Environmental effects of Chinese-style fiscal decentralization and the sustainability implications

Abstract

Abstract Nowadays, as for the developing countries, economic growth and environmental protection serve as two main objectives to achieve sustainability. It has been widely proved that fiscal decentralization is of great use to economic growth, but its environmental effect is still inconclusive. As the complex mechanism for the impact of fiscal decentralization on environment still remains unclear, our study is making an attempt to bridge the gap by introducing a detailed theoretical analysis by making use of a utility maximization approach, and two kinds of fiscal decentralization concerning both revenue and expenditure decentralization are analyzed; besides, an empirical test is further made on their effects on environmental quality and two types of regulations (that is, fiscal environmental input and environmental administrative charge). According to the results of the theoretical analysis, both of the decentralizations have positive effects on environmental improvement. The results of the empirical tests based on the panel data of 30 provinces/municipalities confirm the above theoretical deductions, as well as the following conclusions could also be derived. First of all, the fiscal decentralization has a positive regulatory effect on the environmental regulations mentioned above, which indicates there is synergy between the two kinds of policy tools. Secondly, the empirical results determine a threshold effect of fiscal decentralization on environment. Lastly, compared with expenditure decentralization, the fiscal revenue decentralization proves to be more effective for environmental improvement. Based on these conclusions, it is recommended that the central government should strengthen both environmental management and fiscal decentralization systems so as to achieve a win-win situation for economic growth and environmental protection. Particularly, in order to maximize its potential, we propose that priority be given to fiscal revenue decentralization.