Do economic activities cause air pollution? Evidence from China's major cities

In China, smog pollution has become an increasingly serious environmental issue that seriously threatens its sustainable economic development. Given that smog pollution usually becomes more prominent as economic activities increase, this study investigates the causal relationship between the two. Using panel data of 73 key cities in China during 2013-2017, this research employs the VECM, impulse response function, and variance decomposition to conduct empirical estimations. The results indicate that there is a unidirectional causality between PM2.5 and economic growth, Foreign Direct Investment (FDI), and industrial structure in the long-term, while there is bilateral causality between the Air Quality Index and the other variables. This suggests that, in the short term, there is a one-way causality from foreign trade, economic growth, and industrial structure to air pollution. There is also evidence for the existence of inverted U-shaped relationship between smog pollution and economic growth. The responses of smog pollution to the ratio of secondary industry to is positive, suggesting that the increase in the proportion of the secondary industry would increase smog concentrations. The results of variance decomposition suggest that foreign trade contributes the most to air pollution, followed by economic growth, industrial structure, and FDI.