Equity or efficiency: assessment of how intergovernmental fiscal transfer affects industrial firms’ energy efficiency in China

The intergovernmental fiscal transfer, which aims to balance the fiscal capacity of local governments and fulfill the policy goals of higher-level governments, helps promote social equity, but it may also have an impact on the efficiency of economic activities. This paper evaluates the impact of the intergovernmental fiscal transfer on industrial firms’ energy efficiency by using the panel data of 32,738 industrial firms from 2001 to 2007 in China. Our study shows that intergovernmental fiscal transfer significantly negatively affects industrial firms’ energy efficiency. One mechanism that may generate such variation is that the intergovernmental fiscal transfer will induce local governments to adjust their supporting strategies to lower energy-efficient firms that lack comparative advantages, which in turn hurts energy efficiency. It shows that the intergovernmental fiscal transfer promotes social equity but hurts energy efficiency. We then present four pieces of evidence supporting this mechanism: subsidy, tax incentive, financial support, and employee salary. Specifically, the suppression effect is more pronounced in counties with higher government intervention. We also find that the intergovernmental fiscal transfer has a significant negative impact on NSOEs’ energy efficiency while having little impact on SOEs’ energy efficiency, and the special fiscal transfer shows significant negative impacts on industrial firms’ energy efficiency, while the general fiscal transfer and the tax rebate have little impact on industrial firms’ energy efficiency. These findings suggest that government should pay more attention to the design of the intergovernmental fiscal transfer system and guide local governments to focus more on low-carbon development. In addition, in the process of implementing multiple policy objectives, local governments should pay attention to compatibility issues to avoid the distorted effect of government behavior on resource allocation.