Climate mitigation finance aid and carbon emissions in developing economies: does trade dependency matter?

This study examines the relationship between official climate mitigation finance aid, trade dependency, and carbon emission intensity in developing economies. Using data from 109 countries over 2000–2022 and applying panel fixed-effects regressions, we find that mitigation finance is significantly and negatively associated with recipients' carbon emission intensity. However, this negative relationship is weaker in countries with higher trade dependency on high-income economies, suggesting that external trade structures may constrain the negative association between mitigation finance and carbon emissions. Specifically, a one-standard-deviation increase in mitigation finance is associated with a 0.05-point decrease in carbon emission intensity; however, this relationship significantly diminishes by 0.02 points when the recipient's export share to high-income economies increases by one standard deviation. The weakening effect varies across levels of trade openness, with some evidence in economies with moderate trade openness. Finally, we document a moderating role of the agency channel: the weakening effect is significant only for flows extended by bilateral agencies and disappears for flows channeled through multilateral agencies. These findings underscore the need for policymakers to align climate finance strategies with trade policies to enhance decarbonization efforts in developing economies.