Aid, Growth, Remittances and Carbon Emissions in Nepal

Kishor Sharma,* Badri Bhattarai,** and Salma Ahmed***

abstract
Using historical data from Nepal―one of the largest recipients of aid among
South Asian countries―this paper investigates the link between foreign aid,
growth, remittances and carbon dioxide (CO2) emissions. The investigation of this
issue is particularly important, as policy makers in the least developed countries
are increasingly concerned about growing reliance on energy imports, particu-
larly fossil fuels, and increasing CO2 emissions. Mounting energy consumption
has not only made their economies vulnerable to environmental disasters and in-
creased health costs, but also to external shocks due to frequent fluctuations in
international market prices for petroleum products. Since available studies are
largely based on cross-sectional data―which lump together countries with differ-
ent characteristics― empirical evidence is contradictory. In-depth case studies of
countries with different backgrounds would certainly provide better insights into
the link between aid, growth, remittances and CO2 emissions, and contribute to
ongoing policy dialogue. Our empirical results, based on an in-depth case study
of Nepal, suggest that more foreign aid and remittances reduce CO2 emissions,
whereas financial development and higher income increase CO2 emissions. These
findings point to the importance of market mechanisms for regulating financial
development and higher income to control CO2 emissions, without undermining
competitiveness.
Keywords: Foreign aid, Nepal, Energy consumption, Carbon dioxide emissions,
Environmental disasters and economic costs
https://doi.org/10.5547/01956574.40.1.ksha

1. INTRODUCTION

There is growing literature on the relationship between remittances, energy consumption,

and foreign direct investment (FDI), but little is known about the effect of foreign aid and remit-
tances on carbon dioxide (CO2) emissions (see, Zhang, 2011; Hossain, 2012; Kretschmer et al.,
2013 and literature cited therein). The investigation of this issue is particularly important, as policy
makers in the least developed countries (LDCs) are increasingly concerned with growing reliance
on energy imports, particularly fossil fuels, and increasing CO2 emissions (see Timilsina and Toman,
2018). Mounting energy consumption has not only made their economies vulnerable to environ-
mental disasters and increased health costs, but also to external shocks due to frequent fluctuations

* Corresponding author. College of Business and Law, and Northern Institute, Charles Darwin University, Level 9, 815
George Street, Haymarket, Sydney NSW 2000. E-mail: kishor.sharma@cdu.edu.au.
** SCU Sydney Campus, Southern Cross University, Level 2, 86 Mary St, Surry Hills, Sydney NSW 2010. E-mail:
badri.bhattarai@scu.edu.au.
*** Alfred Deakin Institute for Citizenship and Globalisation, Deakin Waurn Ponds Campus, Deakin University, Geelong,
VIC 3220. E-mail: salma.ahmed@deakin.edu.au.
The Energy Journal, Vol. 40, No. 1. Copyright © 2019 by the IAEE. All rights reserved.

