Revisiting the nexus between fiscal decentralization and CO2 emissions in South Africa : fresh policy insights

Abstract

The argument over fscal decentralization and carbon dioxide emission (CO2) reduction has received much attention. However, evidence to back this claim is limited. Economic theory predicts that fscal decentralization afects environmental quality, but the specifics of this relationship are still up for debate. Some scholars noted that fscal decentralization might lead to a race to the top, whereas others contended that it would result in a race to the bottom. In light of the current debates in environmental and development economics, this study aims to provide insight into how this relationship may function in South Africa from 1960 to 2020. In contrast to the existing research, the present study uses a novel dynamic autoregressive distributed lag simulation approach to assess the positive and negative changes in fscal decentralization, scale efect, technique efect, technological innovation, foreign direct investment, energy consumption, industrial growth, and trade openness on CO2 emissions. The following are the main fndings: (i) Fiscal decentralization had a CO2 emission reduction impact in the short and long run, highlighting the presence of the race to the top approach. (ii) Economic growth (as represented by the scale efect) eroded ecological integrity. However, its square (as expressed by technique efect) aided in strengthening ecological protection, validating the environmental Kuznets curve hypothesis. (iii) CO2 emissions were driven by energy utilization, trade openness, industrial value-added, and foreign direct investment, whereas technological innovation boosted ecological integrity. Findings suggest that further fscal decentralization should be undertaken through further devolution of power to local entities, particularly regarding environmental policy issues, to maintain South Africa’s ecological sustainability. South Africa should also establish policies to improve environmental sustainability by strengthening a lower layer of government and clarifying responsibilities at the national and local levels to fulfill the energy-saving functions of fiscal expenditures.