How do FDI and tax competition of local governments affect PM2.5 rebound effects? Evidence from China

Rebound effects of fine particulate matter (PM_2.5) pollution occurs when improvements in environmental efficiency fail to achieve the expected mitigation. Under economic tournaments, local government competition plays a critical role in addressing the rebound effects. However, it remains unclear whether local government competition exacerbates or mitigates the rebound effects based on different competition means. Particularly in China, local governments often attract foreign direct investment (FDI) and take tax incentives to gain economic advantages. Therefore, this study aims to explore how local government competition affects PM_2.5 rebound effects using dynamic spatial Durbin model, focusing on the differences between FDI and tax competition. The results reveal an inverted-U relationship between FDI competition and PM_2.5 rebound effects, with an inflection point at 20.706 billion Chinese Yuan. While for every 1% increase in tax competition, the PM_2.5 rebound effects consistently increase by 0.137%. Notably, the impact of FDI competition shows significant regional heterogeneity. In economically developed regions, FDI competition surpasses the inflection point of the inverted-U curve, whereby a 1% increase in FDI competition mitigates the rebound effects by 0.064%. While in underdeveloped regions, FDI competition remains at the promotion interval, exacerbating the rebound effects by 0.122% per 1% FDI competition increase. This study offers a theoretical framework to explain how local government competition yields different environmental consequences. The evidence-based findings also guide policymakers to promote environmental-friendly FDI with regional conditions and curb tax competition, balancing economic and environmental priorities.