Regulatory quality concerning carbon dioxide emissions in conjunction with the impact of fiscal decentralization

BACKGROUND AND OBJECTIVES: Global carbon dioxide emissions have risen sharply in recent decades, sparking debate on the role of fiscal decentralisation in environmental outcomes. Some argue that local autonomy fosters innovation and accountability, while others highlight risks of regulatory fragmentation and a “race to the bottom.” The study objectives were to explore the relationship between fiscal decentralization and carbon dioxide emissions, particularly highlighting the frequently overlooked role of regulatory quality, which has often been disregarded in past studies.METHODS: A panel dataset of 73 countries (1990–2019) were analysed using indicators of fiscal decentralisation (subnational expenditure, revenue, and vertical fiscal imbalance) from the International Monetary Fund’s fiscal federalism database. Carbon dioxide emissions were measured per capita and per unit of gross domestic product to capture environmental burden and efficiency. According to the World Bank, regulatory quality was structured to act as a moderating variable. Control variables included gross domestic product per capita (and its quadratic form for the Environmental Kuznets Curve), trade openness, fossil fuel and renewable energy consumption, industrial share of gross domestic product, research and development expenditure, population growth and density, and natural resource rents. The estimation process employed panel fixed- and random-effects models, applying robust adjustments.FINDINGS: Results demonstrate that fiscal decentralization, which includes autonomy in revenue and expenditure, is typically correlated with elevated carbon dioxide emissions per capita and per gross domestic product, exhibiting a stronger influence on per capita emissions. However, interaction with regulatory quality significantly reduces these impacts, confirming that strong institutions moderate negative environmental effects. Emissions have risen due to the increased use of fossil fuels, trade openness, and industrial activities, while factors such as population density and renewable energy consumption have contributed to their reduction. Vertical fiscal imbalance was insignificant, suggesting that emissions are driven more by subnational fiscal intensity than by dependence on central transfers.CONCLUSION: Fiscal decentralisation tends to increase carbon dioxide emissions, especially where institutions are weak. Regulatory quality acts as a crucial moderator, alleviating negative impacts without completely eliminating them. The findings highlight that fiscal decentralisation alone does not ensure environmental efficiency; robust regulatory institutions and intergovernmental coordination are essential to align fiscal autonomy with environmental goals.