Fiscal decentralization and public budgets for energy RD&D: A race to the bottom?

Abstract

In previous studies, fiscal decentralization and public support to energy research development and demonstration (RD&D) have so far been investigated separately. This study combines these two strands of the literature on public policy by exploring the effects of fiscal decentralization (FID) on budget allocation for energy RD&D in renewable energy and energy efficiency fields (GERDD). With the panel of sixteen developed countries over 2000–2018, we explore the relationship between FID and GERDD by combining threshold models with quantile regression techniques. Our estimation strategy allows us to deal with asymmetric effects and potential endogeneity in the relationship between variables. Our analysis shows that the relationship between fiscal decentralization (revenue and expenditure decentralization) and GERDD is nonlinear and conditional on decentralization types. Specifically, the direction of expenditure decentralization changes from positive to negative depending on the degree of fiscal expenditure decentralization, while the adverse and significant impact of revenue decentralization is observed only in countries with greater revenue decentralization. The quantile analysis shows that countries with higher public support levels to energy RD&D tend to mitigate the race to the bottom phenomenon by minimizing the adverse effect of excessive fiscal decentralization. • The effect of fiscal decentralization on public energy RD&D expenditures is not uniform. • Fiscal decentralization affects public energy RD&D expenditures in complex ways. • Policymakers need to obtain the optimal level of decentralization that fosters energy innovations. • Excessive fiscal decentralization harms public support for sustainable energy innovations. • The adverse effects of fiscal decentralization is moderated in countries with higher public energy RD&D expenditures.