Bilateral environmental aid under trade competition

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ABSTRACT Global climate-finance debates increasingly emphasize tensions between donor competitiveness and environmental responsibility. This paper examines how trade competition shapes the allocation of bilateral environmental official development assistance (BEODA). We develop a partial-equilibrium model showing that aid which lowers recipient production costs can intensify competitive pressure on donor markets, reducing incentives to provide such aid. Using data on 29 OECD donors and 116 non-OECD recipients from 2015–2019, we test whether donors adjust BEODA in response to trade competition. The analysis distinguishes between general BEODA and projects targeting energy efficiency, which more directly reduce marginal costs. Across linear, Tobit, and probit models with multiple fixed effects, we find that donors allocate less BEODA to more competitive recipients, with the effect nearly twice as strong for energy-saving projects. These results indicate that donor concerns over competitiveness constrain environmentally beneficial aid, underscoring a central tension between national economic interests and global climate goals.