Green Aid and Environmental Quality in Developing Countries: The Role of Donor‐Recipient Institutional Differences

ABSTRACT Green aid aims to increase the capacity of countries to mitigate the impacts of climate change by improving energy efficiency and deploying green and renewable energy technologies in developing countries. While various donor and recipient country characteristics for the effectiveness of foreign aid have been examined, the role of donor‐recipient institutional quality proximity has not been investigated. This paper analyzes the role of donor‐recipient institutional quality proximity for the effectiveness of green aid in improving environmental quality in developing countries using bilateral green aid flows from 29 donors to 97 recipient countries between 2002 and 2018. The findings demonstrate that green aid improves environmental quality; however, the effectiveness of green aid decreases when the donor‐recipient institutional quality differences increase. Aid allocation that considers donor‐recipient institutional quality differences could enhance the effectiveness of green aid in improving environmental quality.