DOES CLIMATE FINANCE MODERATE THE FDI–CARBON EMISSIONS NEXUS IN SUB-SAHARAN AFRICA? A PANEL SMOOTH TRANSITION REGRESSION AND ASYMMETRIC NARDLANALYSIS

This study examines whether climate finance influences the relationship between foreign direct investment (FDI) and carbon dioxide (CO ) emissions across 38 Sub-Saharan African (SSA) 2 countries from 2000 to 2022 (N = 836 country-year observations). Using Panel Smooth Transition Regression (PSTR), two-step System Generalised Method of Moments (System GMM), and asymmetric Nonlinear Autoregressive Distributed Lag (NARDL) models, we show that the FDI– CO relationship is nonlinear and varies by regime. Below a certain climate 2 finance threshold, FDI increases pollution, aligning with the pollution haven hypothesis. Above this threshold, FDI reduces emissions, consistent with the pollution halo hypothesis. The PSTR transition function and NARDL impulse responses indicate that this change is gradual rather than sudden, with positive and negative FDI shocks producing different emissions responses. These findings are consistent across six alternative specifications. The results suggest that climate finance can change the environmental impact of foreign investment by improving hostcountry environmental standards, promoting clean technology use, and attracting green FDI. The study recommend that SSA governments and climate finance providers coordinate to raise national climate finance receipts toward the estimated threshold, thereby converting FDI from a net pollution source into a driver of decarbonisation.