Fiscal decentralization and environmental pollution: Evidence from Chinese panel data

- We study how fiscal decentralization (FD) affects environment pollution (EP) in China.
- EP is measured as per capita emission of wastewater, waste gas or solid waste.
- We use the provincial panel data during the period 1995-2010.
- We find that fiscal decentralization has no significant causal effect on EP.
- Moreover, FD has significant, positive effects on pollution abatement spending.

China's environmental pollution casts a shadow on its economic success. Concerning fiscal decentralization, China introduced the rule-based tax assignment system in 1994. To avoid the structural change in underlying fiscal regimes, we use the provincial panel data during the period 1995-2010. We find that fiscal decentralization has no significant effect on environmental pollution as it is measured per capita emission of wastewater, waste gas or solid waste in system GMM (Generalized method of moments) estimation. Our results are robust when we use different measures of fiscal decentralization. We further find that fiscal decentralization has a significant, positive effect on pollution abatement spending and pollutant discharge fees, which indicates possible mechanisms for fiscal decentralization to help protect the environment.