Does Fiscal Decentralization Contribute to a Reduction in National CO2 Emissions?

Abstract

Is fiscal decentralization a fundamental policy pillar toward achieving the transition to a sustainable low-carbon economy? Despite recent evidence pointing to the importance of subnational government involvement in regulating transportation, buildings, and land use, little is known about whether decentralized governance systems perform better in curbing greenhouse gas emissions. Here I ask the question whether, since fiscal decentralization leads to greater responsiveness at the local level, more fiscally decentralized countries fare better at curbing CO2 emissions. I hypothesize that more fiscally decentralized countries display lower levels of national CO2 emissions. Based on a novel dataset covering 65 countries for the period 1991 to 2018, my findings support the notion that more fiscally autonomous subnational governments are a positive force on the path to decarbonization. Importantly, I show that this effect is a function of spending rather than revenue decentralization. From a policy perspective, my findings point to important positive spillover effects of fiscal decentralization for climate mitigation.