Public Expenditure, Green Finance, and Environmental Governance: Evidence From China

Due to the constant expansion of China’s industrial sector, environmental pollution has become a major issue that requires urgent and continuous government intervention. We use a panel of 239 Chinese cities for 2007 – 2019 and a system Generalized Method of Moments (GMM) model to estimate the impact of fiscal expenditures on industrial pollution levels. Our results suggest that local fiscal expenditures have a positive and significant impact on industrial wastewater generation, sulfur dioxide emissions, and smoke and dust pollution levels, as well as on pollution intensity. Conversely, expanding environmental protection initiatives helps significantly improve environmental quality. In addition, government expenditure on education has a negative and statistically significant influence on both industrial wastewater and smoke and dust pollution, while higher spending on research and development (R&D) helps curb sulfur dioxide emissions and pollution intensity. We also demonstrate that green financing initiatives can strengthen the negative relationship between education expenditure and R&D spending on the one hand and pollution level and its intensity on the other. Hence, our results offer suggestions for improving the composition of government expenditures and therefore better controlling pollution levels, which can be achieved by increasing investment in environmental protection, spending more on education and R&D, and promoting the spread of green financing initiatives.