The impact of fiscal decentralization on environmental pollution and the transmission mechanism based on promotion incentive perspective.

Abstract

At present, China's economy is transforming from rapid development to high-quality development, and environmental pollution stands out as an urgent need to be addressed. Fiscal decentralization is considered to confer economic incentives on local governments to obtain the right to gain and spend in economic growth. However, at the same time, political incentives are given to local officials under the promotion mechanism based on gross domestic product (GDP) assessment, and these two incentives become key to the environmental performance of the jurisdictions. Therefore, this paper incorporates fiscal decentralization, promotion incentives, and environmental pollution into a unified framework and theoretically analyzes the effects of fiscal decentralization, promotion incentives on environmental pollution, and the intrinsic mechanism of action. Using panel data of 30 Chinese provinces from 2002 to 2018, we examine that fiscal decentralization significantly promotes environmental pollution, and this performance is more obvious in economically underdeveloped regions. In terms of its mechanism of action, fiscal decentralization affects environmental pollution by increasing the demand for foreign direct investment, inhibiting technological progress, and enhancing environmental regulation, while foreign direct investment and technological progress significantly inhibit environmental pollution, but environmental regulation does not present a role of pollution control. Further study finds that under the consideration of "GDP-based promotion incentives," local officials will generate "competition for investment," relax environmental standards for FDI, and generate "competition for growth", which will inhibit technological progress and incomplete enforcement of environmental regulations, thus exacerbating local environmental pollution. On this basis, this paper proposes to further deepen the fiscal system reform, promote the optimization of local government competition system, and effectively restrain the vicious competition behavior of local officials under the fiscal decentralization system, so as to provide relevant insights for realizing China's economic transformation as well as high-quality economic development.