Does aid for renewable energy reduce the consumption of fossil energy?

This study investigates whether official development assistance (ODA) for renewable energy reduces fossil fuel consumption in recipient countries. In doing so, it addresses a critical policy question regarding the effectiveness of aid in supporting energy transitions and climate goals in low- and middle-income countries. To examine this question, we use two panel datasets covering up to 31 countries between 2002 and 2022. The first is a time-series cross-sectional panel analyzed with panel cointegration techniques, while the second is a cross-sectionally dominated dataset with averaged values, analyzed using the system GMM estimator. This dual-method approach accounts for different data characteristics and ensures the robustness of the results. These consistently show that ODA for renewable energy reduces fossil energy consumption. We also find that ODA for renewable energy increases renewable energy consumption and reduces CO2 emissions. These results suggest that targeted renewable energy aid effectively supports decarbonization efforts in developing countries. This study is the first to provide systematic evidence on the impact of foreign aid for renewable energy on fossil fuel use in recipient countries. It is also novel in that it examines the effect of foreign aid for renewable energy on both renewable energy consumption and CO2 emissions.