  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 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.
