The economic and environmental effects of China’s environmental expenditure under financing constraints

Abstract

Sound ecological and environmental governance systems are critical for promoting green and low-carbon economic transformation and high-quality development. However, financing constraints are major obstacle to the revitalization and transformation of China’s real economy. In this study, we constructed an environmental dynamic stochastic general equilibrium (E-DSGE) model that incorporates two types of environmental expenditure and financing constraints, and discussed their economic and environmental effects. Based on this, we further considered the impacts of financing constraints on policy effects. Firstly, we found that increases in carbon emission reduction subsidies in government expenditure (1) increase total economic output and (2) motivate enterprises to increase emission reduction efforts and reduce pollution intensity and emissions, thereby reducing the inventory of environmental pollutants while balancing economic benefits and emission reduction. Secondly, increasing the proportion of government special expenditure on environmental protection promote output growth and directly reduces the pollution stock in the environment. However, such policies may also reduce the emission reduction efforts of enterprises, leading to increases in their pollution emissions and intensity. Lastly, the existence of financing constraints is not conducive to the growth of total output but increases the pollution control effect of emission reduction subsidies and pollution prevention expenditure. Application of the E-DSGE model offers new theoretical insight into environmental economics and macroeconomics. Moreover, the results of this study provide a reference for optimizing the structure of fiscal expenditure.