Decentralization and Pollution: Evidence from the Town Power Expansion Reform in China

Abstract This study examined the environmental consequences of administrative decentralization by focusing on China's town power expansion reform as a quasi‐natural experiment. Using firm‐level panel data for Zhejiang province from 2001 to 2013, it employed a difference‐in‐differences approach to assess the causal impact of decentralization at the town level on firm pollution emissions. The results indicated that this form of decentralization led to a significant 19.1 percent increase in firm‐level pollution, primarily driven by intensified economic competition and tax competition, expanded firms' output, and declined energy efficiency. These findings highlight the complex relationship between administrative decentralization and environmental governance, underscoring the potential unintended consequences of granting more autonomy to lower‐level governments. This study thereby contributes to the debate on the relationship between decentralization and pollution.