Restricted accessResearch articleFirst published online 2025
How does fiscal decentralisation affect carbon footprints? The role of renewable energy intensity: Evidence from the top 10 highly decentralised OECD countries
This study investigates the dynamic relationship between fiscal decentralization (FD), renewable energy intensity (REI), and carbon footprints (CFs) in the ten most highly decentralized OECD countries. Employing the cross-sectional autoregressive distributed lag (CS-ARDL) bound test, the analysis captures both short- and long-term effects of FD and its key determinants. Additionally, the Dumitrescu–Hurlin causality test examines the directional causal relationships among these variables. The findings indicate that FD serves as an effective mechanism for mitigating CFs by enhancing environmental quality. Consequently, local governments in highly decentralized regions should prioritize adopting renewable energy sources. Furthermore, carbon reduction initiatives contribute to energy efficiency and emission reduction targets. A statistically significant negative interaction between REI and CFs suggests that countries with high FD but low REI do not achieve substantial environmental benefits. The Dumitrescu–Hurlin causality test reveals a unidirectional causal relationship from revenue decentralization (REVD), expenditure decentralization (EXPD), composite fiscal decentralization (CFD), REI, gross domestic product (GDP), population size, and environment-friendly technological innovation (EnFTI) to CFs. Despite its contributions, this study has certain limitations. The analysis is restricted to highly decentralized OECD countries, which limits the generalizability of the findings. Additionally, while the CS-ARDL model captures short- and long-term dynamics, it does not account for potential spatial dependencies that may influence environmental outcomes. Future research could incorporate spatial econometric techniques or case-specific studies to enhance robustness.
YangSLiZLiJ. Fiscal decentralisation, preference for government innovation and city innovation. Chinese Management Studies2020; 14: 391–409.
2.
BruvollALarsenBM. Greenhouse gas emissions in Norway: do carbon taxes work?Energy Policy2004; 32: 493–505.
3.
ChengSFanWMengF, et al.Potential role of fiscal decentralisation on inter1 differences in CO2 emissions in China. Environ Sci Technol2020; 55: 813–822.
4.
HaoL-NUmarMKhanZ, et al.Green growth and low carbon emission in G7 countries: how critical the network of environmental taxes, renewable energy and human capital is?Sci Total Environ2021; 752: 141853.
5.
SuC-WUmarMKhanZ. Does fiscal decentralisation and eco-innovation promote renewable energy consumption? Analysing the role of political risk. Sci Total Environ2021; 751: 142220.
6.
WangLSuC-WAliS, et al.How China is fostering sustainable growth: the interplay of green investment and production-based emission. Environ Sci Pollut Res2020b; 27: 39607–39618.
7.
UlucakRKhanSU-D. Determinants of the ecological footprint: role of renewable energy, natural resources, and urbanisation. Sustain Cities and Soc2020; 54: 101996.
8.
ChengYAwanUAhmadS, et al.How do technological innovation and fiscal decentralisation affect the environment? A story of the fourth industrial revolution and sustainable growth. Technol Forecast Soc Change2021; 162: 120398.
9.
ShahzadFFareedZ. Examining the relationship between fiscal decentralization, renewable energy intensity, and carbon footprints in Canada by using the newly constructed bootstrap Fourier Granger causality test in quantile. Environ Sci Pollut Res2023; 30: 4617–4626.
10.
ShahzadFFareedZWanY, et al.Examining the asymmetric link between clean energy intensity and carbon dioxide emissions: the significance of quantile-on-quantile method. Energy Environ2023; 34: 1884–1909.
11.
ShahbazMSinhaA. Environmental Kuznets curve for CO2 emissions: a literature survey. J Econ Stud2019; 46: 106–168.
12.
BatterburySPFernandoJL. Rescaling governance and the impacts of political and environmental decentralisation: an introduction. World Dev2006; 34: 1851–1863.
13.
FellHKaffineDT. Can decentralised planning really achieve first-best in the presence of environmental spillovers?J Environ Econ Manage2014; 68: 46–53.