129
130 / The Energy Journal

in the international market price of energy, namely petroleum products.1 As Sarkar et al. (2015)
argue increased energy consumption appears to have contributed to significant CO2 emissions in
Bangladesh, which likely explains mounting environmental problems in the country. A similar con-
clusion is drawn for Nepal by the World Health Organization (2015), which note, that “…under a
high-emissions scenario heat-related deaths in the elderly (65+ years) are projected to increase to
about 53 deaths per 100,000 by 2080 compared to the estimated baseline of approximately 4 deaths
per 100,000 annually between 1961 and 1990. A rapid reduction in emissions could limit heat-re-
lated deaths in the elderly to about 12 deaths per 100,000 in 2080 (p. 1)”.
While it is argued that higher CO2 emissions in developing countries has been associated
with higher aid inflows, evidence of the effects of aid on CO2 emissions in recipient countries is
scant (Kretschmer et al., 2013).2 At the same time, there is growing evidence to suggest that factors
other than aid, namely income level, higher economic growth, trade openness, and financial devel-
opment also contribute to CO2 emissions (Zhang, 2011; Ozturk and Acaravci, 2013).3 However,
with the exception of Zhang (2011), Ozturk and Acaravci (2013) and Shahbaz et al. (2016), empiri-
cal evidence is still quite limited, particularly in the case-study framework, which takes into account
country-specific features. Available studies are largely based on cross-sectional data that lumps to-
gether countries with different characteristics, producing contradicting results. In-depth case studies
of countries with different backgrounds would certainly provide better insights into the link between
aid, growth and CO2 emissions, and contribute to policy dialogue.
On theoretical grounds, it is reasonable to argue that foreign aid is likely to increase energy
consumption and CO2 emissions directly and indirectly. The direct effect occurs when the imple-
mentation of aid-induced projects results in higher demand for energy, while the indirect effect may
follow when aid-induced education and health programs improve productivity, resulting in higher
purchasing power and hence greater energy consumption and CO2 emissions, although the environ-
mental Kuznets curve (EKC) hypothesis might hold true (Ozturk and Acaravci, 2013). As is well
known, the EKC suggests that economic growth initially leads to deterioration in environment, but
after a certain level of economic growth, the quality of environment improves as income rises. It
could be argued that under the assumption of the EKC hypothesis aid-induced investments, partic-
ularly in health and education, by improving public awareness, might lead to lower consumption
of fossil fuels (Hahn and Melcalfe, 2016).4 If this occurs, per capita CO2 emissions begin to decline
after some threshold level. Additionally, foreign aid in the form of better technology and technical
skills might also help improve energy efficiency and reduce emission intensity. Similarly, aid can
be a means of fostering the spread of low-carbon technologies such as hydro, wind and solar power,
although experiences from developing countries are mixed. Over the years, the Nepalese govern-
ment has received foreign aid for generating clean energy from biogas, solar and hydro resources,
which has contributed to an increase in clean energy production from 1,217,500 gigajoules (GJ) in
2000–2001 to 2,734,600 GJ by 2008–2009 (see, K.C. et al., 2011, p. 4170, Table 2).5 While this is a
pleasing development, Nepal still relies on fossil fuels, which accounted for 14.6% of the total pri-

1.  Fossil fuel price shocks have a significant impact on economic volatility, not only in LDCs but also in developed
countries, see Blazquez et al., 2017. 
2.  Hübler and Keller (2010) have demonstrated that energy intensity is linked to the level of aid.
3.  The literature investigating the link between trade openness, growth, energy consumption and CO2 emissions is grow-
ing. For excellent review see, Nasreen and Anwar (2014) and Shahbaz et al. (2016) and literature cited therein.
4.  In an experimental framework, the authors have demonstrated that information provision and/or the use of social
norms can reduce energy use.
5.  Unfortunately, foreign aid data is not available at disaggregated level to pin point how much of aid has gone to clean
energy generation.

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 Aid, Growth, Remittances and Carbon Emissions in Nepal / 131

