The Relationship between Fiscal Federalism and CO2 emissions in China

Sammanfattning: The decentralization of fiscal responsibilities in China has strengthened economic development and enhanced local public management. However, due to fiscal competition, local governments that are fiscally constrained tend to neglect environmental standards in favour of economic growth. This study researches how outcomes of fiscal federalism in China, measured by budgetary ratios of gross regional products, relate to environmental diversities between provinces, measured by CO2 emission intensity. A panel dataset including 30 Chinese provinces between 2003 and 2015 is empirically tested with fixed-effect method. Test results reveal that provinces with high ratio of revenues have higher CO2 intensity the same year but lower CO2 intensity the second year. Results also show that provinces with high expenditure ratios have lower CO2 intensity. However, provinces with high deficit ratio exhibit lower CO2 intensity. The overall results indicate that the relationship between the budgetary sizes of provinces and decentralized management of environmental protection is contradictory. This may relate to the exclusion of central-to-local transfers and off-budgetary sources, which vary between provinces and potentially affect the relationship. The study determines that the relationship between provincial fiscal diversities and CO2 intensity diverges in China depending on which of revenues, expenditures or deficits that is used as a fiscal proxy.