Drivers of CO2 Emissions: A Debt Perspective

Abstract

CO2 emissions and debt accumulation are twin threats to sustainable development. To fill the gap that few studies can untangle the reasons behind CO2 emissions from the debt perspective, we illustrate debt can cause CO2 emissions through various channels. We then examined how debt-based drivers impact emission trajectories. We use the logarithmic mean Divisia index (LMDI) method to decompose the emission changes into five factors. We make decomposition analyses between different country groups to identify their respective characteristics. Further, to investigate the potential financial crisis impacts, we consider the full period 2001–2019 and two sub-periods (pre- and post-2008). The results show that the gross domestic product (GDP) is always the biggest contributor to emissions, whose effect on advanced economies saw a bigger decrease after 2008 than that on emerging economies. Debt–GDP is second only to GDP in contributing to emissions. It has a similar impact on emissions before and after 2008 for advanced economies, while it rockets after 2008 for emerging economies. Private debt financing of fossil fuels is the prominent inhibitor for both economies, especially for emerging economies. It has a stronger mitigation impact after 2008 than before for emerging economies, while has the opposite change for advanced economies. Debt structure and fossil CO2 intensity have relatively smaller effects on emissions. The crisis is an opportunity to promote low-carbon development. Since the COVID-19 pandemic is analogous to the 2008 crisis in terms of debt level and emission change, we provide recommendations for emission mitigation in the post-pandemic context.

The effect of natural resources extraction and public debt on environmental sustainability

“…However, government debt may put stress on the environment due to the need to increase output for debt settlement. Also authors like Zhao and Liu (2022), Kahn and McDonald (1995) and Shandra et al (2008) have contested that high debt can trigger more deforestation, water pollution and reduce renewable energy development thereby increasing carbon dioxide emission. It may also be argued that the effect of debt may not be linear.…”

“…However as the debt increases and there is the need to settle the debt, attention shifts from allocating resources into environmentally friendly ventures to non-environmentally friendly ventures. Thus, according to Zhao and Liu (2022), Kahn and McDonald (1995) and Shandra et al (2008) high debt may trigger more deforestation, water pollution and reduce renewable energy thereby increasing carbon dioxide emission. The results reported in this study raises an important question on the long-term effect of debt on the environment of a developing country like Ghana.…”

“…Bese et al (2021) estimated and found debt increases carbon emissions in China. Zhao and Liu (2022) recorded different effects of debt on carbon emissions based on the measurement of debt. For instance, while debt structure reduced carbon emissions for advanced countries, it was found to increase carbon emissions in emerging economies.…”

“…Despite the growing number of studies, the seemingly scarce of study for the case of Ghana and African countries on the current issue (Gyamfi, 2021;Joshua and Bekun, 2020) compared to studies on other developing and developed countries/regions regarding natural resources and carbon emission (Aeknarajindawat et al, 2020;Khan et al, 2020Khan et al, , 2021Balsalobre-Lorente et al, 2018;Agboola et al, 2021) and debt and carbon dioxide emission (Bese et al, 2021;Zhao and Liu, 2022) necessitate further studies. Also, the potential non-linear relationship between debt and carbon emission has not been examined empirically yet.…”

“…The conclusion from many of these studies also suggests the need to empirically pay attention to other variables that have not been considered in the literature. It is therefore not surprising that the effect of natural resources and debt is gaining the attention of researchers in recent times (Atif et al, 2022;Boly et al, 2019;Zhao and Liu, 2022;Oludimu and Alola, 2022). Ghana, like many developing countries, has committed to addressing climate change by lowering the rate of carbon dioxide emissions.…”