Synergistic Governance of Pollution Reduction and Carbon Mitigation Through Air Quality Ecological Compensation: Evidence from China

Atmospheric pollutants and CO2 share common origins in fossil fuel combustion, raising the question of whether fiscal incentives targeting air quality alone can indirectly reduce carbon emissions. This study examines this question by evaluating China’s air quality ecological compensation policy, a provincial-level horizontal fiscal transfer mechanism under which cities are rewarded or penalized according to changes in ambient air quality indicators, without incorporating any explicit carbon-related assessment criteria. Using panel data from 268 prefecture-level cities over 2007–2023 and a multi-period difference-in-differences design, we find that the policy significantly reduces the composite pollution carbon index (β = −0.213, p < 0.01), with the effect confirmed by an alternative weighted-average specification (β = −0.153, p < 0.01) and robust to propensity score matching, one-period lagged regression, exclusion of provincial-level municipalities, and exclusion of the COVID-19 period. A two-step mechanism analysis, adopted to avoid post-treatment bias from “bad controls,” reveals that the policy promotes industrial structure upgrading (β = 0.253, p < 0.01), enhances green technological innovation capacity (β = 0.047, p < 0.10), and reduces energy consumption intensity (β = −0.012, p < 0.01). Heterogeneity analysis based on quartile subsamples shows that the synergistic benefits concentrate in cities with stronger fiscal capacity (β = −0.349, p < 0.01 versus insignificant for low-support cities), higher economic development, and greater urbanization (β = −1.558, p < 0.01 for highly urbanized cities), while the policy effect is statistically insignificant in the least-advantaged subgroups across these three dimensions. In contrast, the green coverage dimension reveals an opposite pattern: the effect is strongest in cities with lower green coverage (β = −0.378, p < 0.05) and insignificant in high-coverage cities, indicating diminishing marginal returns where environmental baselines are already favorable. These findings highlight the need for differentiated compensation standards, including tiered compensation coefficients and targeted fiscal support for resource-constrained regions, to ensure equitable governance outcomes.