mary energy supply in 2015 (IEA, 2017), and this share is continuing to rise due to rapid urbaniza-
tion. Despite this, per capita CO2 emissions and electricity consumption in Nepal remains very low
compared to other South Asian countries (see Table A1). So, has foreign aid helped reduce reliance
on fossil fuel and lower CO2 emissions in Nepal? This is an empirical issue and must be investigated
as the link between foreign aid and CO2 emissions is not clear-cut and previous research has failed
to establish a consistent causal pattern between foreign aid and CO2 emissions in a cross-sectional
framework (Arvin et al., 2006). Perhaps, as argued earlier, this could be due to the heterogeneity of
recipient countries that fails to capture country-specific features and characteristics, producing con-
tradicting results. The multifaceted nature of the relationship between aid and the environment also
makes it important to investigate the link between aid, growth and CO2 emissions in a case-study
framework, using the experience of a single country.
In this paper, we shed light on this issue using historical data from Nepal, which has tradi-
tionally been a highly aid dependent country in South Asia (Khadka, 1997; Bhattarai, 2009; Sharma,
2006; Sharma and Bhattarai, 2013). The contribution of foreign aid in Nepal jumped from just under
2% of GDP during 1960–1969 to about 7% during 2010–2015 (Table A2). While aid has been allo-
cated to various sectors, 47.4% of this assistance went to the transport, power and communication
sectors during 1975–2015, which may have contributed to a surge in energy consumption in the
country (Table A3).
During the cold war period, Nepal’s strategic location attracted significant amounts of for-
eign aid from the USA, the former Soviet Union and China, which led to the development of several
infrastructure projects (including highways, hospitals and education institutions) and the establish-
ment of numerous import substitution (IS) industries, accelerating economic growth. However, by
the mid-1980s growth stagnated and Nepal experienced a severe macroeconomic crisis, giving way
to significant liberalization in trade, investment and the financial sector, which not only facilitated
trade, but also attracted significant investment, including foreign investment that might also have led
to increased energy demand and, hence, greater CO2 emissions. This argument is in line with Ozturk
and Acaravci (2013) who find that policy liberalization promotes international trade and attracts
foreign investment, contributing higher energy consumption and CO2 emissions. Consistent with
this view, Fisher-Vanden (2003) finds that that market-oriented reforms lead to CO2 emissions due
to greater use of energy driven by high economic growth.
On theoretical grounds, one could argue that financial sector liberalization also leads to
higher energy demand and CO2 emissions through the following channels. First, financial sector
liberalization lowers financing costs, increases financing channels and disperses operational risk,
which helps attract new investment, leading to higher energy consumption and CO2 emissions. Sec-
ond, efficient financial intermediation seems to be conducive to consumer loans, making it easier
to purchase household items (such as washing machine, refrigerators, air condition and computers)
and automotive vehicles, increasing energy demand and emitting more CO2 (Zhang, 2011). Making
loans accessible, financial sector liberalization also intensifies demand for quality housing, transport
and infrastructure, leading to higher energy consumption and CO2 emissions.
In recent years, Nepal has recorded a surge in remittances, swelling from just under 5%
of GDP in 2001 to nearly 30% by 2013 (see Figure 1;Sharma, 2015; Joshi and Bohara, 2017). The
influx of remittances has led to soaring consumption, especially the demand for white goods and
quality housing, putting further pressure on energy consumption and CO2 emissions. Since remit-
tances are a transitory type of income, households tend to spend more on consumer-durable goods
(such as kitchen appliances, furniture, cars, motorcycles), which obviously contribute to increased
energy consumption and CO2 emissions (Adams, 1998; Thapa and Acharya, 2017). A study by Shah
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132 / The Energy Journal

Figure 1: Remittances as percentage of GDP

Source: Compiled by the authors based on data from NRB (various issues), CBS (various issues) and MoF (various issues)

(2017) finds that about two-thirds of remittance-recipient households in Nepal purchase land and
house, further increasing emissions. However, it could be argued that higher electricity tariffs, to-
gether with irregular electricity supply and up to 14 hours of power outage in a day, may also have
encouraged the remittance-recipient households to divert a significant proportion of remittances
towards clean energy production and/or purchase of energy-efficient appliances (Pyakural, 2009;
NITI Foundation and Asian Foundation, 2011; Ministry of Finance (MoF), 2014b).
It must be noted that the remittance data presented in Figure 1 only captures remittances
coming through commercial banks and financial intermediaries, as a significant proportion of re-
mittances from India come through informal channels, which is not captured by the official data.
When unofficial inflows are also considered, the total inflow of remittance is significantly higher.
According to Jones and Basnett (2013), annually about 4 million Nepalese youth travel overseas in
search of employment and most of them go to India.
Nepal heavily relies on traditional fuels, such as wood and wood waste, animal dung and
plant residue, and its reliance on fossil fuels, such as coal, oil products, LPG and electricity is less.
While traditional fuels are available domestically, fossil fuels come from foreign countries, mainly
imported from India. According to IEA (2017), traditional fuels such as biofuels and waste ac-
counted for 81.5% of the total primary energy supply in Nepal in 2015, whereas the share of fossil
fuels was 14.6%, although traditional fuels are gradually being replaced by fossil fuels due to rapid
urbanization and deforestation. Consequently, imports of fossil fuels as a percentage of total mer-
chandise imports rose from less than 1% in 1975 to 14% by 2015. While fossil fuels are beneficial
for economic growth, their potential health and environmental effects resulting from CO2 emissions
and air pollution are well documented and undesirable from environmental, public health and wel-
fare perspectives. It is increasingly evident that greater use of fossil fuels affects public health and
the environment, and any strategy to reduce their consumption can significantly reduce these costs
(Barrett et al., 2015; World Health Organisation, 2015; Xia et al., 2015; Sirag et al., 2017).
All rights reserved. Copyright © 2019 by the IAEE.
 Aid, Growth, Remittances and Carbon Emissions in Nepal / 133

It is in this context that we investigate the link between foreign aid, remittances, growth
and CO2 emissions in Nepal. The rest of the paper is organized as follows. Section II presents a
model and discusses data and econometric procedures. Section III reports empirical results. The
paper concludes with policy remarks in Section IV.

