Financial Development and Carbon Emissions: Analyzing the Role of Financial Risk, Renewable Energy Electricity, and Human Capital for China

This study introduces the role of financial risk index and renewable energy electricity output along with financial development and human capital as new determinants of carbon emissions and uses updated time-series data from 1988-2018 for China, employing novel econometric approaches, i.e., Narayan and Popp 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 human capital index and rising shares of renewable energy in electricity output help 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 which promotes sustainable environment. This study recommends 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.

Automated summary

The study finds that improving human capital index and increasing the share of renewable energy in electricity output helps limit carbon emissions, while factors such as GDP and financial risk index can increase carbon emissions. The negative association between financial development and carbon emissions supports the idea that financial development promotes a sustainable environment. The study recommends China to promote quality human capital, green financial development, and increase the share of renewable energy in electricity to achieve the 2030 climate targets.