Environmental Quality, Energy Consumption and Economic Inequality in China: Smooth Structural Shifts and Causal Linkages

Abstract

The space-temporal evolution of economic inequality is examined with Markov chain test method, and the dynamic interrelationships among environmental quality, energy consumption, and economic inequality in China from the province-level are tested by focusing on accounting for structural shifts in causal linkages in this paper. We first employ the Toda-Yamamoto causality framework and then augment it with a Fourier approximation which captures structural changes as a smooth process. The empirical findings show that taking into account smooth structural shifts is important for the causal linkages between economic inequality and energy consumption, and also between environmental quality and energy consumption. The causality analysis with structural changes provides a causal linkage between economic inequality and energy consumption in 26 out 30 provinces and a causal linkage between environmental quality and energy consumption in 7 out 30 provinces, while the quantities are 22 out 30 and 5 out 30 respectively when not accounting for structural shifts. These findings are consistent with the fact that provincial economics in China have experienced structural changes in economy-environment-energy sectors. We also conduct additional analyses which point out that regional and cyclical dependency matter for the causal relationships, and the method of HP filtering can not effectively solve the problem of smooth shifts in economy-environment-energy causality.