How does vertical fiscal imbalance affect energy consumption in China?

Evaluating the influencing factors of energy consumption at the system level has become a focus in high-quality economic development. However, the existing literature has not yet explored whether and how vertical fiscal imbalance (VFI) affects energy consumption. Thus, we aim to address this gap. We empirically examine the effect of VFI on energy consumption and its possible mechanisms by using China’s panel data at the province level from 1998 to 2018. We find that VFI significantly increases energy consumption, but this influence has evident regional heterogeneity. Moreover, VFI indirectly affects energy consumption through industrial structure upgrading, and the positive influence of VFI on energy consumption is strengthened by the improvement in intergovernmental fiscal transfers. These findings give political references to deepen fiscal reform, reduce energy consumption, and implement strategies for energy saving and emission reduction.