Can international financial assistance drive the clean energy transition in developing countries?

Abstract

In this study, we investigated the role of international financial assistance in promoting clean energy development and environmental sustainability across 89 developing countries from 2000 to 2021. Using a Panel ARDL model with the Pooled Mean Group (PMG) estimator, assesses assessed the short-and long-run effects of global financial flows directed toward clean energy research, development, and production (RD&P). The findings revealed that while international financial assistance contributes to reductions in CO2 emissions in the long run, its influence on the renewable energy share in total energy supply remains weak and statistically insignificant. This outcome reflects the structural challenges facing developing economies, particularly rapid energy demand growth driven by industrialization and limited absorptive capacity for green technologies. The results further highlight the critical role of governance quality in shaping the effectiveness of external finance: Stronger governance systematically amplifies environmental returns in upper-income economies while influencing the relationship differently in lower-income settings. Policy implications suggest that international support should not only increase in scale but also be better targeted and better governed, emphasizing system-enabling investments, institutional strengthening, and long-term policy alignment to ensure a sustained and inclusive clean-energy transition.