How does vertical fiscal imbalance affect environmental pollution in China? New perspective to explore fiscal reform's pollution effect.

Exploring fiscal reform's pollution effect draws increasing attention. Our paper brings a new perspective, i.e., the vertical fiscal imbalance (VFI) perspective, to study such issue. With the panel data of China's provincial level from 1999 to 2016, we reveal whether and how VFI affects environmental pollution. We find that VFI significantly enhances the environmental pollution level of China. As the VFI increases, environmental pollution effect caused by VFI appears to be aggravated. According to the transmission path check, we confirm in our paper that VFI can indirectly lead to environmental degradation by affecting the two channels environmental regulation and industrial transformation. Further, through the sub-sample regressions, we find that the impacts of VFI on environmental pollution as well as the transmission paths are regionally heterogeneous. Finally, we believe that using the VFI as a variable to explore fiscal reform's effect on environment is of rationality, and for a better environmental quality, VFI should be avoided.