Bilateral environmental aid and trade

ABSTRACT

The paper estimates the determinants of the growing volume of bilateral environmental aid for the mitigation of climate change using an empirically testable multilateral framework in which both donors and recipient countries compete in world export markets. As the potential donors weigh environmental benefits against the economic costs of providing aid, strategic interactions between the donors and the recipient countries as well as among the donors, influence the evolution of environmental aid. The paper shows that while the volume of bilateral environmental aid increases with the recipient country’s credible environmental commitment and bilateral trade volume, the competitive pressure in the export market reduces bilateral environmental aid. Free-riding incentives prevail among the individual donors, whereas the multilateral environmental aids that aim to restore the loss of global environmental resources without altering individual trade competitiveness can increase bilateral environmental aids.

KEYWORDS:

• Environmental ODA
• international trade
• competitive threats
• credible commitment
• multilateral institutions

JEL CLASSIFICATION:

• F18
• F35
• Q54

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

¹ The assumption can be relaxed to allow for the case that the marginal production cost decreases in abatement capital.

² Bertrand competition implies ${\nu }_{ni}=-1$.

³ As of 2022, only a limited number of non-OECD countries have implemented a carbon tax, including Argentina, Uruguay and South Africa (World Bank 2022).

⁴ http://www.oecd.org/dac/financing-sustainable-development/development-finance-topics/climate-change.htm.

(Accessed on October 16, 2020). We use committed bilateral aid amount as a proxy for the aid decision variable. See Rabehajaina et al. (2022), for example.

⁵ See https://climate-laws.org/.