Importing innovation or indigenous innovation: Evaluating the effect of climate finance on promoting environmental sustainability in developing countries

This paper examines the influence of climate finance on the CO₂ emissions and explores the underlying mechanisms from the perspectives of external and indigenous innovations, with a cross-country panel dataset encompassing 140 developing countries from 2002 to 2022. The results indicate that climate finance has a negative and significant impact on CO₂ emissions. Specifically, a one-standard-deviation increase in climate funds correlates with an approximate 3.31 % reduction in per GDP CO₂ emissions. However, heterogeneity analysis reveals that in the least developed countries, climate finance does not significantly reduce carbon emissions and, in some cases, may even enhance the carbon emissions. Mechanism analysis suggests that climate finance promotes environmental sustainability by introducing external innovation rather than promoting indigenous innovation in developing countries. These results shed new light on the pollution halo hypothesis in developing nations.