Aid, Growth, Remittances and Carbon Emissions in Nepal

Using historical data from Nepal—one of the largest recipients of aid among South Asian countries—this paper investigates the link between foreign aid, growth, remittances and carbon dioxide (CO2) emissions. The investigation of this issue is particularly important, as policy makers in the least developed countries are increasingly concerned about growing reliance on energy imports, particularly fossil fuels, and increasing CO2 emissions. Mounting energy consumption has not only made their economies vulnerable to environmental disasters and increased health costs, but also to external shocks due to frequent fluctuations in international market prices for petroleum products. Since available studies are largely based on cross-sectional data—which lump together countries with different characteristics— empirical evidence is contradictory. In-depth case studies of countries with different backgrounds would certainly provide better insights into the link between aid, growth, remittances and CO2 emissions, and contribute to ongoing policy dialogue. Our empirical results, based on an in-depth case study of Nepal, suggest that more foreign aid and remittances reduce CO2 emissions, whereas financial development and higher income increase CO2 emissions. These findings point to the importance of market mechanisms for regulating financial development and higher income to control CO2 emissions, without undermining competitiveness.