In the context of global climate change and protecting the ecosystem from greenhouse gas emissions, understanding the link between CO2 emissions and economic growth is very pertinent. This relationship has been extensively tested in the light of the Environmental Kuznets Curve (EKC) by many empirical studies; however, the seminal work in this regard was conducted by Grossman and Kreuger (1991). In this regard, Dinda (2004) and Al-mulali et al. (2016) review all the studies on the topic of EKC regarding various countries and regions. The literature on the EKC hypothesis is large enough, and multiple factors such as industrialization, urbanization, ICT, trade openness, renewable energy, and globalization have come out as determinants of environmental quality alongside economic growth (Ullah et al. 2021). However, energy efficiency and green innovations, which could be essential factors in mitigating CO2 emissions, are not studied extensively as promoters of sustainable development and a clean environment. The relationship between these factors and CO2 emissions is mainly observed over a long period of time. Therefore, in this study, we aim to observe the relationship between energy efficiency and green innovations on environmental quality in China.
Energy is served as an essential input in production; hence, the main contributor to the industrialization and economic development of developed and emerging economies. On the other side, this process of modernization and development is not free of cost, and an environmental cost is attached to this process (Chang et al., 2018). Several empirical studies have tried to find the role of energy consumption on the economic development of various countries and regions, and most of them have accounted for the problems of environmental pollution and CO2 emissions (Arouri et al., 2012; Ozturk & Al-Mulali, 2015). Moreover, various studies have also highlighted that the adverse effects produced by energy consumption can be countered by increasing energy efficiency (Filippini and Zhang, 2016). Therefore, several past studies have considered energy efficiency as a key element in increasing energy security, driving economic growth, and reducing environmental problems.
Given the importance of energy efficiency, many developed and emerging economies have incorporated energy efficiency policy into their energy-related strategies, targets, and overall national agendas. (IEA, 2014). To achieve targets of high environmental quality alongside high economic growth, the world has to invest heavily in green technology (Wurlod and Noailly, 2018). Another way to successfully achieve the targets mentioned above is to improve the countries' institutional quality that could effectively contribute to the implementation of energy policies. Although many nations have implemented the energy efficiency policy, the efficacy of these policies largely varies from country to country depending upon the difference in their level of institutions, relative factor prices, degree of specialization, and status of their technological development (Usman et al., 2012).
Following the Oil crisis in the 1970s, energy efficiency has grabbed global attention (Florini & Sovacool 2009). Ever since the oil crisis of 1970, a plethora of studies have tested the impact of energy efficiency on environmental quality with regards to the use of energy in various sectors and for different countries. Literature, in the context of energy efficiency, can be divided into two main classifications. The first group of studies focuses on the techniques to measure energy efficiency. The second group of studies focuses on the factors that can affect energy efficiency. The first group of studies includes many studies, but they haven't reached a consensus on the definition of energy efficiency (Filippini and Hunt, 2015). However, this group of studies provided several definitions relying on the simple ratio from production to the energy input used in production. In order to observe a rise in energy efficiency, miscellaneous measurable variables are primarily used, including a thermodynamic indicator, physical thermodynamic indicator, economic indicator, etc. (Patterson, 1996).
Green innovations have also gained popularity during recent years, and they can help achieve green economic growth, which is the need of the hour. One of the most pertinent benefits of green innovations is that they can significantly cut carbon emissions, which is a significant cause of environmental degradation, by increasing energy efficiency and developing more sophisticated and modern technologies (Cantore et al. 2012). Therefore, during the Paris agreement various countries have agreed to work together that leads them towards the path of green economic growth. Despite all these efforts, there are several hurdles still exist in the implementation of green technology not only at the domestic but international level (Maskus, 2010). The decision of the countries regarding investment in green technologies will depend on whether the green technology help reduces energy inefficiency and increases productivity or not. In this context, empirical studies provided mixed results. Palmer et al. (1995) indicated that green technology might cause energy efficiency and productivity to fall. On the other side, Lin and Moubarak (2014) and Wurlod and Noailly (2018), highlighted that green technology improves energy efficiency and also increases productivity.
China is the second-largest economy in the world, the largest consumer of energy, and the biggest contributor to global CO2 emissions (Aslam et al. 2021). China is an emerging economy, which is growing at a great pace. The demand for controlling CO2 emissions in China is on the rise. The pressure is mounting on China domestically and internationally (Yuelan et al. 2021). Energy efficiency and green innovations can help reduce CO2 emissions without compromising economic growth. Not much studies are available that have particularly targeted China in this context. Therefore, in this study, we try to analyze the nexus between energy efficiency, green innovations, and environmental quality in China. This study is different from all previous studies because it relies on the asymmetry assumption, which provides us an opportunity to separately calculate the impact of positive and negative changes in energy efficiency and green innovations on CO2 emission in China. To that end, the analysis applied linear and non-linear ARDL models. To the best of our knowledge, this is a first-ever study that tried to capture the asymmetric impact of energy efficiency and green innovations on CO2 emissions in China.