2. THE MODEL, DATA AND ECONOMETRIC PROCEDURES

Several channels (e.g. foreign aid, income, trade openness, financial development and re-
mittances) can drive CO2 emissions. Following Ozturk and Acaravci (2013), we specify the follow-
ing model to investigate the link between CO2 emissions and various components of growth. The
expected signs of the coefficients are in parentheses.

COt =  β0 + β1ECt + β2AIDt + β3Yt + β4Yt2 + β5OPNt + β6FDt + β7REt + μt (1)

(+) (?) (+) (–) (+) (+) (+)

Where,
CO is CO2 emissions measured by metric kg per capita
EC measures energy consumption (kg of oil equivalent per capita)
AID is net official development assistance as a percentage of GDP
Y captures per capita real income (GDP per capita 2000 US$)
Y 2 is the square of per capita real income to capture the effects of economic growth on CO2
emission (proxy by square of GDP per capita 2000 US$)
OPN is openness index (measured by trade as a percentage of GDP)
FD is an indicator of financial development measured by domestic credit to private sector
as percentage of GDP
RE measures remittance as percentage of GDP
μt is an error term.
The model specified above is estimated using annual data from 1971–2013.6 The selection
of years was dictated by data availability, which were collected from a number of sources, including
the World Development Indicators (World Bank, 2017), Statistical Yearbook (Central Bureau of
Statistics, 1991, 2001, 2015), OECD (2016), Economic Survey (Ministry of Finance, Government
of Nepal, various issues) and Quarterly Economic Bulletin (Nepal Rastra Bank, various issues). A
full list of the variables, along their definition and sources, is provided in the Appendix Table A4,
descriptive statistics for the variables used are presented in Appendix Table A5.
To estimate the specified model, we use the autoregressive distributed lag (ARDL) ap-
proach to cointegration. One of the advantages of this approach is that it can be used irrespective of
whether the regressors are I(1) or I(0), and thus it avoids the pre-testing problem of unit root (see,
Pesaran and Pesaran, 1997). The use of ARDL also avoids the endogeneity problem, which applied
researchers often face. As correctly argued by Nkoro and Klevin (2016, p 78–79) “since each of
the underlying variables stands as a single equation, endogeneity is less of a problem in the ARDL
technique because it is free of residual correlation (i.e. all variables are assumed endogenous).”
The approach uses the error correction version of the ARDL, as follows:

6.  Our purpose for using a long data period is motivated by the fact that it provides higher degrees of freedom, which
improves the predictability of the model. Further, it reduces noise coming from the individual time series cointegrated
regressions and establishes long-run relationships between the series.

Copyright © 2019 by the IAEE. All rights reserved.

134 / The Energy Journal

m −1 m −1
α + ∑ bi ∆Yt −i + ∑ ci ∆X t −i + d1Yt −m + d 2 X t −m + µt
∆Yt = (2)
=i 1 =i 0

Where α is a vector of constants, Yt is vector of endogenous variables, Xt is a vector of explanatory

variables and b and c are matrices of parameters.
It must be noted that the error correction model (ECM) is derived from the ARDL model
through a simple linear transformation that integrates short-run adjustments with long-run equi-
librium without losing long-run information. However, during the estimation process, the associ-
ated ECM model takes sufficient lags, which helps avoid the endogeneity problem (see, Nkoro and
Klevin, 2016; Pesaran et al., 2001).
There are two stages in the ARDL approach to cointegration. In the first stage, the hypoth-
esis of no cointegration is tested. The null hypothesis is that the coefficients on the lagged regressors
in the error correction form of the underlying ARDL model are jointly zero. That is, there exists
no long-run relationship between them. The null hypothesis is defined by H0: d1 = d2 = 0 and tested
against the alternative of H1: d1 ≠ 0, d2 ≠ 0. The approach uses the F-test although the asymptotic
distribution of the F-statistic in this context is non-standard, irrespective of whether the variables
are I(0) or I(1).7 If a long-run relationship between the variables is found, in the second stage the
long-run parameters are estimated using the ARDL method. We set the lag length equal to two on all
variables in the ARDL equation, which is a standard practice in the empirical analysis. The model
is tested using the Schwarz Bayesian criterion for lag selection and diagnostic tests are performed
for all equations.
It is important to note that although the ARDL model avoids pre-testing the problem of unit
root, if the order of the integration of any of the variables is greater than one, the critical bounds pro-
vided by Pesaran et al. (2001) are not valid. Therefore, it is crucial to test for unit root to confirm all
variables in the specified model meet the underlying assumptions of the ARDL bound test approach
to cointegration before proceeding to model estimation procedures.

