Elsevier

Energy

Volume 234, 1 November 2021, 121243
Energy

The role of energy prices and non-linear fiscal decentralization in limiting carbon emissions: Tracking environmental sustainability

https://doi.org/10.1016/j.energy.2021.121243Get rights and content

Highlights

  • Employed Westerlund cointegration and found long-run equilibrium association.

  • Applied CS-ARDL and AMG techniques to obtain the influence estimates.

  • Linear (non-linear) fiscal decentralization promoted (reduced) carbon emissions.

  • Fiscal decentralization presented an inverted U-shaped association with carbon emissions.

  • Energy prices and institutional quality mitigated carbon emissions.

Abstract

Since the role of fiscal decentralization cannot be overlooked in tracking sustainable development goals targets of a clean environment and climate mitigation, it is inevitable to understand the comprehensive picture of its link with environmental quality. Unlike past studies, this study investigates the combined influence of energy prices and non-linear fiscal decentralization on carbon emissions in the presence of institutional quality and gross domestic product in the model. It employed advanced econometric panel techniques on data from 1990 to 2018 for the top seven fiscally decentralized Organisation for Economic Co-operation and Development (OECD) nations, including Spain, Belgium, Austria, Switzerland, Germany, Australia, and Canada. The main outcomes are as follows: first, a cointegrating equilibrium link is existent among the study variables. Second, the linear term of fiscal decentralization promotes carbon emissions, while the non-linear term mitigates it. It verified the inverted U-shaped curve between fiscal decentralization and carbon emissions. Third, increasing energy prices for non-renewable energy decrease carbon emission due to a substitution effect. Among other explanatory variables, improvement in the quality of institutions decreases carbon emissions, while the gross domestic product increases it. These findings suggest strengthening fiscal decentralization, lowering non-renewable energy prices, and improving institutional quality to check the deteriorating environmental quality in the study sample and other worldwide regions.

Introduction

Fiscal decentralization (FD) involves transferring expenditure obligations and revenues, along with other duties, from the central government's level to the lower provincial or state levels. Some studies view this transfer as an essential avenue that brings more substantial economic growth, better efficiency, and greater equality. In theory, local governments are closer to the people and have an informational advantage, allowing them to achieve better outcomes, particularly in the fields of public goods and services [1]. Several researchers see this transition as a significant pathway that leads to enhanced performance, greater equality, and faster economic growth. Ji et al. [2] stated that the local government better manages regional development. For instance, due to its proximity to the services' recipients, the local government has the informational benefit of knowing people's desires, enabling it to react quickly to escalating residents' needs [3].

It is believed that pro-poor districts give disadvantaged populations access to goods and services by enhancing their ability and livelihoods, which encourages them to engage in decision-making. It is often assumed that regions involving a disadvantaged portion of society in the growth phase would result in an equitable allocation of urban services [2]. The race to the top strategy can be described by the fact that certain regions establish high environmental requirements and implement a beggar-thy-neighbor initiative to export their polluting activities to nearby provinces [4]. On the other hand, some regions set low environmental standards for the environment-linked industry at the expense of environmental deterioration. In recent decades, the sub-national governments, in contrast to the central governments, remained relatively more focused on environmental policies [5]. Nevertheless, the lower regulatory bodies merely obey the rules laid down by the central governments. In most instances, the sub-national governments do not conform to those rules [6].

Regarding the influence mechanism between fiscal decentralization and the environment, both expenditure and revenue decentralization have been argued to determine the environmental quality [7]. Yet, no consensus has been developed on fiscal decentralization-environmental quality nexus. To illustrate, some studies revealed that fiscal decentralization increases environmental degradation attributed to the race to the bottom [[8], [9]]. In contrast, some studies found that fiscal decentralization improves the environmental quality associated with the race to the top [5,10,11]. In the face of those opposing empirical evidence, it is essential to investigate the influence of fiscal decentralization from different lenses. The linkage between fiscal decentralization and the environment is probably not linear through the course of fiscal decentralization. At the nascent stage of fiscal decentralization, the local governance structure may opt for the race to the bottom approach to promote local economies, deteriorating the local environmental sustainability [12]. However, at its later stage, local governments may follow the race to the top approach to promote competition, improving the environmental conditions [13]. This is the entry point where the non-linear role of fiscal decentralization to track environmental sustainability comes into play. However, the mere consideration of the linear parameter of fiscal decentralization would only provide a shred of partial empirical evidence on its linkage with the environment. Thus, exploring the impact of non-linear fiscal decentralization on environmental quality becomes inevitable to put forward a robust policy framework.

Moreover, the role of energy prices would be dependent on whether race to the top or race to the bottom was in action under a fiscally decentralized setup. On the one hand, under the race to the bottom regime, local economies attract and allow more entities like enterprises and industries to promote local economic conditions [14]. The availability of more of such entities escalates energy consumption, which resultantly pushes up the energy prices, along with the deterioration of environmental quality [15]. On the other hand, under the race to the top regime, local economies compete on performance enhancement and allow firms and enterprises' entry concerning stringent environmental conditions [16]. Therefore, it leads only competitive firms to get entry to the local economies, which reduces the energy demand and energy prices, cultivating the scope of providing better local environmental quality [17]. Besides, energy prices play the role of a rationing device in managing the energy services under the energy governance phenomenon and consequently may affect the environmental quality [18]. In this regard, higher energy prices may lead to a governance struggle for energy-efficient technologies to improve environmental sustainability [19]. However, lower energy prices leave the disincentives for such a struggle and consequently deteriorate the environmental quality [20]. In light of these linking mechanisms, the combined role of energy prices and non-linear fiscal decentralization appears the paramount concern of modern energy environmental nexus.

