Earth shackled by debt, emitting greenhouse gases.

Is Your Country's Debt Hurting the Planet? The Surprising Link Between National Debt and Greenhouse Gas Emissions

Lena Voss in Climate & Environment December 2025 • 4 min read.

"New research reveals a concerning connection between a nation's external debt and its environmental impact, particularly its greenhouse gas emissions."

Climate change is one of the most pressing issues of our time, demanding immediate and comprehensive action. While much attention is paid to individual behaviors and corporate practices, the role of national economic factors often remains overlooked. One such factor is external debt, particularly in emerging market and developing economies (EMDEs). These nations, striving for economic growth, often rely on external financing, but new research suggests this reliance may come at an environmental cost.

A recent study sheds light on the intricate relationship between external debt and greenhouse gas (GHG) emissions in EMDEs. Unlike previous research, this study employs advanced analytical techniques to address the potential for skewed results and more accurately reveals the true impact of external debt on the environment.

The findings expose a troubling paradox: as developing nations accumulate external debt, their ability to enforce environmental regulations weakens, leading to increased GHG emissions. This article delves into the study's methodology, findings, and implications, highlighting the urgent need for a more sustainable approach to economic development and debt management.

The Debt-Emissions Connection: How External Borrowing Impacts the Environment

Earth shackled by debt, emitting greenhouse gases.

The study, encompassing 78 EMDEs over the period 1990-2015, moves beyond simple observation to establish a causal link. Researchers used international liquidity shocks – unexpected changes in the availability of funds on the global market – as external instruments to isolate the impact of external debt on GHG emissions. This approach addresses a critical issue known as 'endogeneity,' which can skew results when cause and effect are not clearly distinguishable.

The results reveal a significant positive relationship: a 1 percentage point increase in external debt as a percentage of GDP leads, on average, to a 0.5% increase in greenhouse gas emissions. This finding highlights a concerning trade-off between economic development, fueled by external debt, and environmental sustainability.

Compromised Environmental Enforcement: Governments burdened by debt may prioritize economic growth and debt repayment over environmental protection. This can lead to lax enforcement of environmental regulations, allowing industries to pollute more freely.
Tax Base Focus: Heavily indebted countries often focus on expanding their tax base to service their debts. This can incentivize industries that generate revenue, even if they are environmentally harmful.
Private Sector Capture: In some cases, governments may be unduly influenced by private sector entities that hold the debt. These entities may lobby against stricter environmental regulations that could negatively impact their profits.

While economic growth spurred by external debt can lead to investments that increase energy consumption and pollution, the researchers discovered that external debt impacts emissions even when accounting for GDP growth, which is an interesting find.

Reversing the Trend: Sustainable Finance for a Greener Future

The study's findings present a call to action. If EMDEs are to meet their global and individual environmental commitments, the relationship between external debt and GHG emissions must be reversed. This requires a shift towards sustainable finance models that prioritize environmental protection alongside economic development. International institutions, advanced economies, and private markets must collaborate to provide financing that supports green technologies, sustainable infrastructure, and effective environmental governance in developing nations. Only then can EMDEs pursue economic growth without compromising the health of the planet.

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This article is based on research published under:

DOI-LINK: https://doi.org/10.48550/arXiv.2206.0184,

Title: The Effect Of External Debt On Greenhouse Gas Emissions

Subject: econ.gn q-fin.ec

Authors: Jorge Carrera, Pablo De La Vega

Published: 03-06-2022

Everything You Need To Know

What is the core relationship between external debt and greenhouse gas (GHG) emissions in emerging market and developing economies (EMDEs)?

The study reveals a concerning link: an increase in external debt is associated with a rise in greenhouse gas emissions in EMDEs. Specifically, a 1 percentage point increase in external debt as a percentage of GDP leads, on average, to a 0.5% increase in GHG emissions. This suggests that as these nations accumulate external debt, their environmental performance may suffer, creating a trade-off between economic growth and environmental sustainability. This connection highlights that the way in which EMDEs finance their economic development has significant implications for global efforts to combat climate change.

How does external debt influence environmental regulations and enforcement in heavily indebted developing countries?

Heavily indebted countries face various challenges. Governments may prioritize economic growth and debt repayment over environmental protection, leading to relaxed enforcement of environmental regulations. Additionally, these countries might focus on expanding their tax base to service their debts, potentially incentivizing industries that generate revenue even if they are environmentally harmful. Furthermore, external debt can lead to private sector capture, where governments are influenced by entities holding the debt, who may lobby against stricter environmental regulations to protect their profits. These factors collectively weaken environmental governance, contributing to increased GHG emissions.

What methodology did the study use to establish a causal link between external debt and GHG emissions, and why was it important?

The study, encompassing 78 EMDEs, employed advanced analytical techniques to overcome challenges in previous research. Researchers used international liquidity shocks as external instruments to isolate the impact of external debt on GHG emissions. This approach addresses 'endogeneity,' a critical issue where cause and effect are not clearly distinguishable, which can skew results. By using this methodology, the researchers could more accurately reveal the true impact of external debt on the environment, establishing a causal link and moving beyond simple observation. This careful analysis increases the credibility of the findings.

Besides GDP growth, what other factors can explain the impact of external debt on greenhouse gas emissions?

Even when accounting for GDP growth, external debt still impacts emissions. The study found that there are multiple pathways. Compromised environmental enforcement is a significant factor: governments, burdened by debt, may prioritize economic growth and debt repayment over environmental protection, leading to lax enforcement of environmental regulations, allowing industries to pollute more freely. Secondly, Heavily indebted countries often focus on expanding their tax base to service their debts, incentivizing industries that generate revenue, even if they are environmentally harmful. Finally, private sector capture comes into play as governments are influenced by entities holding the debt, who may lobby against stricter environmental regulations that could negatively impact their profits.

What solutions are proposed to reverse the trend of increasing greenhouse gas emissions in EMDEs due to external debt?

The study calls for a shift towards sustainable finance models to reverse the negative impacts of external debt on GHG emissions. This involves prioritizing environmental protection alongside economic development. International institutions, advanced economies, and private markets need to collaborate to provide financing that supports green technologies, sustainable infrastructure, and effective environmental governance in developing nations. This collaborative effort is essential for enabling EMDEs to pursue economic growth without compromising the health of the planet, ensuring that environmental commitments can be met alongside economic goals.