Mitigating climate change in developing economies: Interactions between foreign capital inflows, governance, and renewable energy

This study investigates the impact of foreign capital inflows (official development assistance, foreign direct investment, and remittances), economic growth, renewable energy consumption (REC), and governance on greenhouse gas (GHG) emissions in 70 developing economies from 2001 to 2019. By incorporating multiple sources of foreign capital and utilizing governance effectiveness as a governance indicator, the study provides a nuanced analysis of their individual and interactive effects on climate change mitigation. Using the system Generalized Method of Moments, along with robustness checks through pooled ordinary least squares and instrumental variable regression, the findings reveal that official development assistance, foreign direct investment (FDI), and effective governance significantly reduce GHG emissions. In contrast, REC and remittances are associated with increased emissions. However, the synergistic interaction of all four variables—foreign capital inflows, governance, REC, and gross domestic product—demonstrates a net positive effect on mitigating climate change. These results underscore the importance of channeling well-governed capital flows toward renewable energy and sustainable development. Policymakers should strategically allocate official development assistance and attract FDI to renewable energy projects while enhancing governance to ensure accountability and sustainability. Mechanisms must be developed to direct remittance flows toward climate resilience and clean energy adoption. Governments should invest in governance reforms and renewable energy technologies to foster decarbonization and improve institutional capacity. Renewable energy must be integrated into national economic strategies, supported by innovation and green investment incentives. Developing economies should build robust legal and institutional structures to support practical and science-based climate action.