Investigation of pollution haven hypothesis for China: An ARDL approach with breakpoint unit root tests

China is experiencing a stage of L-type economy while climate change challenge appears tougher and tougher. However, up to now there exists no consensus about whether the influx of foreign direct investment should be responsible for domestic CO2 mounting situation. The study aims to investigate the validity of the Pollution Haven Hypothesis (PHH) in China using 1980-2012 annual time-series data. To achieve this goal, the Autoregressive Distributed Lag Cointegration (ARDL) approach is used to examine the hypothesis, and gross domestic product (GDP), GDP square, energy use, inward foreign direct investment (FDI), economic freedom, urbanization, financial development as well as trade openness are included as major drivers of CO2 emissions. Unlike many previous studies, we also perform breakpoint unit root tests and incorporated a structural break into our model. The results of bounds test show that there is a stable long-run relationship between chosen variables in each model. CO2 emissions will increase by 0.058% with 1% increase in inward FDI (% of GDP), which indicates that PHH does exist in China. Since China could be regarded as a model for developing countries, the results of our study are useful for other developing countries.