Aid or sanction? Comparing the effectiveness of climate finance and environmental taxation in mitigating environmental degradation in Africa

Abstract

In line with Sustainable Development Goal 15, which focuses on life on land, protecting our planet for future generations becomes an imperative challenge. To address this, the present study examines the comparative efficiency of climate finance and environmental taxes in mitigating environmental degradation across Africa. Using data from 26 African countries over the period 2012 to 2021, this study employs the system Generalized Method of Moments regressions to analyze the effect of these two financial mechanisms on environmental outcomes. The results reveal that both climate finance and environmental taxes significantly contribute to reducing environmental degradation, with environmental taxes proving to be more effective. The study further identifies human capital and governance as the indirect paths through which climate finance and environmental taxes mitigate environmental degradation in Africa. The findings remain consistent even after conducting a series of robustness checks using alternative proxies for climate finance, environmental taxes, and ecological footprint. Based on the results, the paper recommends prioritizing and enhancing environmental tax policies, as well as expanding and effectively allocating climate finance, while also investing in human capital and governance reforms for more effective environmental outcomes.