The role of energy use in testing N-shaped relation between industrial development and environmental quality for Chinese economy

The study investigates the relationship between industrial production and environmental quality in a Chinese economy. The estimates of the ARDL bounds test over the sample 1972-2020 provide evidence of the long-run relation between industrial production and environmental quality in the presence of a controlling factor energy use. The results also confirm the presence of an N-shaped impact of industrial production on environmental quality in the long and short-run in China. The findings further demonstrate that the use of energy is polluting the environment in China in both periods. These findings have opened up a thought process for the policymakers to see to what extent industrial development should be allowed in China by controlling energy use where it is not harmful to environmental quality. The findings also unfold two cutoff points of industrial production for environmental quality. The maximum cutoff point of industrial production is 29.21% at which environmental quality becomes worse off and the minimum cutoff point is 30.71% at which environmental quality turns well off in the long run in China. Vector Error Correction Model (VECM) based causality test suggests a unidirectional causal link running from linear, squared, and cubic terms of industrial production to carbon emissions in the short run, but they have a bidirectional causal link between each other in the long run. Moreover, a bidirectional causal link between energy use and environmental quality is witnessed in the short run but energy use is causing environmental quality in the long run in China. These findings are robust to various diagnostic tests applied in the study. The study proposes such policies that may allow industrial production to be increased up to a level where it will not hurt the natural environment. While beyond a minimum cutoff point, industrial production may be restructured by shifting from unclean energy to environmentally friendly clean energy.