Financing Climate Policies through Climate Bonds – A Three Stage Model and Empirics

Research in International Business and Finance, Forthcoming

24 Pages Posted: 9 Dec 2016

See all articles by Michael Flaherty

Michael Flaherty

The New School - Department of Economics

Arkady Gevorkyan

New School for Social Research; Federal Reserve Bank of Cleveland

Siavash Radpour

The New School - Department of Economics

Willi Semmler

The New School - Department of Economics; Universitaet Bielefeld; IIASA

Date Written: May 30, 2016

Abstract

The funding of climate mitigation and adaptation policies has become an essential issue in climate negotiations. Emissions trading schemes (ETS) and carbon tax policies are widely discussed as viable mitigation strategies, the revenue from which might then be used for adaptation efforts. In most current models, the burden of enacting mitigation and adaptation policies falls on current generations. This paper expands on a recent article by Sachs (2014) that proposes intertemporal burden sharing, suggesting that implementation of climate policies would represent a Pareto improving strategy for both current and future generations. In particular, this paper proposes that green bonds (also referred to as climate bonds) represent an immediately implementable opportunity to initiate Sachs’ plan; the issuance of green bonds could fund immediate investment in climate mitigation such that the debt might be repaid by the future generations, those who benefit most from reduced environmental damages. The Sachs model is a discrete time overlapping generations model which we generalize and turn into a continuous time version exhibiting three major stages. We solve this three phase model by using a new numerical procedure called NMPC that allows for finite horizon solutions and phase changes. We show that the issued bonds can be repaid and the debt is sustainable within a finite time horizon. We also study econometrically whether the current macroeconomic environment is conducive to successfully phasing in such climate bonds.

Keywords: Climate Policies, Intertemporal Model, Continuous Time Model, Climate Bonds

Suggested Citation

Flaherty, Michael and Gevorkyan, Arkady and Radpour, Siavash and Semmler, Willi, Financing Climate Policies through Climate Bonds – A Three Stage Model and Empirics (May 30, 2016). Research in International Business and Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2881718 or http://dx.doi.org/10.2139/ssrn.2881718

Michael Flaherty (Contact Author)

The New School - Department of Economics ( email )

65 Fifth Avenue
New York, NY 10003
United States

Arkady Gevorkyan

New School for Social Research ( email )

6 East 16th Street
New York, NY 10003
United States

Federal Reserve Bank of Cleveland ( email )

East 6th & Superior
Cleveland, OH 44101-1387
United States

Siavash Radpour

The New School - Department of Economics ( email )

Room 1116
6 East 16th Street
New York, NY 10003
United States

Willi Semmler

The New School - Department of Economics ( email )

65 Fifth Avenue
New York, NY 10003
United States

HOME PAGE: http://www.newschool.edu/nssr/faculty/?id=4e54-6b79-4e41-3d3d

Universitaet Bielefeld ( email )

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Bielefeld, NRW
Germany

IIASA ( email )

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Austria

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