesis in China is significant because the GDP squared negatively impacts CO2e in both the short and long run. The estimated parameter of energy efficiency (ENEFC) is negatively significant in the short term, whereas total natural resources significantly impact CO2e in the long run. FDINX has a positive and weakly significant impact on CO2e in the long run, as FDINX increases economic expansion by providing financial resources through cheap loans for dirty industries. The outcomes are significant for foreign direct investment (FDI), which has less impact on environmental sustainability than does FDI in the short run. Our research also supported the pollution haven hypothesis for China in the short run.