The effect of external debt on greenhouse gas emissions

Jorge Carrera and Pablo de la Vega
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Jorge Carrera: University of La Plata

Journal of Economics and Finance, 2024, vol. 48, issue 3, No 9, 754-776

Abstract: Abstract We estimate the causal effect of external debt on greenhouse gas emissions in a panel of 78 emerging market and developing economies over the 1990-2015 period. Unlike previous literature, we use external instruments to address the potential endogeneity in the relationship between external debt and greenhouse gas emissions. Specifically, we use international liquidity shocks as instrumental variables for external debt. We find that dealing with the potential endogeneity problem brings about a positive and statistically significant effect of external debt on greenhouse gas emissions: a 1 percentage point (pp.) rise in external debt as a percentage of GDP causes, on average, a 0.5% increase in greenhouse gas emissions. One possible mechanism of action could be that, as external debt increases, governments are less able to enforce environmental regulations because their main priority is to increase the tax base to pay increasing debt services or because they are captured by the private sector who owns that debt and prevented from tightening such regulations.

Keywords: External debt; GHG emissions; Instrumental variables; Panel data (search for similar items in EconPapers)
JEL-codes: C23 C26 F64 H63 (search for similar items in EconPapers)
Date: 2024
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Working Paper: The Effect of External Debt on Greenhouse Gas Emissions (2024)
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DOI: 10.1007/s12197-024-09674-x

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