3. EMPIRICAL RESULTS

The results for the unit root test based on the augmented Dickey–Fuller approach are re-
ported in Table 1. All variables are found to be I(1).
Table 2 presents the results for the long-run relationship between CO2 emissions and inde-
pendent variables as specified in the model above. It is important to note that before estimating the
final model, we performed diagnostic tests to ensure robustness in the estimates. At the diagnostic
testing stage, we dropped GDP-square and openness variables from the model as in their presence
the specified model failed to pass the test due to high collinearity between them. With the removal
of these variables, the predictability of the model improved significantly.
Based on the bound test for cointegration, there is evidence of the long-run relationship
between CO2 emissions and other independent variables included in the model.8 The robustness test

7.  Pesaran and Pesaran (1997) provide appropriate critical F-values. They use two sets of critical values. The first set
assumes that all the variables in the ARDL model are I(1) and the second assumes that they are I(0). This provides a band
covering all the possible classifications of the variables into stationary and nonstationary or even fractionally integrated ones.
If the calculated F-statistic is above the upper value of this band, the null hypothesis is rejected indicating cointregation be-
tween the variables irrespective of whether they are I(0) or I(1). If the F-statistic falls below the band, the null hypothesis of
no cointegration cannot be rejected while a value within the band implies the test is inconclusive.
8.  The results show that F-statistics (3.771) are significant at 5% level and greater than the upper bound critical value
(3.674) provided by Pesaran et al. (2001).

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 Aid, Growth, Remittances and Carbon Emissions in Nepal / 135

Table 1: Unit root test based on augmented Dickey-Fuller approach

Levels (lag = 2) Ist differences (lag = 2)
Variables Intercept Intercept & Trend Intercept Intercept & Trend
CO 0.813 (–2.935) –1.495 (–3.523) –3.516 (–2.936)** –4.102 (–3.526)**
EC 0.117 (–2.933) 0.208 (–2.936) –3.317 (–2.938)** –3.623 (–3.529)**
AID (lag = 0) –1.499 (–2.929) –1.312 (–3.515) –7.741 (–2.931)** –8.007 (–3.518)**
Y (lag = 1) 5.117 (–2.931) 0.635 (–3.518) –3.446 (–2.931)** –7.106 (–3.518)**
Y2 5.500 (–2.931) 3.192 (–3.518) –0.862 (–2.933) –6.977 (–3.515)**
OPN (lag = 0) –1.879 (–2.931) –2.058 (–3.518) –5.638 (–2.929)** –5.646 (–3.515)**
FD 1.181 (–2.931) –1.143 (–3.518) –3.267 (–2.933)** –3.768 (–3.520)**
RE (lag = 0) 2.607 (–2.931) 0.452 (–3.518) –5.625 (–2.929)** –6.154 (–3.518)**
Notes: ** indicates significance at 5% level. Figures in ( ) indicates t-statistic. Maximum lag = 2 based on Schwarz Bayesian
Criterion.

Table 2: Long-run coefficients

Variables Coefficients t-statistics
Constant –2.620 (–0.027)
AID –3.801 (–2.197)**
EC –0.354 (–0.987)
FD 1.543 (2.504)*
Y 0.496 (4.241)*
RE –2.279 (–3.077)*
R-square 0.943
Adjusted R-square 0.935
Notes: ** and * indicate 5 and 1% significance levels respectively.
Note that Error Correction Term (ECT) is found to be negative and significance at
1% level. The ECM is –0.703, which means, system’s speed of adjustments towards
the long run equilibrium is 70%. However, short run coefficients are not significant.
Thus, the results are not reported here.

