Relating fiscal decentralization and financial inclusion to environmental sustainability: Criticality of natural resources

Abstract

This study deals with a novel perspective on how natural resource dependence (NRD) and natural resource abundance (NRA) moderate the effects of fiscal decentralization and financial inclusion on energy and carbon intensity. Our work develops on the Stochastic Impacts by Regression on Population, Affluence, and Technology framework, considering the selected seven Organization for Economic Co-operation and Development members as the investigative laboratory from 1995 through 2018. Employing a panel Method of Moments Quantile Regression with fixed effects, we find that fiscal decentralization is beneficial for environmental sustainability, especially across the countries with a higher level of energy and carbon intensity; however, enhanced financial inclusivity is detrimental to the environmental quality, with more visible effects in more energy-efficient economies. As per the direct effects, NRD and NRA mitigate energy and carbon efficiency, with more substantial contributions in less energy- and carbon-intensive countries. Concerning the indirect effects, NRD and NRA positively moderate the influence of fiscal decentralization and financial inclusion on energy and carbon intensities, displaying more substantial effects in more energy-efficient economies. Among other control variables, environmental innovation, renewable electricity, employment to population ratio, and economic progress enhance environmental sustainability. We suggest fiscal decentralization should be built on a more transparent and accountable subnational governmental setup to prevent rent-seeking and fragile environmental protection. We also recommend inclusive finance should enhance the access to and affordability of financial services to economic agents for green consumption and investment ventures to achieve environmental sustainability, among other Sustainable Development Goals.