Fiscal centralization and urban industrial pollution emissions reduction: Evidence from the vertical reform of environmental administrations in China

Abstract

The relationship between fiscal regimes and urban industrial pollution emissions is unclear. This paper aims to explore the effects and mechanisms of fiscal centralization on urban industrial pollution emissions and environmental quality. Using the vertical reform of environmental administrations (VREA) in China as a quasi-natural experiment of fiscal centralization, this study applies a staggered difference-in-differences (DID) model to explore the differences in industrial pollution emissions between centralization cities and decentralization cities. The main findings are: (1) VREA significantly inhibits regional industrial pollution emissions, and the reform effect increases over time. This conclusion still holds after considering a series of robustness issues. (2) Industrial sulfur dioxide (SO2) and solid particulate emissions in the fiscal centralization cities have decreased significantly by 0.3281% and 0.2240%, respectively. However, there is no significant change in industrial wastewater discharges. (3) Environmental regulations, environmental expenditures, and pollution control investments of local governments are the main channels through which VREA reduces industrial pollution emissions. (4) The effects of VREA are more significant in central and western cities and small cities. (5) Relative to decentralization cities, centralization cities have improved air and water quality by 0.0825% and 0.1628%, respectively. These findings help to accurately assess the effects of fiscal centralization on regional environmental governance and provide a decision-making reference for further deepening environmental centralization reform in China.