indicates the stability of the coefficients based on cumulative sum, suggesting that the estimated
coefficients are stable over the periods at the 5% significance level (see Figure 2).
The coefficient for foreign aid (AID) variable is found to be negative and statistically sig-
nificant, suggesting that development assistance has helped reduce CO2 emissions. How does for-
eign aid lower CO2 emissions? To answer this question, one must look at that component of aid
that is directed towards hydro- and solar-power generation, biogas and environmental-awareness
programs. Unfortunately, aid data are not available at that level of disaggregation for Nepal. How-
ever, as Islar et al. (2017, p.669) note “approximately 70% of the total population has access to
electricity…, of which 25% uses off-grid solutions such as solar and micro-hydro power.” These
projects are largely funded by the donor community and may have made some contribution to a
fall in CO2 emissions, as the consumption of renewable energy (in tons of oil equivalents) surged
from 64 tons in 2008–2009 to 166 tons in 2012–2013 and further to 292.49 tons by 2015–2016 (see,
Ministry of Finance, 2013, 2014a, 2016, 2017; Kumar et al., 2015). Our finding of a link between
aid and CO2 emissions is opposite to the findings of Bhattacharyya et al. (2016) who, in a study of
131 countries, find no systematic evidence of the link between foreign aid and CO2 emissions. This
difference may be because their study is based on a panel dataset that lumps together countries of
different socio-economic backgrounds, failing to capture country-specific features and peculiarities.
There is no statistical evidence to suggest that higher energy consumption (EC) results in
greater CO2 emissions in Nepal as the coefficient for energy consumption variable is statistically
insignificant. This is perhaps because our measure of energy consumption includes all sources of
energy, including renewable energy, whose consumption, as discussed earlier, has surged in recent
Copyright © 2019 by the IAEE. All rights reserved.
136 / The Energy Journal

Figure 2: Cumulative sum test for coefficients stability

Source: Estimated by the authors based on data from OECD (2016).

years in Nepal. Shrestha et al. (2009), applying the log mean Divisia index method of decomposition
for a group of 15 developed and developing countries, also find similar results for twelve countries,
but not in all 15 countries.
As expected, our findings provide strong support for the hypothesis that financial develop-
ment (FD) contributes to CO2 emissions. The financial sector reform initiated in the mid-1980s in
Nepal, led to the establishment of several domestic banks and finance companies, providing easy
access to consumption and investment loans (Acharya, 2003). As access to finance improved, the
booming middle-income class, especially in urban centers, responded by purchasing apartments,
white goods and motor vehicles, which might have contributed to an increase in emissions. Our
findings of a link between financial development and CO2 emissions is similar to Shahbaz et al.
(2012) who uncovered a statistically significant positive relationship between CO2 emissions and
financial development in Pakistan. Ozturk and Acaravci (2013), on the other hand, find no statisti-
cal evidence of a link between financial development and CO2 emissions in the long run in Turkey.
Differences in results between the studies could be attributed to country-specific features and the
methodologies applied. The coefficient for real income (Y) variable is statistically significant and
has a positive sign, providing further evidence in support of the hypothesis that higher real income
leads to greater CO2 emissions, often associated with increased energy consumption. With the lib-
eralization of the Nepalese economy since the mid-1980s, households have experienced an increase
in real income. As their income rose they responded by purchasing houses and consumer-durable
goods, contributing to CO2 emissions (Sharma, 2015).
The coefficient for remittance (RE) variable is statistically significant and has an unex-
pected negative sign, indicating that the influx of remittances has helped reduce CO2 emissions
in Nepal. This may have occurred through the greater use of remittances by remittance-recipient
households for clean energy production and/or purchase of energy-efficient appliances as electric-
ity price surged (Pyakural, 2009; Ministry of Finance, 2014b).9 It could also be argued that rising

9.  Nepal has one of the highest electricity tariffs in South Asia (see Pyakural,2009).

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 Aid, Growth, Remittances and Carbon Emissions in Nepal / 137

electricity tariffs, together with up to 14 hours of power outage in a day in the wake of electricity
shortages, may also have encouraged these households to shift towards clean energy (NITI Founda-
tion and Asian Foundation, 2011). Our findings of a link between the influx of remittances and lower
CO2 emissions is interesting, one that has significant policy implications for many LDCs, requiring
further investigation in the future as more data become available.

