Does climate finance and foreign capital inflows drive de-carbonisation in developing economies?

Abstract

Sustainable development requires high investment, and developing economies need external aid to afford it. Developed economies are committed to providing financial support to fight climate change to those with fewer resources suffering the severest consequences. Climate finance consists of financial activities focusing on mitigating and adapting to climate change effects. In this paper, two critical perspectives were addressed: the role of climate finance on environmental degradation and human development and climate finance determinants. This research compiled a panel covering 36 developing economies from 2001 to 2019. Panel-corrected Standard Errors and Feasible Generalized Least Squares estimators were applied. The Seemingly Unrelated Regressions method was carried out to provide robustness of the empirical findings. The empirical results show that climate finance contributes to environmental degradation mitigation, and this effect is more notable in lower-middle-income countries. In these countries, regulatory quality contributes to environmental quality. Moreover, climate finance and human development have a positive bilateral relationship. However, the results suggest that foreign capital inflow slows down human development. These findings provide useful information for policymakers to design and implement environmental policies and strategies to maximize the allocation of climate finance funds and thus help to improve environmental quality.

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