Transformative Routes to Sustainable Development: The Nexus Between Fiscal Decentralization and Sustainable Environment in Developing Countries

The debate on fiscal decentralization (FD)’s potential impact on environmental sustainability is expanding, but actual evidence is few. A balanced dataset of 21 developing nations from 2000 to 2020 is used to explore how FD impacts environmental sustainability. We employ second-generation unit root tests, Westerlund cointegration, and cross-section autoregressive distributed lag (CS-ARDL) models for empirical assessment. In addition, a novel Environmental Sustainable Development Index (ESDI) is used. The results demonstrate FD enhances ESDI. Economic growth, total natural resource rent, and population growth impair sustainability, while institutional quality enhances it. Eco-friendly natural resource exploitation helps countries become more sustainable. These goals require modern sustainable development methods. Analysis of FD and institutional quality policies reveals how nations combat environmental pollution, providing policymakers with empirical evidence for global climate change initiatives. According to the findings, local governments should be empowered to reduce emissions, mitigate environmental harm, and establish sustainable industrial practices.