How does fiscal decentralization lead to renewable energy transition and a sustainable environment? Evidence from highly decentralized economies

Abstract

Effective fiscal management ensures the coordination of taxes and spending authority for attaining inclusive and sustainable growth. Therefore, this study intends to estimate the direct and indirect channels of expenditure, revenue, and composite fiscal decentralization on carbon emissions through renewable energy transition in highly decentralized countries. It employs a cross-sectional augmented auto-regressive distributed Lag (CS-ARDL) method, allowing dependencies across countries and heterogeneity in the slope parameters. In the long run, the direct effects of expenditure (revenue) decentralization on carbon emissions are significantly positive (negative) with coefficient magnitudes of 0.16% and 0.04% (0.09% and 0.08%). The indirect effects of expenditure and revenue decentralization are substantially negative through renewable energy consumption with the coefficient magnitude of 0.135% and 0.138%, respectively. In contrast, composite decentralization and its interactive terms with renewable energy show an emissions-mitigating effect of 0.179% and 0.192%, respectively. These outcomes exhibit that the down-delegation of financial authority (revenue or composite) at local government increases resource efficiency and leads to higher renewable energy consumption. Similar results are echoed in the short run; however, the magnitude of coefficients is significantly higher in the long run. The overall findings provide fascinating policy recommendations.