Is financial development good for the environment? An asymmetric analysis with CO₂ emissions in China

This paper examines the asymmetric effect of financial development on CO₂ emissions in China by controlling for the effects of economic growth and energy consumption. So far, no consensus has been found as regards the nature and the intensity of the relationship between CO₂ emissions and financial development in China. While most previous studies found a positive effect of financial development on the environment, there have been also studies showing that financial development increases CO₂ emissions in China or has no effect on it. Moreover, these studies have not accounted for a possible asymmetric impact that financial development can have on CO₂ emissions in China. The empirical study in this paper is carried out with the unit root test with structural breaks and the nonlinear autoregressive distributed lag model. The obtained results show that an asymmetric effect exists. An increase in financial development helps decreasing CO₂ emission. These results show the importance to support financial development in China to decrease CO₂ emissions while sustaining economic growth.