Public debt burdens constrain a government's ability to address climate and environmental issues. We exploit China's local government debt restructuring in 2015 to investigate the green costs of debt overhang. We find that cities with heavier debt burdens prior to the swap experience larger improvements in air quality afterwards. These cities are also more likely to shift away from coal-fired power plants to clean energy ones. Polluting firms in these cities experience larger increases in environmental penalties and green patents. Alternative factors such as top-down environmental inspection and other city-level characteristics cannot fully explain the results. Our findings underscore the impact of financial constraints on local governments' tradeoff between economic and environmental outcomes.