Should Africa Innovate, Tax, or Both to Address Climate Change-Induced Vulnerability? Empirical Evidence

Although climate change impacts in developing countries have been widely studied, limited empirical work has examined how specific policy tools such as environmental taxes and innovation-targeted grants affect climate vulnerability in Sub-Saharan Africa, where institutional constraints and environmental risks intersect acutely. Using unique panel data on 20 African countries, we examine, first, how countries transition from one level of climate-induced vulnerability to the other, and then, the impact of environmental taxes and environmental-related grants on these transitions. Using the Markov chain and the dynamic autoregressive model, we find that it takes on average about 9 years for a country to switch from one class of climate-induced vulnerability to the other. Second, we find negative impacts of both environmental taxes and grants, conditional on baseline levels of vulnerabilities. Third, environmental taxes and innovation grants tend to worsen vulnerability in countries with weak political institutions (weak accountability systems, rule of law, and high levels of corruption). Finally, our findings suggest that strengthening political institutions is a critical step to reducing climate change-induced vulnerabilities.