The impacts of GDP, trade structure, exchange rate and FDI inflows on China's carbon emissions

This paper examines the impacts of GDP, trade structure, exchange rate and FDI (foreign direct investment) inflows on China's carbon emissions from 1982 to 2016 and verifies the validity of EKC (Environmental Kuznets Curve) hypothesis for China. Differentiated from the existing literature which rarely considers services trade and exchange rate, this paper uses the proportion of services trade to measure trade structure, and exchange rate as one of the independent variables. Firstly, the stability of each variable is tested by ADF (Augmented Dickey-Fuller) and NP (Ng-Perron) test. Then, ARDL bound test is used to test the cointegration of the variables as it has better properties than traditional cointegration methods and is more suitable for the model in this paper. Thirdly, Error Correction Model is used to analyze the long-term and short-term dynamic relationship between the variables. Fourthly, the Granger causality test based on the VAR is performed. It is found that during the study period EKC hypothesis was valid for China, and that whilst the impacts of both services trade and exchange rate on China's carbon emissions were negative, the impacts of FDI inflows were positive. Conclusions and policy implications are provided at the end of the paper.