Can Resource-backed Loans Mitigate Climate Change ?

Resource-backed loans are used today by many resource-rich countries as an effective means of providing public goods and services. However, this type of financing can undermine environmental sustainability (e.g., forest cover loss, CO2 emissions, pollution, ecological collapse, material footprint, etc.). In this paper, we first use propensity score matching, which allows for self-selection bias in signature policies, coarsened exact matching, and the entropy balancing method to test whether resource-backed loans have a causal impact on forest cover loss in 64 developing countries from 2004 to 2018. Through a series of econometric and alternative specification tests, we find that resource-backed loans increase forest cover loss. Nevertheless, when we disaggregate resource-backed loans to run the regressions, we find that mineral, tobacco, and cocoa-backed loans increase forest cover, while oil-backed loans have no significant direct impact on forest cover. We recommend that signatory countries and those considering signing resource-backed loans put in place a very strong compensation mechanism, such as introducing taxes or reforming the current tax system in resource-backed loan agreements, to protect biodiversity and mitigate the environmental impacts of these loans. Signatory countries must ensure full transparency of resource-backed loans to make the characteristics of the loans more fluid, avoiding a situation of budgetary debauchery.