Reform of government level and local environmental pollution: evidence from China

Jingyuan Yu, Shuai Chen and Linmu Li ()
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Jingyuan Yu: Guangdong University of Finance and Economics
Shuai Chen: Guangdong University of Finance and Economics
Linmu Li: Guangdong University of Finance and Economics

Environment, Development and Sustainability: A Multidisciplinary Approach to the Theory and Practice of Sustainable Development, 2025, vol. 27, issue 2, No 38, 3609-3628

Abstract: Abstract In this study, the effect of a fiscal reform of government level implemented in China on enterprise pollution emissions is estimated, using data from the Chinese polluting enterprise database. The results provide strong evidence that fiscal decentralization decreases environmental quality as measured by a comprehensive indicator composed of wastewater, waste gas, and waste solids. Compared to non-province-managing-counties in province-managing counties, corporate pollution has increased by 3.4%, especially in companies owned by cities and counties and in companies that belong to low-pollution industries and are facing financial constraints. This shows that, although the PMC reform enhanced the provision of environmental public goods by local governments, it also strengthened the race to the bottom caused by interjurisdictional competition. Therefore, the total effect of the PMC reform on pollution is positive. This suggests that relying solely on fiscal decentralization cannot effectively improve environmental quality. Higher-level governments should design a more effective incentive mechanism to decrease enterprise emissions.

Keywords: Reform of government level; Environmental quality; Province-managing-county; Differences-in-differences (search for similar items in EconPapers)
JEL-codes: H41 H77 Q53 Q56 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1007/s10668-023-04032-z

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