As one of the world's largest economies, Chinese economy is maintaining the rapid economic development along with the cost of environmental degradation. The role of fiscal policy instruments is still unknown in the Chinese pollution equation. To do this, the present study is an effort to quantify the nexus of fiscal policy instruments and environmental degradation for Chinese economy over 1980 to 2016. The results reveal that fiscal policy instruments significantly increase the environmental degradation in the long run. The GDP and energy consumption of Chinese economy also enhance the environmental degradation respectively. The innovative accounting approach and diagnostics tests also applied to confirm the empirical estimates of study are reliable and valid for policy implications. The outcomes of study reveal that expansionary fiscal policy will lead to environmental degradation. Therefore, the Chinese authorities may consider the usage of advance and eco-friendly production methods to sustain the fast-growing economic growth along with the healthier environment.
Keywords: CO2 emissions; Energy consumption; Environmental degradation; Fiscal policy.