Resolving the Green Finance Paradox: The Crucial Role of Renewable Energy and Absorptive Capacity

This study investigates how international climate finance affects carbon emissions in a global panel of 212 countries, 2000–2023, and documents a Green Finance Paradox: cross-sectional targeting directs finance toward high-emission economies, biasing naive estimates upward, while estimators isolating within-country variation point toward a negative causal effect once targeting is addressed. Mediation analysis identifies the renewable energy share as the dominant channel. Estimating the finance-to-renewable-share path separately within the pre- and post-2016 periods reveals two qualitatively different dynamics rather than one mechanism operating at different speeds. Before 2016 the path coefficient is significantly negative at short horizons and attenuates by 26.6 percent over three years, consistent with an implementation lag between disbursement and operational capacity. After 2016 the coefficient is statistically null at short horizons and turns significantly positive at longer horizons; this reversal is reported transparently and treated as an open question rather than forced into a single narrative. A formal structural break test, rolling-window estimates, and a change in the reporting coverage of the underlying indicator around 2016 jointly support a genuine discontinuity after the Paris Agreement, although available data cannot fully separate compositional reallocation, declining deployment efficiency, and measurement-coverage change as explanations. Temporal disaggregation shows emission-reducing associations in high-absorptive-capacity economies concentrating entirely in the pre-2016 period, indicating that absorptive capacity matters only when finance is mitigation-oriented and reliably measured. These findings inform the design of the COP29 New Collective Quantified Goal and point to instrument-level disaggregation of climate finance as a priority for future research.