Foreign Aid, Governance Quality, and Climate Change: Evidence from Africa

Foreign aid tends to act as a catalyst in reducing carbon emissions and mitigating the impact of climate change, with governance quality playing a critical role in its effectiveness. This chapter uses a panel dataset of 52 African countries from 2002 to 2022, and the system Generalized Method of Moments (GMM) estimator to examine the direct impacts of foreign aid on climate change. It also examines the moderating role of governance quality in the nexus between foreign aid and climate change in Africa. The results show a non-linear and inverted U-shaped effect of foreign aid on climate change, implying that foreign aid causes an increase in carbon emissions initially, before it reduces afterward, when a peak is attained. This is akin to the environmental Kuznets curve hypothesis, which is also confirmed in this study. Also apparent is a synergistic effect between foreign aid and governance quality toward mitigating carbon emissions in Africa. In this regard, improved governance quality helps to complement foreign aid in reducing carbon emissions. Essentially, given that the average receipt of official development assistance (ODA) in Africa exceeds the computed threshold of $12.625 per capita, securing more ODA would help immensely to reduce carbon emissions. Accordingly, appropriate governance mechanisms should be leveraged to secure and effectively deploy foreign aid toward carbon emissions reduction on the continent.