Does the carbon emission rights trading pilot policy aggravate local government fiscal pressure? Evidence from China

Abstract

The carbon emission rights trading pilot (CERTP) policy is an important measure to promote low-carbon economic development. This pilot policy also affects the entry and survival of enterprises and is thus related to local government fiscal pressure. The objective of this paper is to examine whether the CERTP policy increases local government fiscal pressure. Based on the quasi-natural experiment of China's CERTP policy, using a dataset from 314 prefecture-level cities in China over the period 2005 to 2019, this paper applies the staggered difference-in-differences (DID) model to examine the impact of the CERTP policy on local government fiscal pressure, and further tests the spatial spillover effects and potential mediation mechanisms of this pilot policy. The results indicate that the implementation of the CERTP policy significantly increases local government fiscal pressure, especially in the eastern regions and regions with low economic development levels, which provides further evidence of a causal relationship between the CERTP policy and fiscal pressure. The results of the spatial spillover effects confirm that the implementation of the CERTP policy in neighboring prefecture-level cities would increase local government fiscal pressure in the local region. The results of the mediation mechanism effect reveal that the CERTP policy aggravates local government fiscal pressure by inhibiting the progress of green technology by enterprises, hindering the emergence of new enterprises, and increasing the number of closures of high-carbon emissions enterprises. This paper recommends that when implementing the CERTP policy, it is necessary to weigh the overall impact of the policy, not just its effect on carbon emissions reduction. The fiscal sustainability of local governments cannot be ignored.