14.
FredrikssonPGMillimetDL. Strategic interaction and the determination of environmental policy across US states. J Urban Econ2002; 51: 101–122.
15.
KoniskyDM. Regulatory competition and environmental enforcement: is there a race to the bottom?Am J Pol Sci2007; 51: 853–872.
16.
MillimetDL. Assessing the empirical impact of environmental federalism. J Reg Sci2003; 43: 711–733.
17.
SigmanH. Decentralisation and environmental quality: an international analysis of water pollution levels and variation. Land Econ2014; 90: 114–130.
18.
ZhangKZhangZ-YLiangQ-M. An empirical analysis of the green paradox in China: from the perspective of fiscal decentralisation. Energy Policy2017a; 103: 203–211.
19.
ZhangY-JPengY-LMaC-Q, et al.Can environmental innovation facilitate carbon emissions reduction? Evidence from China. Energy Policy2017b; 100: 18–28.
20.
LevinsonA. Environmental regulatory competition: a status report and some new evidence. Natl Tax J2003; 56: 91–106.
21.
AlmarshadSO. The impact of good governance and decentralisation reforms on the effectiveness of local authorities: The case of Saudi municipalities. Riaz, Saudi Arabia: The University of Connecticut, 2011.
22.
CaglarAEAvciSBDaştanM, et al.Investigation of the effect of natural resource dependence on environmental sustainability under the novel load capacity curve hypothesis. Intern J Sustain Develop World Ecol2024; 31: 431–446.
23.
ZhuTZhaoLZhaoL, et al.The impact of financial decentralisation on industrial structure upgrading: From the coordination perspective of fiscal decentralisation. Intern Rev Financ Anal2025; 104301.
24.
LiHFangKYangW, et al. Regional environmental efficiency evaluation in China: analysis based on the Super-SBM model with undesirable outputs. Math Comput Model2013; 58: 1018–1031.
25.
HuangFZhouDWangQ, et al. Decomposition and attribution analysis of the transport sector’s carbon dioxide intensity change in China. Transp Res A Policy Pract2019; 119: 343–358.
26.
HeQ. Fiscal decentralization and environmental pollution: Evidence from Chinese panel data. China Econ Rev2015; 36: 86–100.
27.
LiuYHaoYGaoY. The environmental consequences of domestic and foreign investment: Evidence from China. Energy Policy2017; 108: 271–280.
28.
EscalerasMChiangEP. Fiscal decentralization and institutional quality on the business environment. Econ Lett2017; 159: 161–163.
29.
YavuzDKaraFYıldızM. Fiscal decentralisation and environmental quality: the role of local governance in renewable energy transitions. Environ Econo Policy Studies2024; 26: 77–92.
30.
WuHLiYHaoY, et al.Environmental decentralisation, local government competition, and regional green development: evidence from China. Sci Total Environ2020; 708: 135085.
31.
AdamADelisMDKammasP. Fiscal decentralization and public sector efficiency: evidence from OECD countries. Econ Gov2014; 15: 17–49.
32.
WangLLeiP. Fiscal decentralization and high-polluting industry development: city-level evidence from Chinese panel data. Int J Smart Home2016; 10: 297–308.
33.
JinJZouH-f. Fiscal decentralization, revenue and expenditure assignments, and growth in China. J Asian Econ2005; 16: 1047–1064.
34.
OatesWE. Toward a second-generation theory of fiscal federalism. Intern Tax Public Finance2005; 12: 349–373.
35.
Martinez-VazquezJTimofeevA. Decentralization measures revisited. Public Finance Manage2010; 10: 13–47.
36.
ChenXChangCP. Fiscal decentralization, environmental regulation, and pollution: a spatial investigation. Environ Sci Pollut Res2020; 27: 31946–31968.
37.
TangYYinMYangW, et al. Emerging pollutants in water environment: occurrence, monitoring, fate, and risk assessment. Water Environ Res2019; 91: 984–991.
38.
