The Impact of Fiscal Decentralization on Environmental Pollution Index: Theoretical Analysis and Empirical Examination

Abstract

As sustainable development gains momentum, many Chinese cities are increasingly focused on balancing economic growth with environmental pollution control. This study develops a theoretical model to assess the impact of fiscal decentralization on environmental pollution, examining both the direct and indirect pathways of influence. Fiscal decentralization is regarded as a mechanism that empowers local governments with economic incentives, allowing them to gain from economic growth by granting them control over revenue generation and expenditure. The analysis reveals that the effect of fiscal decentralization on environmental quality depends on the interplay between the "growth effect" and the "regulation effect," with the growth effect typically prevailing. Fiscal decentralization tends to increase pollution directly by prioritizing economic expansion over environmental protection and indirectly by affecting factors such as economic development and urbanization. Utilizing panel data from 279 cities in China, this paper empirically examines both the direct impact of fiscal decentralization on pollution levels and the indirect channels through economic growth and urbanization. The findings indicate that the growth effect often overshadows the regulation effect, leading to higher pollution levels through both direct and indirect mechanisms. This research concludes by proposing policy measures to address the environmental challenges posed by fiscal decentralization, emphasizing the importance of balanced local governance and stronger environmental regulations.