Fiscal support design for residential energy transition: A central-local government perspective

Residential energy transition projects generate significant externalities, which make government support crucial. The central government provides fiscal support to local governments, which, in turn, supplement these funds with their own budget allocations to deliver subsidies to residents. However, the current central government's fiscal support, based on local governments' administrative levels, may not meet specific regional needs. This study employs a Stackelberg game framework to analyze the central-local government dynamics in China's residential energy transition. The central government, as the leader, designs a linear fiscal support mechanism comprising an incentive coefficient and a fixed amount to maximize social welfare. The local government, as the follower, determines the number of transitioning households to maximize the local economic and political gains. Our findings suggest that for areas with high transition costs, the financial support mechanism should include both a higher fiscal incentive coefficient and a higher fixed amount. In regions where energy transitions yield significant environmental benefits, a higher incentive coefficient and a lower fixed amount are recommended. Greater local government risk aversion and transition uncertainty warrant a lower incentive coefficient and a higher fixed amount. With an increased central government budget, raising the incentive coefficient and lowering the fixed amount is advised. The findings provide valuable insights for designing an effective central fiscal support mechanism that promotes an equitable energy transition.