Though previous studies demonstrated enormous progress in reflecting the influence of energy prices, fiscal decentralization, and institutional quality on environmental quality, they lacked several aspects. Firstly, given no research investigated the non-linear impact of fiscal decentralization on CO2 emissions, it is crucial to determine whether the environment (CO2 emissions) responds to the linear and non-linear fiscal decentralization in the same fashion. Secondly, no study has been known to include the role of energy prices in fiscal decentralization-environment nexus. Energy prices might extend an integral part at various decentralized levels of a nation and through fiscal decentralization to improve or deteriorate the environment. Thirdly, none of those studies examined these linkages in the selected seven fiscally decentralized developed countries. Several characteristic features of these countries make them a suitable sample selection for the present research. (1) During the last three decades, these countries have departed from a centralized institutional framework and evolved into a highly decentralized fiscal setup. It emphasizes the significance of the sampled time period (1990–2018) of the current study. (2) According to the most recent statistics, these countries were known to have an average ratio of fiscal decentralization of around 58% in 2018, greater than its value for the rest of the world (57%). (3) During the global financial crisis from mid-2007 to early 2009, the sampled countries were subject to adverse hits among the other European countries with a federal administrative structure. Thus, these countries serve as a good representative laboratory of how their evolution of fiscal decentralization revived from the brunt of those financial and economic shocks. In this way, these countries set a classic fiscal decentralization pathway for the fiscally centralized or poorly decentralized countries to design institutional reforms and achieve a decentralized structure. (4) As of 2018, the average CO2 emissions of these nations increased from around 48 million tonnes (Mt) in 1990 to approximately 99 Mt in 2018. In particular, Germany, Australia, and Canada are ranked amongst the world's top 15 highest emitters. These reasons hold the underlying sampled countries hot favorite to investigate the links of fiscal decentralization and energy prices with the environment.

In closing, this study investigates the combined influence of energy prices and non-linear fiscal decentralization on the environment (CO2 emissions) of the top seven fiscally decentralized Organisation for Economic Co-operation and Development (OECD) nations (Spain, Belgium, Austria, Switzerland, Germany, Australia, and Canada) during 1990–2018. In technical terms, this study contributes to the empirical literature by including the combined influence of energy prices and non-linear fiscal decentralization on the CO2 emissions model, which was overlooked by prior studies. To achieve the above-stated objective, advanced econometric techniques involving cross-sectional dependence, slope heterogeneity, unit root, cointegration, and parameter estimations are employed for robust empirical findings. Finally, useful policy implications are extracted based on empirical results.

The rest of the study is structured as follows. Section 2 presents a summary of related studies. Section 3 is based on data and methods utilized. Section 4 explains the findings, and Section 5 discusses the conclusion points and policies.

Section snippets

Literature review

The groundbreaking work of Samuelson [21] and Musgrave [22] laid a basis for further work about the effects of fiscal decentralization on improving the efficiency, accountability, and distribution of public service delivery. After their studies, analyses have been undertaken to evaluate the interaction amongst fiscal decentralization, output, and other macroeconomic practices. For example, Cheng et al. [10] investigated the interconnection between CO2 emissions and fiscal decentralization.

Model specification and description of variables

Fiscal decentralization is deemed as a foundation of equality, efficiency, and economic growth. Local government is claimed to be doing well, closer to communities, and benefits from the accessibility of more knowledge and providing public goods and services together with improved results [2]. Likewise, there are two separate pathways, i.e., race to the top and race to the bottom, through which the environment is impacted by fiscal decentralization [4]. According to Oates [1]; an increase in

Results and discussions

The empirical outcomes obtained from the econometrics applied in segment (3b) is shown here. The SCH and CSI test findings are illustrated in Table 2. The SCH test's empirical findings illustrate that the null hypothesis is rejected at a significance level of 1%. The results evidence of heterogeneity amongst cross-section slope coefficients. Likewise, the results of CSI demonstrate that all cross-sections are dependent.

The unit root test results are shown in Table 3. The empirical findings

Conclusion and policy implications

Unlike previous studies, this study examined the combined influence of energy prices and non-linear fiscal decentralization on CO2 emissions in the top seven fiscally decentralized OECD nations from 1990 to 2018 by incorporating institutional quality and gross domestic product as other explanatory variables. It used advanced panel econometrics tools, i.e., slope heterogeneity test, cross-section dependence test, Pesaran [55] panel unit root test, Westerlund [56] error correction mechanism based

Credit author statement

Shan Shan: Conceptualization, Methodology, Software; Munir Ahmad: review & editing; Software Zhixiong Tan: review & editing, Supervision, Project administration. Tomiwa Sunday Adebayo: Conceptualization, review & editing. Dervis Kirikkaleli: Conceptualization, Software, Formal analysis, review & editing, Supervision Rita Yi Man Li: Data curation, Formal analysis, Writing-Original Draft.

Declaration of competing interest

The authors declare that they have no known competing financial interests or personal relationships that could have appeared to influence the work reported in this paper.

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