An empirical analysis of the green paradox in China: From the perspective of fiscal decentralization

While it is generally recognized that the introduction of environmental policy can effectively control carbon emissions, the green paradox hypothesis puts forth a new warning about the validity of this policy's implementation. This study uses panel data on 29 Chinese provinces from 1995 to 2012 to investigate the impact of fiscal decentralization on the functional mechanisms of environmental policy while controlling for the spatial correlations of carbon emission. The empirical results indicate that environmental policy alone can achieve the objective of reducing carbon emissions. However, the Chinese style fiscal decentralization makes the environmental policy significantly promote carbon emissions, leading to a green paradox. Moreover, we find that the impact of fiscal decentralization on environmental policy varies greatly among different geographical regions and the direct-controlled municipalities. In addition, our study confirms the spatial correlations in China's carbon emissions by using a spatial integration term. Finally, we recommend that emission reduction efforts should be incorporated into the local government's performance evaluation system to improve the institutional environment. Further, differentiated environmental policies and measures should be considered for different provinces to maximize the emission reduction potential.