Altruistic Foreign Aid and Climate Change Mitigation

This paper emphasizes the value of jointly addressing environmental and development objectives. We consider one altruistic developed country and several heterogeneous developing countries. We demonstrate that the lack of coordination between countries in tackling climate change finds a simple solution if developing countries can expect to receive development aid transfers from the developed country. The timing of the decision is central to the mechanism: development aid transfers should be determined after pollution abatement levels. The main restriction of our result is that it only holds if the developed country is altruistic enough to make positive development aid transfers to developing countries. Nevertheless, even from a purely selfish point of view, it may be profitable for the developed country to be more altruistic, leading to higher welfare for all countries.