The Nexus Between Fossil Fuels, FDI, Economic Growth, Carbon Dioxide Emissions, and Renewable Energy: The Case of Hong Kong

This study investigates the nexus between fossil fuel consumption, foreign direct investment (FDI), economic growth, carbon dioxide (CO 2 ) emissions, and renewable energy adoption in Hong Kong. The motivation behind this research stems from the urgent need to balance Hong Kong’s economic growth with environmental sustainability, particularly in the context of rising CO 2 emissions and global commitments to reduce carbon footprints. Understanding the interactions among these variables is critical for shaping policies that promote sustainable development. The empirical methodology employed in this study involves the application of vector autoregressive (VAR) models and Granger causality tests to analyze time‐series data from 2000 to 2023. These methods enable examining short‐term and long‐term relationships among the key variables, capturing their dynamic interactions and causal links. The study also conducts impulse response function (IRF) analysis to understand the magnitude and direction of response to the variables’ shocks. The main findings reveal a significant positive relationship between fossil fuel consumption and CO 2 emissions, indicating that Hong Kong’s reliance on fossil fuels directly contributes to environmental degradation. FDI inflows also exacerbate CO 2 emissions, while economic growth positively correlates with emissions, consistent with the Environmental Kuznets Curve (EKC) hypothesis. However, the turning point for emissions reduction has not yet been reached in Hong Kong. On the other hand, renewable energy adoption is negatively correlated with CO 2 emissions, suggesting that increasing the share of renewables in the energy mix could mitigate environmental impacts. The policy implications of these findings are clear. First, Hong Kong must intensify efforts to promote renewable energy adoption through more significant investment in renewable infrastructure and financial incentives. Second, policies regulating FDI should incorporate environmental standards to ensure incoming investments support sustainable development goals. Last, the findings suggest the need for enhanced energy efficiency measures and stricter environmental regulations to decouple economic growth from CO 2 emissions. This study provides important insights for policymakers balancing economic growth with environmental sustainability, offering actionable recommendations for achieving long‐term sustainable development in Hong Kong. This study contributes to the literature by providing novel insights into the energy–economy–environment relationship in an urban, resource‐constrained economy. Policy recommendations emphasize short‐term regulatory measures, medium‐term renewable energy investments, and long‐term strategies for sustainable development.