4. CONCLUSION

This paper contributes to ongoing policy debate about the link between foreign aid, growth,
remittances and CO2 emissions in Nepal. The investigation of this issue is particularly important, as
policy makers in LDCs are increasingly concerned with their growing reliance on energy imports,
which has not only made their economies vulnerable to external shocks, but also to environmental
disasters such as, floods and earthquakes. In addition, health costs associated with high CO2 emis-
sions are on the rise, putting pressure on health sector budgets.
Although it is argued that higher CO2 emissions in developing countries are associated
with higher aid inflows, evidence on the effects of aid on CO2 emissions is contradictory. At the
same time, there is growing evidence to suggest that factors other than foreign aid, namely, income
level, higher economic growth, trade openness, and financial development, also contribute to CO2
emissions. We contribute to this debate using the ARDL approach to cointegration and historical
data from Nepal, which has been one of the highest recipients of aid among developing countries.
Our results suggest that higher foreign aid and remittances lower CO2 emissions in the long run,
while financial development and higher income increase CO2 emissions. It appears that foreign aid
has fostered the spread of low-carbon technologies, such as biogas and hydro- and solar-power.
Meanwhile, the influx of remittance income may have enabled remittance-recipient households to
shift towards clean energy production and/or purchase of energy-efficient appliances in the wake of
rising electricity prices and increasing power cuts, which have been up to 14 hours in a day in the
wake of electricity shortage.
These findings have significant policy implications and point to the importance of exercis-
ing market mechanisms to monitor financial development and income growth to control CO2 emis-
sions without undermining the competitiveness of the economy. While these findings are interesting
and provide useful insights to policy makers and the donor community, they must be treated with a
degree of caution given that in the absence of some data we have relied on proxies to capture the ef-
fect of financial development on CO2 emissions. As more data becomes available, future researchers
can develop indicators to more accurately capture the effects of foreign aid, remittances and growth
on CO2 emissions. Additionally, more case studies of countries from different socio-economic sit-
uations would improve our understanding of the link between foreign aid, growth, remittances and
CO2 emissions in developing countries.

ACKNOWLEDGMENTS

We thank the editor, David C. Broadstock, and three anonymous referees for insightful
comments and suggestions that have significantly improved the revised paper. We are also grateful
to Debajyoti Chakravarty for carefully reading the paper.

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138 / The Energy Journal

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140 / The Energy Journal

APPENDIX

Table A1: CO2 Emissions (metric tons per capita) and Electricity consumption (kWh per
capita) in Selected South Asian countries, 1970–2014
Bangladesh Nepal India Pakistan SriLanka
Year CO2 Electricity CO2 Electricity CO2 Electricity CO2 Electricity CO2 Electricity
1970–1975 0.06 14.04 0.03 7.06 0.38 103.75 0.34 100.90 0.25 65.27
1976–1981 0.08 19.82 0.03 12.74 0.44 138.72 0.38 131.11 0.24 88.00
1981–1986 0.11 32.23 0.04 24.30 0.55 194.81 0.50 199.17 0.25 127.09
1987–1992 0.14 51.95 0.06 37.27 0.74 290.04 0.63 301.57 0.25 159.19
1993–1998 0.19 81.01 0.12 50.34 0.91 375.70 0.73 356.16 0.40 232.39
1999–2004 0.25 131.47 0.11 73.37 1.01 432.28 0.82 412.99 0.59 335.10
2005–2010 0.35 218.12 0.15 95.18 1.32 592.98 0.96 466.90 0.63 427.81
2014 0.46 310.39 0.28 139.14 1.73 805.60 0.90 471.04 0.89 535.07
Source: Compiled by the authors based on World Development Indicators online database (World Bank, 2017).

Table A2: Nepal’s average total aid, bilateral and grants aid, 1960–2015
Total aid Bilateral aid Grants aid
Year (% of GDP) (% of total aid) (% of total aid)
1960–69 1.86 96.65 99.89
1970–79 3.87 68.24 71.38
1980–89 10.10 54.65 64.17
1990–99 10.25 60.87 67.68
2000–09 6.84 71.82 81.52
2010–15 6.53 68.57 90.13
1960–15 6.57 70.75 77.52
Source: Estimated by the authors based on data from OECD (2016).

