Environmental pollution and green intergovernmental fiscal relations: Fiscal decentralization for sustainable...

Pakistan ranks third globally in environmental pollution vulnerability, grappling with persistent challenges such as air pollution, solid waste accumulation, soil degradation, and declining water quality. Despite these pressing issues, pollution-related risks have received limited research attention. This study investigates the influence of fiscal decentralization on environmental pollution through adopting greener intergovernmental relations. Annual data spanning from 1983 to 2024 of Pakistan were utilized to explore the dynamic relationship. The analysis employed a Structural Vector Autoregressive (SVAR) model and Impulse Response Functions (IRF) to assess the short and medium-term effects of fiscal decentralization and environmental outcomes. Our findings reveal a significant negative association (p = 0.026) between federal transfers and soil pollution, with green funding linked to higher soil organic carbon. Conversely, federal transfers show significant positive correlations with solid waste and air pollution, indicating inefficiencies or misaligned incentives in the current fiscal framework. After employing structural constraints in SVAR, revenue decentralization significantly reduces water, soil, and air pollution, although spending on solid waste worsens soil degradation. Particularly, expenditure decentralization is positively linked with intensifying pollution across numerous domains. These results suggest revenue decentralization can improve environmental outcomes by improving fiscal accountability and responsiveness, but unregulated expenditure decentralization may worsen pollution risks. Policymakers need to design conditional green fiscal transfers that align policies with project-specific environmental goals and global climate pledges. Strengthening environmental fiscal frameworks at the subnational level and empowering provincial governments to mobilize green taxes and invest in sustainable infrastructure are critical steps toward achieving effective and sustainable environmental governance in Pakistan.