The Effects of Financial Liberalization on Country-Level Emissions

Two literatures predict opposite things about what happens to a country’s pollution when it opens its equity market to foreign investors. Foreign institutional investors have been shown to push firms toward better environmental performance; but liberalization also enlarges the publicly traded share of the economy, and public firms have been shown to pollute more than otherwise similar private ones. The authors put these against each other as competing hypotheses using the 41 countries that liberalized between 1983 and 1999 in Bekaert, Harvey, and Lundblad’s (2005) coding, country-level emissions from the EDGAR database, and a staggered difference-in-differences design using the Callaway and Sant’Anna (2021) estimator with country and year fixed effects, controlling for log GDP, log population, temperature deviation, corporate governance reforms and mandatory environmental disclosure. Emissions rise: on their most conservative estimates, liberalization is associated with a 13.8% increase in carbon dioxide emissions over the following 5 years and 21.7% over 10 years, with greenhouse gases up 8.8% and 15.0% and sulfur dioxide up 8.3% and 16.8% over the same windows. A placebo test on residential and other small-source emissions finds no significant effect, which the authors read as consistent with the increase coming from corporate rather than household behavior and therefore with the public-firm expansion channel rather than with overall economic growth. The design identifies the effect of these particular liberalization episodes in the 1980s and 1990s, a period when, as the authors note, global warming was a less salient issue for institutional investors — though they also observe that sulfur dioxide was already a significant concern then and foreign investors did not curb it — and they report that some pre-treatment periods are significantly positive, while describing those pre-treatment effects as economically small.

Kim Ceulemans | Macro Paper Warehouse

The Effects of Financial Liberalization on Country-Level Emissions