Effectiveness of Climate Finance in CO2 Emissions Reduction: An Empirical Analysis

Abstract

This study aims to analyze the relationship between climate finance and CO2 emissions in 52 developing countries from 2002 to 2021. As climate change worsens day-by-day, understanding this relationship is of paramount importance for designing effective policies to reduce CO2 emissions. The study has used two-step system GMM to find out the impact of climate finance and economic growth on CO2 emissions in developing countries.
As the economic growth ensues, pollution increases in the start but then declines as income further increases. Our results suggest that an increase in climate finance aid increases CO2 emissions, but as economies prosper, the rise in income reduces the emissions in developing economies. The study recommends allocation of climate aid efficiently and in areas where the emissions reduction is much higher in percentage. In addition, discouraging more investment in emission generating industries is recommended.