KuaiPYangSTaoA, et al. Environmental effects of Chinese-style fiscal decentralization and the sustainability implications. Journal of Cleaner Production2019; 239: 118089.
BirdRMSmartM. Intergovernmental fiscal transfers: international lessons for developing countries. World Bank Institute2002; 30: 899–912.
41.
ShahAShahS. Decentralisation and its implications on fiscal policies and sustainable growth: an overview. Intern J Public Admin2021; 44: 269–285.
42.
GemmellNKnellerRSanzI. Fiscal decentralisation and economic growth. World Dev2013; 43: 1–13.
43.
PesaranMHShinY. An autoregressive distributed lag modelling approach to cointegration analysis. In: Econometrics and economic theory in the 20th century: the Ragnar Frisch centennial symposium. Cambridge University Press, 1999, pp.371–413.
44.
ShahzadSJHLiLWangY. The role of fiscal decentralisation in enhancing environmental sustainability. Environ Sci Pollut Res2020; 27: 3475–3487.
45.
GarcíaCSánchezJLópezM. Technological innovation and environmental sustainability: a comparative study of OECD countries. Environ Innov Soc Transit2023; 37: 45–59.
46.
OatesWE. An essay on fiscal federalism. J Econ Lit1999; 37: 1120–1149.
47.
BanzhafHSChuppBA. Fiscal federalism and interjurisdictional externalities: new results and an application to US air pollution. J Public Econ2012; 96: 449–464.
48.
FarooqiMRZhangXKhanA. Fiscal decentralization and environmental sustainability: role of institutional quality. Environ Econ Policy Studies2022; 24: 451–475.
49.
JiménezJLPérezJ. Fiscal decentralization and environmental quality: does institutional quality matter?Econ Model2019; 80: 35–49.
50.
BardhanP. Decentralization of governance and development. J Econ Perspect2002; 16: 185–205.
51.
PesaranMHYamagataT. Testing slope homogeneity in large panels. J Econom2008; 142: 50–93.
52.
PesaranMHYangCF. Econometric analysis of production networks with dominant units. J Econom2020; 219: 507–541.
53.
CampelloMGalvaoAFJuhlT, et al.Testing for slope heterogeneity bias in panel data models. J Bus Econ Stat2019; 37: 749–760.
54.
LuWWangHLinY, et al.Psychological status of medical workforce during the COVID-19 pandemic: A cross-sectional study. Psychiatry Res2020; 288: 112936.
55.
KhanZAliMJinyuL, et al.Consumption-based carbon emissions and trade nexus: evidence from nine oil exporting countries. Energy Econ2020; 89: 104806.
56.
ChudikAPesaranMH. Common correlated effects estimation of heterogeneous dynamic panel data models with weakly exogenous regressors. J Econom2015; 188: 393–420.
57.
DumitrescuEIHurlinC. Testing for Granger non-causality in heterogeneous panels. Econ Model2012; 29: 1450–1460.
58.
PesaranMH. A simple panel unit root test in the presence of cross-section dependence. J Appl Econ2007; 22: 265–312.
59.
NguyenHTVoTHNLeDDM, et al.Fiscal decentralisation, corruption, and income inequality: evidence from Vietnam. J Asian Finance, Econ Business2020; 7: 529–540.
KalmazDBKirikkaleliD. Modeling CO2 emissions in an emerging market: empirical finding from ARDL-based bounds and wavelet coherence approaches. Environ Sci Pollut Res2019; 26: 5210–5220.
62.
JiXUmarMAliS, et al.Does fiscal decentralisation and eco-innovation promote sustainable environment? A case study of selected fiscally decentralised countries. Sustain Develop2021; 29: 79–88.
63.
CutterWBDeShazoJR. The environmental consequences of decentralising the decision to decentralise. J Environ Econ Manage2007; 53: 32–53.
64.
WangQLiYLiR. Rethinking the environmental kuznets curve hypothesis across 214 countries: the impacts of 12 economic, institutional, technological, resource, and social factors. Humanities Soc Sci Commun2024; 11: 1–19.
