Local government debt governance and carbon emissions in China

Abstract

The implicit debt risks arising from the unregulated expansion of financing platforms can easily lead to incentive distortions, causing local governments to engage in non-green behaviors. Using data from 284 prefecture-level cities between 2010 and 2021, and considering the new Budget Law's implementation in 2015 as a natural experiment, this paper employs a difference-in-differences model to investigate the carbon emission reduction effects of local government debt governance. The results indicate that the reform significantly reduced regional carbon emission intensity through two main channels: mitigating extensive land competition and reducing resource allocation distortion. Heterogeneity analysis shows that the carbon emission reduction effects are more pronounced in regions with greater fiscal pressure. Additionally, the study finds that the reform creates a co-governance benefit between carbon dioxide and other pollutants, with only the issuance of revenue bonds showing significant carbon emission reduction effects. The findings of this study provide important policy implications for synergizing government debt risk resolution with the achievement of “dual carbon” goals.