Fiscal decentralization, renewable energy consumption and carbon emissions in the old and new eu countries

Abstract

Purpose: As climate change poses a threat to environmental and economic stability, it is increasingly important to understand the role of fiscal policy in promoting sustainability. To address environmental challenges, EU countries need to integrate sub-national levels of government into their environmental strategies and policy frameworks. Therefore, fiscal decentralisation plays an important role in the transfer of financial resources from the central government. Consequently, fiscal decentralisation has proven to be a crucial strategy to mitigate climate change and environmental degradation. This paper examines the linkage between fiscal decentralisation and the use of renewable energy to mitigate carbon emissions in EU countries from 2004 to 2022.
Design/methodology/approach: For this paper, the authors used a Method of moments quantile regression as the primary estimation method, complemented by established techniques such as unit root tests, Kao and Westerlund cointegration tests, and Pedroni residual cointegration tests to assess stability and cointegration among the variables in the panel data sample. As a robustness check, Driscoll and Kraay’s standard errors were applied.
Findings: The empirical results reveal asymmetric environmental effects of fiscal decentralisation across EU countries. In new EU countries, expenditure decentralisation is associated with higher CO₂ emissions, while revenue decentralisation shows no systematic mitigation effect. This suggests that without strong environmental safeguards, local spending autonomy may reinforce pollution-intensive development. In contrast, fiscal decentralisation in old EU countries shows only modest and statistically weak relationships with emissions, reflecting more mature institutional and regulatory settings. Across all models, economic growth remains the primary driver of emissions, while renewable energy use consistently reduces them. Overall, the study highlights that decentralisation alone does not guarantee environmental gains; its effectiveness depends on the institutional context and the alignment of local fiscal powers with environmental objectives. Strengthening local environmental governance and expanding renewable energy investment appear essential, particularly for newer EU countries undergoing institutional convergence.
Research limitations/implications: Although the study represents a unique, complex and dynamic research, it also has limitations. The first limitation is the restriction of the sample and the time period. Different results could be obtained for a longer period and for a larger sample of countries, while the second is the availability of data for certain variables.
Originality: To the best of our knowledge, there is a notable research gap focusing on fiscal decentralisation to enhance environmental performance, especially in the context of old and new EU countries. Therefore, this paper represents a first attempt to investigate the linkage between fiscal decentralisation and renewable energy in reducing CO₂ emissions to enhance environmental performance. By using quantile regression analysis as a methodological approach, the results also point to a further direction of research for each individual EU country and over a longer period of time.

Keywords: fiscal decentralization, carbon emissions, renewable energy, EU countries, quantile regression analysis

JEL Classification: H70, H72, C23, Q58