Does central ecological transfer payment enhance local environmental performance? Quasi-experimental evidence from China

Central transfer payment for the key ecosystem zones has become the most funded payments for ecosystem services program in China. The ecological fiscal transfer (EFT) aims to improve the eco-environmental quality of the targeted counties by providing supplementary fiscal funds, though not strictly specifying the usage. This study employs a time-varying difference-in-difference strategy to investigate the impact of EFT on environmental outcome by using a comprehensive county-level dataset covering 1949 counties from 2004 to 2015. Estimates show that the policy had a positive impact on local air quality, whereas the dynamic effect is diminishing. The policy effect is achieved through more stringent environmental regulation and stricter industrial access. Reduction of industrial dust emission is more noticeable than that of sulfur dioxide. There is an economic scale effect that the scale of a county can increase effectiveness of EFT on air quality improvement, whereas an opposite development stage effect will undermine its effectiveness. Heterogeneities were detected concerning transfer intensity, intervention period, geographical region, and ecosystem type. These findings facilitate a deep understanding how EFT could play a significant role in protecting local environment in large developing countries. Several policy implications are drawn to enhance the effectiveness of the largest EFT program.