Abstract: The negative effects of energy consumption and pollution have restrained Chinese economy from further rapid sustainable growth. Examining their relationship with economic growth can lay a solid foundation for the decision-making of energy conservation and pollution reduction and ensure the sustainable development of Chinese economy. Using panel data of 30 Chinese provinces from 2001 to 2008, this paper builds a comprehensive model of pollution, energy consumption and economic growth and conducts an empirical study on the interactions between pollution, energy consumption and average GDP. The estimated results show that energy consumption has a greater impact on output compared with conventional factors of production such as labour (human capital) because energy consumption has higher output elasticity than labour. Pollution has relatively little effect on output, which means that China's economic growth is still powered by physical capital expansion and substantial energy consumption. Energy consumption and pollution still increase with China's economic growth and the EK.C hypothesis is only partially confirmed.
Keywords: energy consumption; environment pollution; economic growth; simultaneous equations; China.
Because China's economic growth still relies on the development of manufacturing and heavy industries, export and fixed asset investment, current energy consumption grows rapidly. It is self-evident that energy consumption, which underlies economic growth with other factors of production, is one of the most important inputs in all economic activities. Meanwhile, due to the limitations of technological progress, pollution is still an inevitable byproduct of production. Consequently the rapid increase in energy consumption and pollution as an indicator of fast economic growth will damage the environment and have tremendous impacts on ecological balance (Arrow et al., 1995; Smulders, 1995; Brown et al., 2011; Ansuategi, 2003; Cantore, 2005). The increasingly striking environmental and social cost of China's economic growth has had very serious negative effects (Zhang and Zuo, 2007). Given the severity of environment problems, the dilemma between economic growth and environment protection, the coordinated growth of energy consumption, environment and economy, and the achievement of sustainable development have become much-debated topics in the academia (Payne, 2010; Nel and Van Zyl, 2010; Brock and Taylor, 2004; Chichilnisky, 1997; Panayotou, 2000; Gradus and Smulders, 1993; Galeotti, 2007; Aslanidis, 2009).
Because the impacts of energy consumption and environment pollution on economic growth are as different as apples and oranges, they are discussed separately in most literature. Some literature discussed the relationship between energy consumption and economic growth (Payne, 2010; Nel and Van Zyl, 2010); others discussed the relationship between environment pollution and economic growth (Arrow et ah, 1995; Smulders, 1995; Ansuategi, 2003; Cantore, 2005; Panayotou, 2000; Gradus and Smulders, 1993; Galeotti, 2007; Aslanidis, 2009; Verbeke and De Clercq, 2002). However electric power is mainly provided by thermal power plants in China, meanwhile coal will still be the dominant energy source in the foreseeable future. Under the current situation, it is impossible to separate the impacts of energy consumption and pollution on economic growth; therefore it is absolutely necessary to take into account the interactions of the three elements. Building a model of economic growth under the constraint of energy use and environment pollution, Zhang and Zuo (2007) integrated the relationship between energy consumption, environment pollution and economic growth, but they did not include the feedback of economic growth on energy use and environment pollution.