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The effect of external debt on greenhouse gas emissions

Author

Listed:
  • Jorge Carrera

    (University of La Plata)

  • Pablo de la Vega

    (Universidad Nacional de La Plata)

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.

Suggested Citation

  • Jorge Carrera & Pablo de la Vega, 2024. "The effect of external debt on greenhouse gas emissions," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 48(3), pages 754-776, September.
    • Handle: RePEc:spr:jecfin:v:48:y:2024:i:3:d:10.1007_s12197-024-09674-x
    DOI: 10.1007/s12197-024-09674-x
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    More about this item

    Keywords

    External debt; GHG emissions; Instrumental variables; Panel data;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • C26 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Instrumental Variables (IV) Estimation
    • F64 - International Economics - - Economic Impacts of Globalization - - - Environment
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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