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

Abstract

The argument over fiscal decentralization and carbon dioxide emission (CO₂) reduction has received much attention. However, evidence to back this claim is limited. Economic theory predicts that fiscal decentralization affects environmental quality, but the specifics of this relationship are still up for debate. Some scholars noted that fiscal 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 fiscal decentralization, scale effect, technique effect, technological innovation, foreign direct investment, energy consumption, industrial growth, and trade openness on CO₂ emissions. The following are the main findings: (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 effect) eroded ecological integrity. However, its square (as expressed by technique effect) 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 fiscal 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.

Keywords: CO2 emissions; Cointegration; Dynamic ARDL simulations; EKC; Economic growth; Energy consumption; Fiscal decentralization; Industrial value-added; South Africa; Trade openness.

Fig. 1

The Impulse Response Plot for Scale Effect (Economic Growth) and CO₂ Emissions. Figure 1 presents an increase and a decrease by 10% in scale effect and its effect on CO₂ emissions where dots denote average prediction value. The dark blue to light blue line shows 75, 90, and 95% confidence interval, respectively

Fig. 2

The Impulse Response Plot for Technique Effect and CO₂ Emissions. Figure 2 presents an increase and a decrease by 10% in technique effect and its effect on CO₂ emissions where dots denote average prediction value. The dark blue to light blue line shows 75, 90, and 95% confidence interval, respectively

Fig. 3

The Impulse Response Plot for Fiscal Decentralization and CO₂ Emissions. Figure 3 presents an increase and a decrease by 10% in fiscal decentralization and its effect on CO₂ emissions where dots denote average prediction value. The dark blue to light blue line shows 75, 90, and 95% confidence interval, respectively

Fig. 4

The Impulse Response Plot for Energy Consumption and CO₂ Emissions. Figure 4 presents an increase and a decrease by 10% in energy consumption and its effect on CO₂ emissions where dots denote average prediction value. The dark blue to light blue line shows 75, 90, and 95% confidence interval, respectively

Fig. 5

The Impulse Response Plot for Foreign Direct Investment and CO₂ Emissions. Figure 5 presents an increase and a decrease by 10% in foreign direct investment and its effect on CO₂ emissions where dots denote average prediction value. The dark blue to light blue line shows 75, 90, and 95% confidence interval, respectively

Fig. 6

The Impulse Response Plot for Industrial Value-Added and CO₂ Emissions. Figure 6 presents an increase and a decrease by 10% in industrial value-added and its effect on CO₂ emissions where dots denote average prediction value. The dark blue to light blue line shows 75, 90, and 95% confidence interval, respectively

Fig. 7

The Impulse Response Plot for Trade Openness and CO₂ Emissions. Figure 7 presents an increase and a decrease by 10% in trade openness and its effect on CO₂ emissions where dots denote average prediction value. The dark blue to light blue line shows 75, 90, and 95% confidence interval, respectively

Fig. 8

The Impulse Response Plot for Technological Innovation and CO₂ Emissions. Figure 8 presents an increase and a decrease by 10% in technological innovation and its effect on CO₂ emissions where dots denote average prediction value. The dark blue to light blue line shows 75, 90, and 95% confidence interval, respectively

Fig. 9

Plot of Cumulative Sum of Recursive Residuals (CUSUM)

Fig. 10

Plot of Cumulative Sum of Squares of Recursive Residuals (CUSUMSQ)