Finance and Pollution: Do Credit Conditions Affect Toxic Emissions?

Abstract: We evaluate the impact of credit conditions on firms’ emissions of toxic pollutants. There are differing influences: tighter credit might (a) stifle firm production, reducing toxic emissions, (b) induce firms to economize on non-core business functions, such as pollution abatement, increasing pollution; (c) have no effect on pollution if environmental regulations bind. Using four identification strategies, we find that shocks that tighten a firm’s credit conditions increase its emissions of toxic pollutants, and those that ease a firm’s access to credit reduce its toxic emissions. The estimates suggest that finance exerts a large impact on firms’ emissions of toxic pollutants.

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