Address for correspondence:

August 2005 (preliminary draft- not to be quoted without permission) Abstract. There exists in the literature a presumption that foreign aid (especially if it is tied) can be used effectively to reduce cross border pollution. Focussing on the interaction of private and governmental pollution abatement in the recipient country and tied foreign aid we identify three main reasons why the optimism of the literature may not be justified: (a) foreign aid crowds out private and/or governmental pollution abatement in the recipient country, (b) foreign aid creates incentives to increase output and emissions and (c) foreign aid induces capital accumulation because it raises the rental of capital