Gospel or disaster? An empirical study on the environmental influences of domestic investment in China

Since the beginning of China's reform and opening up in late 1970s, the contradiction between environmental quality and economic development has become increasingly acute. As the main driving force of development, China's fixed asset investment (FAI) has grown rapidly. In the meanwhile, China's energy consumption surged and the environmental pressures mounted. The surge in FAI may have great influences on the environmental quality. On the one hand, the rapid increase in FAI facilitated the development of the secondary industry especially energy- and pollution-intensive industries, which brought about significant amount of energy-related pollution. On the other hand, growing investment on environmental investment is expected to slow environmental deterioration. Moreover, the environmental quality and domestic investment may have potential spatial correlations. In this paper, after fully accounting for the spatial dependence, the relationship between domestic investment and environmental quality in China is quantitatively investigated. Using CO ₂ and SO ₂ as two representative pollutants, the estimation results indicate that the spatial dependence indeed exists, and total effects of FAI on pollutant emissions are positive. However, there is no evidence that environmental protection investment had expected effects to effectively curb pollutant emissions in China.