Does fiscal decentralization improve energy and environmental performance? New perspective on vertical fiscal imbalance

Abstract

Chinese-style fiscal decentralization and vertical fiscal imbalance may cause substantial incentive distortion, which is not beneficial for public environmental governance. Based on China's provincial panel data from 2000 to 2017, the non-radial directional distance function is used to assess energy and environmental performance, then we examine the impact of fiscal decentralization on energy and environmental performance from the perspective of vertical fiscal imbalance. The results show that the divergence between revenue decentralization and expenditure decentralization leads to vertical fiscal imbalance, which significantly reduces energy and environmental performance. Meanwhile, there is regional heterogeneity in the influence of vertical fiscal imbalance. Vertical fiscal imbalance in the eastern and economically developed regions worsen energy and environmental performance, while the vertical fiscal imbalance in the central, western regions and economically backward regions improve energy and environmental performance since they receive more transfer payments. Different fiscal compensation methods have different impacts on vertical fiscal imbalance. In addition, the influence mechanisms show that vertical fiscal imbalance harms energy and environmental performance by inhibiting industrial structure upgrading and technological innovation and strengthening government intervention. Therefore, to reduce energy and environmental efficiency losses, we recommend deepening fiscal reform and controlling vertical fiscal imbalance.