Fiscal Decentralization, Environmental Accountability and the Provision of Environmental Public Goods in China: Evidence from 30 Provinces

Abstract

This paper uses panel regression model to analyze the relationship between fiscal decentralization and local environmental management based on data from 30 Chinese provinces for the period 2002 to 2010. We hypothesize that for China, enterprises account for the majority of local government tax revenue and, due to their mobility, exert leverage over local government decisions concerning environmental public goods. To correct this situation, China’s central government implemented an environmental accountability system that features two indexes, COD for water pollution and SO2 for air pollution, which are considered in evaluating local government officials’ job performance. We find that the degree of fiscal decentralization strongly correlates with local government accepting higher levels of pollution. This paper empirically verifies that local government officials are reacting to the accountability system as demonstrated by the modest increase of pollutants included in the accountability system in comparison to the drastic increase of excluded pollutants.