Conference Agenda

Environmental sustainability efforts in many developing countries are constrained by limited fiscal capacity, making external environmental assistance an important instrument for advancing global commitments under SDGs 12, 13 and 17. However, evidence on whether such assistance improves environmental outcomes and how its effectiveness interacts with domestic fiscal conditions remains limited. This study examines the environmental impact of aid in Africa’s ten largest recipient countries and assesses whether its effectiveness depends on domestic fiscal capacity. Using balanced panel data from 2002 to 2022 and applying fixed effects (FE), instrumental variable fixed effects (IV-FE) and instrumental variable generalised methods of moments (IV-GMM) estimators, the analysis shows that environmental aid is, on average, negatively associated with environmental quality but significantly enhances domestic revenue mobilisation, indicating a fiscal crowd-in effect. The results further reveal that the environmental effectiveness of aid is conditioned by domestic fiscal capacity, with higher income levels not necessarily strengthening revenue mobilisation, and by trade openness, which generates environmental and fiscal pressures. These findings highlight the need to integrate environmental aid into national budgeting systems, strengthen domestic fiscal capacity and coordinate aid with trade and industrial policies to support cleaner production, stronger environmental regulation and green industrial upgrading.