Can green fiscal policy improve green total factor carbon efficiency? Evidence from China

Green fiscal policy has emerged as a crucial tool for promoting sustainable development in developing countries. The “National Comprehensive Demonstration City of Energy Conservation and Emission Reduction Fiscal Policy” (ECER fiscal policy) launched by the Chinese government in 2011 is a typical green fiscal policy, but its effect remains to be evaluated. This study measures the green total factor carbon efficiency (GTFCE) of Chinese cities from 2004 to 2019 and employs a time-varying difference-in-differences (DID) model to assess the causal effect of the ECER fiscal policy on GTFCE. The findings suggest that the ECER fiscal policy, combining financial incentives and environmental regulation attributes, can effectively enhance GTFCE in pilot cities. Mechanism analysis demonstrates that the low-carbon effect of the ECER fiscal policy is mainly through optimizing resource allocation and facilitating green innovation. Heterogeneity analysis further highlights the policy’s amplified impact in cities with officials under 54 years old and higher environmental attention from local governments. These findings offer valuable insights for policymakers in developing countries regarding fiscal policy optimization in advancing carbon reduction.