Fiscal Decentralization and Local Environmental Pollution in China

Fiscal decentralization is one of the tools for the central government to engage local governments in environment management. However, its effects are inconclusive. This paper aims to examine the impact of fiscal decentralization on environmental pollution and the role of government environmental preference in China’s provinces. The results show that fiscal revenue decentralization exacerbates local environmental pollution more seriously than expenditure decentralization. This negative environmental effect of fiscal decentralization could be moderated by government environmental preference. Based on our findings, it is recommended that China’s local governments should improve environmental preference so that fiscal decentralization can create a win–win situation for the economy and environment. Furthermore, the different effects of fiscal revenue and expenditure decentralization create a necessity for differentiated management of fiscal decentralization by the central and local governments.