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Importing innovation or indigenous innovation: Evaluating the effect of climate finance on promoting environmental sustainability in developing countries

Author

Listed:
  • Zhang, Jinhua
  • Li, Yafei
  • Du, Ruonan
  • Hua, Xiuping

Abstract

This paper examines the influence of climate finance on the CO2 emissions and explores the underlying mechanisms from the perspectives of external and indigenous innovations, with a cross-country panel dataset encompassing 140 developing countries from 2002 to 2022. The results indicate that climate finance has a negative and significant impact on CO2 emissions. Specifically, a one-standard-deviation increase in climate funds correlates with an approximate 3.31 % reduction in per GDP CO2 emissions. However, heterogeneity analysis reveals that in the least developed countries, climate finance does not significantly reduce carbon emissions and, in some cases, may even enhance the carbon emissions. Mechanism analysis suggests that climate finance promotes environmental sustainability by introducing external innovation rather than promoting indigenous innovation in developing countries. These results shed new light on the pollution halo hypothesis in developing nations.

Suggested Citation

  • Zhang, Jinhua & Li, Yafei & Du, Ruonan & Hua, Xiuping, 2025. "Importing innovation or indigenous innovation: Evaluating the effect of climate finance on promoting environmental sustainability in developing countries," Energy Economics, Elsevier, vol. 149(C).
    • Handle: RePEc:eee:eneeco:v:149:y:2025:i:c:s0140988325005535
    DOI: 10.1016/j.eneco.2025.108726
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    JEL classification:

    • F35 - International Economics - - International Finance - - - Foreign Aid
    • O13 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Agriculture; Natural Resources; Environment; Other Primary Products
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes
    • O44 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Environment and Growth

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