1. Introduction
China’s economic development has been soaring since its reform and opening up, creating a world-renowned growth miracle. However, the long-standing extensive and high-speed economic development model has exacerbated energy consumption and environmental pollution and become a bottleneck in limiting the green and coordinated development of the economy and society [
1,
2]. According to the British Petroleum World Energy Statistical Yearbook (2021), global energy consumption fell by 4.5% in 2020 compared to the previous year, creating the largest decline since the end of World War II. However, China’s consumption of fossil fuels and renewable energy had inverse growth, with natural gas use increasing by almost 7% and oil demand increasing by 220,000 bpd, making it one of the few major economies to see an increase in energy demand. Facing the growing exacerbation of both energy demand and ecological damage, it has become increasingly vocal about accelerating the transformation of the economy from high speed and extensive development to high quality and green development [
3,
4,
5]. Served as an important driving force to improve energy utilization and mitigate environmental pollution, the green innovation has become an inevitable choice for “win-win” economic and environmental development [
6,
7].
The negative externality of environmental pollution and the positive externality of green innovation lead to an increase in the inertia of local enterprises to undertake environmental management and green innovation [
8]. On the one hand, local enterprises pay no cost for the extraction of natural resources; on the other hand, the benefits of environmental management and green innovation undertaken by local enterprises are shared by all economic parties, while the costs are borne alone. Therefore, internalizing the externality problem is the key to incentivizing local enterprises to undertake pollution prevention and green innovation [
9,
10]. Serving as the primary instrument to internalize pollution externalities, the mechanism of influence of environmental regulation on regional green innovation is receiving widespread attention from scholars [
11,
12,
13,
14]. The Chinese government has also issued a series of environmental regulatory policies in recent years, such as the Environmental Protection Law of the People’s Republic of China, the Environmental Protection Tax Law of the People’s Republic of China, and the Regulations on the Administration of Emission Permits, with a view to promoting regional environmental governance and green and innovative development [
15]. The core of the environmental management system lies in the allocation of authority over environmental management affairs among different levels of government, that is, the problem of environmental decentralization. This context indicates that environmental decentralization may be a key factor affecting the effect of environmental regulation on green innovation [
16,
17,
18]. So, what is the relationship between environmental decentralization, environmental regulation, and regional green innovation? Does the environmental decentralization really weaken the green innovation effect of environmental regulation? If so, under what conditions does environmental decentralization have a dampening effect? Clarifying the above questions will not only help to optimize the environmental decentralization system, but also has important practical implications for the realization of regional environmental governance and high-quality green development.
Based on the institutional environment during China’s market economy transition period, this study explores the mechanisms of environmental regulation and environmental decentralization on regional green innovation at the regional level. There are three main contributions of this study to the literature. First, environmental regulation, environmental decentralization and regional green innovation are analyzed under the same framework. Thus, the research conclusions contribute to a more comprehensive understanding of the internal mechanisms by which environmental regulation plays a role in green innovation. Second, this study extends the theoretical extension of Porter’s hypothesis and uses a fixed-effects model to analyze the impact of various types of environmental decentralization on green innovation in different regions, providing a theoretical basis for different regions to develop differentiated environmental decentralization strategies. Finally, the moderating effect of environmental decentralization on the green innovation effect of environmental regulation is explored, and the effective range of its role is determined and tested based on the threshold model, thus contributing to the high-quality and green development of the regional economy.
The rest of the paper is organized as follows.
Section 2 provides a brief literature review.
Section 3 performs a mechanism analysis of environmental regulation, environmental decentralization, and regional green innovation.
Section 4 explains the estimation model and data used in this study.
Section 5 presents empirical results and discussion.
Section 6 provides conclusions and related policy implications.
2. Literature Review
Current and expected government regulation is particularly important with regard to pushing firms to engage in green innovation [
19,
20], and its green innovation effect has led to a debate between the “facilitation” and “disincentive” arguments, i.e., whether the “innovation compensation” effect of environmental regulation prevails. The “promotion theory” studies the effect of environmental regulation on green innovation from a dynamic perspective, and the most central explanatory theory is the “Porter hypothesis” [
21]. It suggests that under free trade and economic globalization, companies in developed countries, which have stricter environmental regulations than developing countries, are at a disadvantage in price competition. Here, firms that successfully innovate to reduce polluting emissions can reduce the burden of regulatory costs and thus compete on price favorably with other firms [
22,
23]. The promotion effect of environmental regulation on green innovation has been empirically tested by many scholars based on this hypothesis [
24,
25,
26,
27]. The “disincentive theory”, based on neoclassical economics, states that increasing the environmental regulation intensity will lead to an increase in the pollution control cost for producers, resulting in their reduction on green innovation inputs, thus inhibiting the development of regional green innovation [
28,
29]. In addition, some scholars have also suggested that the green innovation effect of environmental regulation has non-linear characteristics [
30,
31,
32], which are influenced by factors such as government subsidies [
33], R&D investment [
34], industrial structure [
35], and foreign investment [
36].
