Economic Incentive to Ignore the Environment: The World Environmental Regime, Foreign Direct Investment, and Decoupling of Development Aid

The world environmental regime has influenced government policy and improved environmental conditions around the globe, but its influence on governance is sometimes decoupled from, or loosely connected with, actual practice. This article examines the influence of the environmental regime on foreign aid and proposes that economic incentive, in the form of FDI, is a source of decoupling between aid donors’ stated environmental goals and actual aid commitments. Using a three-dimensional panel design (donor × recipient × year), I test allocations of environmental protection and fossil fuel aid in a two-stage process where first the aid recipient is chosen, and then the aid amount. I find that although donor and recipient environmental regime integration are associated with higher likelihood of exchanging environmental aid, other factors (donor/recipient GDP, recipient democracy, etc.) determine the amount of aid. Regime integration does not reduce the likelihood of exchanging fossil fuel aid, but donor regime integration is associated with giving less fossil fuel aid, contingent on the donor’s level of FDI in the recipient nation. I conclude that the world environmental regime and the global economy exert contradictory pressures on aid organizations that result in policy–practice decoupling. The world environmental regime, therefore, has only been partially successful in improving foreign aid, and its effect is constrained by donors’ economic incentive to ignore environmental norms.