Table A3: Sectoral distribution of foreign aid as a percentage of total aid, (1975–2015)
Industry and Transport, Power and
Year/Average Agriculture Commerce Communication Social services Others
1975–1980 18.88 9.45 57.68 13.66 0.4
1981–1985 30.5 7.64 42.96 18.3 0.76
1986–1990 24.56 9.64 46.78 18.02 1.04
1991–1995 29.08 8.56 42.56 19.44 0.38
1996–2000 19.5 1.14 51.94 27.4 0.188
2001–2005 14.18 1.376 40.78 41.6 2.052
2006–2009 13.89 1.0 41.30 43.50 0.31
2010–2015 14.07 1.15 41.5 42.28 1.03
1975–2015 22.9 6.5 47.4 22.7 0.9

Source: Estimated by the authors based on data from CBS (1991, 2001, 2015).

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 Aid, Growth, Remittances and Carbon Emissions in Nepal / 141

Table A4: Definition of data and their sources

Label Definition
CO CO2 Emissions, measured by
metric kg per capita
EC Energy Consumption,
estimated by kg of oil
equivalent per capita
Y Per capita real income,
estimated by GDP per
capita 2000 US $
AID AID is net ODA as a
percentage of GDP
Y2 Square of per capita real
income to capture the
effect of economic growth
OPN Openness, measured by trade
as percentage of GDP
FD Financial development,
measured by domestic
credit to private sector as
percentage of GDP
RE Remittance as percentage
of GDP
Data source
World Bank (2017), World Development Indicators. http://databank.worldbank.
org/data/reports.aspx?source=world-development-indicators
World Bank (2017), World Development Indicators. http://databank.worldbank.
org/data/reports.aspx?source=world-development-indicators
World Bank (2017), World Development Indicators. http://databank.worldbank.
org/data/reports.aspx?source=world-development-indicators
OECD (2016), OECD online data, http://stats.oecd.org/Index.
aspx?DataSetCode=TABLE2A
World Bank (2017), World Development Indicators. http://databank.worldbank.
org/data/reports.aspx?source=world-development-indicators
World Bank (2017), World Development Indicators. http://databank.worldbank.
org/data/reports.aspx?source=world-development-indicators and OECD (2016)
World Bank (2017), World Development Indicators. http://databank.worldbank.
org/data/reports.aspx?source=world-development-indicators, Central Bureau
of Statistics (1991, 2001, 2015) and Ministry of Finance (various issues) http://
mof.gov.np/en/archive-documents/economic-survey–21.html
Nepal Rastra Bank (NRB) (various issues) https://nrb.org.np/red/publica.
php?tp=economic_bulletin&&vw=1000
Central Bureau of Statistics (CBS) (1991, 2001, 2015) and Ministry of Finance
(MoF) (various issues) http://mof.gov.np/en/archive-documents/economic-
survey-21.html

Table A5: Descriptive Statistics in Level and Growth

Variables in Levels (1971–2015) Mean Minimum Maximum Range St. Dev
CO2 emissions (metric tons per capita) 0.083 0.016 0.234 0.217 0.058
AID (% GDP) 4.287 1.685 8.105 6.421 1.648
EC (kg of oil equivalent per capita) 325.038 299.018 388.849 89.831 26.688
RE (% GDP) 13.053 0.977 31.753 30.776 10.857
FD (% GDP) 23.015 3.515 65.045 61.529 18.662
Y (constant 2010 US$) 413.728 273.054 689.514 416.460 123.927
Y2 (constant 2010 US$) 186187.592 74558.520 475429.957 400871.438 113944.250
OPN (% of GDP) 39.195 13.579 64.036 50.457 12.932
Variables in Growth
CO2 emissions (metric tons per capita) 8.532 –32.213 54.258 86.471 20.979
AID (% GDP) 2.232 –37.772 80.037 117.809 19.632
EC (kg of oil equivalent per capita) 0.517 –5.551 3.676 9.227 1.472
RE (% GDP) 24.536 –24.355 358.259 382.614 76.039
FD (% GDP) 7.442 –22.257 38.548 60.804 13.342
Y (constant 2010 US$) 2.120 –5.212 7.174 12.387 2.459
Y2 (constant 2010 US$) 4.345 –10.153 14.864 25.017 4.971
OPN (% of GDP) 3.436 –17.149 39.193 56.342 9.869
Source: Estimated by the authors based on data from OECD (2016).

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