Environmental aid fiscal capacity and environmental quality in the ten largest environmental aid recipient countries in Africa

Abstract Environmental sustainability efforts in many developing countries are constrained by limited fiscal capacity; thus, external environmental assistance becomes an important instrument for advancing global commitments under SDGs 12, 13, and 17. However, evidence on whether such assistance improves environmental outcomes and how its effectiveness interacts with domestic fiscal conditions remains limited. This study examines the environmental impact of aid in Africa’s ten largest recipient countries and assesses whether its effectiveness depends on domestic fiscal capacity. Using balanced panel data from 2002 to 2022 across Africa’s top 10 environmental aid recipients selected by funding scale and data availability, and applying Fixed Effects (FE), Instrumental Variable Fixed Effects (IV-FE) and Instrumental Variable Generalised Method of Moments (IV-GMM) estimators, the analysis shows that environmental aid is, on average, associated with a decrease in environmental quality but significantly enhances domestic revenue mobilisation, indicating a fiscal crowd-in effect. This suggests a short-term trade-off: the immediate deployment of aid projects strains environmental resources, but the accompanying increase in domestic tax revenues provides the fiscal capacity required to improve environmental governance over the long term. The results further reveal that the environmental effectiveness of aid is conditioned by domestic fiscal capacity, with higher income levels not necessarily strengthening revenue mobilisation, and by trade openness, which generates environmental and fiscal pressures. These findings highlight the need to integrate environmental aid into national budgeting systems, strengthen domestic fiscal capacity and coordinate aid with trade and industrial policies to support cleaner production, stronger environmental regulation and green industrial upgrading.