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The unexpected outcomes: how does climate finance affect corruption in developing countries?

Mengchao Wang¹, Henri Njangang²

¹School of Economics, Capital University of Economics and Business, Beijing, 100070, China.

Journal of Environmental Management

|June 6, 2025

Summary

Climate finance can unfortunately increase corruption in developing nations. This effect is less pronounced in countries with high existing corruption levels and varies significantly by region, being strongest in Latin America.

Keywords:

Adaptation Climate change Climate finance Corruption Mitigation Panel data

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Area of Science:

Environmental Economics
Development Studies
Public Policy

Background:

Climate finance is crucial for sustainable development but can be vulnerable in nations with weak governance.
External funding may incentivize corruption and resource diversion in developing countries.

Purpose of the Study:

To analyze the impact of climate finance on corruption levels in developing countries.
To investigate the relationship between climate finance and corruption over a 20-year period.

Main Methods:

Panel data analysis of 130 developing countries (2000-2021).
Instrumental variable two-stage least squares (IV-2SLS) to address endogeneity.
Quantile regression and regional disaggregation for heterogeneity analysis.

Main Results:

Climate finance is found to increase corruption in developing countries.
The impact of climate finance on corruption is less significant in countries with high baseline corruption.
Geographic variation observed: strongest effect in Latin America and the Caribbean, moderate in Africa, and insignificant in Asia.

Conclusions:

Climate finance can exacerbate corruption, particularly in regions with weaker governance.
Context-specific factors, including existing corruption levels and geography, mediate this relationship.
Policy interventions are needed to mitigate corruption risks associated with climate finance flows.