Although the conclusions of the above studies are mixed, they are mostly based on the theoretical perspective of welfare economics, which assumes that local governments always seek to maximize social welfare. However, environmental federalism and public choice theory reject the assumption of “welfare government” and propose the assumption of “economic man” in the political market, arguing that local governments have the characteristic of maximizing their own interests [
37]. The incentive incompatibility between local governments’ behavioral preferences and environmental governance goals often leads to selective enforcement of regulations [
38], and environmental decentralization reforms are the main cause of local government behavioral alienation. Accordingly, plenty of studies have explored the impact mechanisms of environmental decentralization on regional green innovation. Some scholars have argued that environmental decentralization is conducive for local governments to strengthen environmental regulation and force enterprises to engage in green technological innovation, thus promoting the development of regional green innovation [
39,
40,
41]. While others have suggested that excessive environmental decentralization can lead to strategic interactions and a “race to the bottom” in the environmental regulation behavior of local governments, weakening the incentive to internalize pollution and thus inhibiting regional green innovation [
42].
There are diversity characteristics in environmental affairs management, and scholars have classified environmental decentralization into environmental administration decentralization, environmental supervision decentralization, and environmental monitoring decentralization according to their functions [
43]. Different types of environmental decentralization have differential effects on green innovation in different regions [
44,
45,
46]. Mohamed et al. used panel quantile regression to confirm the U-shaped effect of environmental decentralization on regional green growth [
47]. Wu, H. et al. suggested that environmental decentralization and environmental administrative decentralization have a facilitating effect on regional green development, while environmental supervision and monitoring decentralization have a negative effect [
48]. Zhang, W. et al. found that environmental decentralization promotes green technology innovation after inhibition, and in the long run, environmental decentralization in developed regions and low-emission regions is more conducive to green technology innovation [
49].
Despite the increasing literature on environmental regulation, environmental decentralization, and green innovation, research in this area still has some limitations. First, the previous literature did not incorporate environmental regulation, environmental decentralization, and green innovation into the same analytical framework for theoretical and empirical research. Second, previous studies ignored the differential impact of different environmental decentralization on green innovation in different regions, which is not conducive to the development of differentiated environmental decentralization strategies. Finally, previous literature neglected the moderating effect of environmental decentralization on the green innovation effect of environmental regulation.
6. Conclusions and Policy Recommendations
Building a scientific and rational modern environmental management system is an institutional guarantee to achieve green development. How environmental management affairs are appropriately divided between the central and local governments closely affects the efficiency and quality of regional green innovation. Therefore, this paper analyzed environmental regulation, environmental decentralization, and regional green innovation under the same framework by constructing a fixed-effects model and a panel threshold model. The research draws the following conclusions. First, environmental regulation significantly promotes regional green innovation while environmental decentralization exacerbated regional innovation, and their effect coefficients are 1.112 and −0.761 respectively. Second, the impact of environmental regulation and environmental decentralization on green innovation is heterogeneous, with the level of economic development and the type of environmental decentralization being key factors influencing the role of environmental regulation. The result confirms that green innovation utility of environmental regulation increases with the improvement of regional economic level [
86]. Finally, excessive environmental decentralization inhibits green innovation by hindering the effective implementation of environmental regulatory policies, and the biggest threshold of environmental decentralization is 0.9694. According to the conclusions, some policy implications can be obtained as follows.
First, the central government can appropriately increase the intensity of environmental regulations to increase the motivation of local governments to engage in green innovation. Currently, Chinese enterprises have the strength to withstand high standards of environmental regulations. The government should not only increase emission charges for heavy polluters, but also actively encourage enterprises to engage in green innovation activities such as clean technology research and development.
Second, under China’s environmental decentralization system, the local government’s attitude of sacrificing the environment for the economy is rooted in the imperfection of the performance appraisal system. Therefore, it is necessary to accelerate improving the good performance evaluation system, combining economic and environmental indicators. The setting of performance evaluation indicators should coordinate the relationship between economic growth and environmental governance. The government cannot sacrifice the environment for rapid growth, nor can it excessively pursue environmental quality at an economical cost [
87].
Third, differentiated environmental decentralization strategies need to be developed for different regions. Since developed regions have stronger economic and technological strength, local environmental autonomy can be moderately relaxed to make full use of the information advantages of local governments so as to improve regional green innovation performance. For underdeveloped regions, the central government should reduce the environmental administrative and monitoring powers of local governments, while increasing environmental assessment and supervision, as well as setting environmental bottom-line standards and incentives to motivate local governments to conduct green innovation.
Although this study for the first time quantitatively investigates the relationship between environmental regulation, environmental decentralization, and regional green innovation, there are still some limitations, which could also be possible future research directions. For instance, the provincial panel data utilized in this study is not large due to the data availability, which may be prone to some small sample size bias. Moreover, the effect of environmental decentralization is closely related to the game and competition between local governments. In particular, environmental governance in neighboring areas may affect one another, thus the spatial spillover of environmental effects of environmental decentralization caused by local competition can be considered in future research.