From aid to resilience: Assessing the impact of climate finance on energy vulnerability in developing countries

Abstract

Climate change is a major threat, and tackling it requires massive investment in sustainable practices and technologies. This paper explores the impact of the Global Climate Finance Fund (CF), including the Adaptation Finance Fund (AF) and Mitigation Finance Fund (MF), on energy vulnerability from 2000 to 2019 in a panel of 74 developing countries. Estimation using the Ordinary Least Squares (OLS) method showed that the CF significantly reduces energy vulnerability in developing countries. Furthermore, these results show that the MF has a greater reduction effect on energy vulnerability than the AF. To deal with the omitted variables bias and reverse causality, we applied the Oster (2019) stability test, and the Instrumental Variable Generalized Method of Moments (IV-GMM). The results confirm previous findings that climate finance reduces energy vulnerability, with mitigation finance having a larger effect. These results remained robust to the introduction of additional controls, to the exclusion of outliers, and to the use of alternative climate finance measures. Instrumenting climate finance by the share of important votes at the UN General Assembly and using three different instrumental estimation techniques, such as the Instrumental Variable Two-Stage Least Squares (IV-2SLS), Lewbel (2012), and Kiviet (2020), does not change our results. Finally, an asymmetry analysis through the application of the Canay (2011) quantile regression demonstrated that climate finance reduces energy vulnerability only for countries with a medium and high level of energy vulnerability. Based on these results, policy recommendations have been formulated.