Do Fiscal Incentives Contribute to Pollution Control? Empirical Evidence from China

Given the growing concerns over environmental degradation and the demand for sustainable development, the Chinese government has implemented several fiscal incentive policies to enhance environmental governance. Taking the phased comprehensive demonstration cities of the Energy Saving and Emission Reduction Fiscal Policy (ESERFP) as an exogenous shock, this study uses a staggered difference-in-differences method to evaluate the impact of the fiscal incentive policy on pollution control using panel data from 268 prefecture-level cities in China from 2003 to 2017. The results indicate that the industrial pollutant emissions in the demonstration cities significantly decreased compared with those in the non-demonstration cities under the influence of the ESERFP. Specifically, industrial wastewater discharges in the demonstration cities decreased by 15.5% while industrial sulfur dioxide emissions decreased by 19.5%. Moreover, promoting industrial structure upgrades and green technology innovations are the main mechanisms of the ESERFP in reducing industrial pollution emissions. Furthermore, the emission-reduction effect of the ESERFP is more significant in areas with more fiscal resources, lower promotion incentives based on local economic performance, greater emphasis on environmental protection, and those with no old industrial bases. Further analysis shows that the positive effect of the ESERFP on pollution control in the demonstration cities remains relatively effective after the demonstration period ends, and the policy does not sacrifice economic dividends. Overall, this study explores the impact of fiscal incentive policies designed to achieve environmental improvements via pollution control, offering valuable fiscal policy insights for China and other developing economies seeking solutions to environmental pollution, including fiscal incentive policy formulation and implementation, fiscal incentives to support regional green transformations, improving the differentiation and precision of fiscal incentives and enhancing environmental performance assessment.