Environmental fiscal federalism and atmospheric pollution: A tale of two Indian cities

This paper empirically tests the suitability of local vs state government expenditure in providing an environmental
public good, namely airborne pollution control in two municipal areas in India. We employ an innovative
methodology where factual and counterfactual state and local expenditure regimes are constructed to capture
different degrees of decentralization. Econometric results highlight higher efficacy of state level expenditure
(centralization) as spillover/regional effects become important. Particularly, superiority of state expenditure is
evident in the control of suspended particulate matter (SPM), which has wide cross-boundary effects. Local
expenditure and the counterfactual of local expenditure for uniform provision (both decentralized provision
modes) emerge as more effective than state to control point-source local pollutant SO2. However, they may also
supplement the effects generated by state expenditure in the case of NO2 emissions, which entail spillovers and
seem amenable to pressure group influence at local level.