How does economic policy uncertainty affect CO2 emissions? A regional analysis in China

Abstract

More recently, the COVID-19 pandemic outbreak has created massive economic policy uncertainty (EPU). EPU and its economic fallout have been a hot topic of study; however, the impact of EPU on CO2 emissions has been seldom addressed to date. This paper investigates the effects of the EPU on CO2 emissions. It elucidates the role of EPU in moderating the environmental regulation-CO2 emissions nexus at the national and regional levels using the panel data model and provincial panel data from 2003 to 2017 in China. The main empirical results are as follows. The EPU has a negative impact on carbon emissions; however, this relationship is non-significant even at the 10% level in the central and western region datasets. Environmental regulation positively increases the CO2 emissions implying that the green paradox occurs in the whole and western regions datasets. From the perspective of the moderating effect of uncertainty, EPU exerts a positive impact upon the environmental regulation-CO2 emissions nexus in the whole and western region datasets. The moderating effect is not significant in the eastern and central regions. The results demonstrate that the re-examination of the EKC hypothesis is inconclusive. Kuznets relationship between economic growth and CO2 emissions for the national, eastern, and central samples was confirmed. In contrast, CO2 emissions monotonically rise as GDP grows for western datasets. Based on the overall findings, some policy implications were put forward. We recommend that the local government should consider EPU to improve the institutional environment. Further, different regions should implement various environmental policies according to regional conditions maximizing the emission reduction potential.