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Reward and punishment mechanism reform for ecological compensation and energy consumption structure transformation

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  • Dongming, Wei
  • Razi, Ummara
  • Bashir, Muhammad Adnan
  • Shanshan, Meng

Abstract

This study assessed the impact of China’s ecological compensation, reward, and punishment reform, a fiscal innovation that links intergovernmental transfers to air quality performance, on the transformation of provincial energy consumption structures. Using panel data from 30 Chinese provinces from 2002 to 2023 and applying a staggered difference-in-difference approach, the study treats the rollout of air quality-based ecological compensation as a quasi-natural experiment. The outcomes demonstrate that the reforms have significantly promoted a cleaner energy structure, supporting a dual shift from coal to oil and gas, as well as from fossil fuels to non-fossil energy sources. Mechanism analysis revealed that the policy effectiveness is amplified by the development of green finance, industrial upgrading, and green innovation, while its impact varies with local governance emphasizing, industrialization levels, and renewable energy endowments. Moreover, the effectiveness of the compensation mechanism depends critically on its design scheme that combined hierarchical ranking with year-on-year performance criteria yield stronger behavioral response, While the compensation formula that apply floating asymmetric reward-penalty coefficients are more effective than those relay on fixed symmetric rates, These findings offers new evidence on how fiscal policy instrument can strengthen subnational environmental governance and accelerate energy transition in large decentralized economies.

Suggested Citation

  • Dongming, Wei & Razi, Ummara & Bashir, Muhammad Adnan & Shanshan, Meng, 2026. "Reward and punishment mechanism reform for ecological compensation and energy consumption structure transformation," Economic Analysis and Policy, Elsevier, vol. 90(C), pages 1046-1070.
    • Handle: RePEc:eee:ecanpo:v:90:y:2026:i:c:p:1046-1070
    DOI: 10.1016/j.eap.2026.01.059
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