Unraveling the carbon emissions Puzzle: Assessing the impact of FDI, financial development, and fossil fuel energy consumption on China's commitment to COP26 Agenda - Asymmetric evidence

Abstract

In the context of China, this study investigates the relationship between foreign direct investment (FDI), financial development, fossil fuel energy use, and CO2 emissions. We examine both short- and long-run dynamics, as well as asymmetries, in the connection between these factors and CO2 emissions using the Nonlinear Autoregressive Distributed Lag (NARDL) model. By utilizing a sophisticated econometric strategy that captures the complexity and nonlinearities of this connection, the study adds to the body of current knowledge. The empirical results show that FDI, financial development, fossil fuel energy use, and CO2 emissions have substantial correlations and asymmetries. Results indicate that FDI and financial development have positive short-term effects on CO2 emissions, but their long-term impacts are negative, indicating that sustainable investment and financial practices may have environmental benefits. Furthermore, fossil fuel energy consumption exhibits a positive relationship with CO2 emissions, emphasizing the need for cleaner energy sources to mitigate environmental impacts. A number of recommendations have been made, including attracting green and sustainable investments through incentives for renewable energy projects, developing green financial systems to facilitate sustainable financing, promoting the transition to cleaner energy sources, and implementing comprehensive policies against climate change aligned with international obligations.