The Effects of Financial Liberalization on Country‐Level Emissions

Abstract We use country‐level shocks and a difference‐in‐differences framework to study how financial market liberalization is related to country‐level carbon dioxide, overall greenhouse gas, and sulfur dioxide emissions. Liberalization increases the number of foreign institutional investors, which could lead to a decrease in firm pollution. Alternatively, liberalization increases the proportion of public firms in the economy, which may result in higher emissions. After correcting for Gross Domestic Product (GDP), liberalizations lead to economically large and statistically significant increases in emissions: a 21.7% increase in CO 2 emissions over 10 years. A placebo test suggests that the increase is due to corporate, not household, emission behavior.