Has the development of FDI and foreign trade contributed to China's CO2 emissions? An empirical study with provincial panel data

Since the reform and opening up in 1978, China's Foreign Direct Investment (FDI) and foreign trade have grown rapidly. At the same time, China's Carbon Dioxide (CO2) emissions surged and China has become the world's biggest CO2 emitter. The purpose of this paper is to investigate the relationship between FDI, foreign trade and Carbon Dioxide emissions in China. Using a two-equation model adapted from Halkos and Paizanos (2013), the total impact of FDI on emission is divided into the direct and indirect impacts and estimated accordingly. The results suggest that the increase in per capita FDI helps to inhibit the growth of China's per capita CO2 emissions. Concretely, the dominating direct effect of FDI on carbon emissions is negative and the indirect effect is positive. However, for foreign trade, both direct and indirect effects on CO2 emissions are insignificant after taking consideration of potential endogeneity and introducing dynamics.