Does fiscal decentralization and <scp>eco‐innovation</scp> promote sustainable environment? A case study of selected fiscally decentralized countries

TLDR

Fiscal decentralization is increasingly viewed as a tool to improve environmental outcomes. This study investigates how linear and nonlinear fiscal decentralization influence CO₂ emissions. Panel data from Australia, Austria, Belgium, Canada, Germany, Spain, and Switzerland (1990‑2018) were analyzed with advanced econometric methods that accommodate heterogeneous coefficients and cross‑sectional dependence. The analysis finds that both linear and nonlinear fiscal decentralization, along with higher GDP, eco‑innovation, and renewable energy use, reduce CO₂ emissions, supporting policies that promote green growth and fiscal decentralization.

Abstract

Abstract This study highlights the importance of fiscal decentralization in promoting a sustainable environment. The literature on the importance of fiscal decentralization in affecting environmental quality is scant, and thus, this study attempts to fill the gap by incorporating the linear and nonlinear terms of fiscal decentralization as possible determinants for CO 2 emissions. Particularly, we utilize data from seven highly fiscally decentralized countries, that is, Australia, Austria, Belgium, Canada, Germany, Spain, and Switzerland, over the period 1990–2018. For empirical analysis, advanced panel data econometric tools are used that can deal with both heterogeneous coefficients and dependence of cross‐sections. The findings confirm that linear and nonlinear terms of fiscal decentralization improve the environment by reducing CO 2 emissions. Moreover, gross domestic product (GDP) increases, while eco‐innovation and renewable energy usage reduce CO 2 emissions. This study recommends that any policy that targets green growth will affect CO 2 emissions. Moreover, policies targeting fiscal decentralization, GDP, eco‐innovation, and renewable energy will play the role in more than 1 year, namely in the long run.