Green Bonds, Transition to a Low-Carbon Economy, and Intergenerational Fairness: Evidence from an Extended DICE Model

30 Pages Posted: 7 Nov 2018

See all articles by Sergey Orlov

Sergey Orlov

International Institute for Applied Systems Analysis (IIASA); Moscow State University - Faculty of Computational Mathematics and Cybernetics

Elena Rovenskaya

International Institute for Applied Systems Analysis (IIASA)

Julia M. Puaschunder

Harvard University; New School for Social Research; Columbia University; Princeton University; George Washington University Center for International Business Education and Research; The New School - Bernard Schwartz Center for Economic Policy Analysis (CEPA)

Willi Semmler

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

Date Written: December 12, 2017

Abstract

Perceived intergenerational unfairness is one of the obstacles for a rapid transition to a low carbon economy whereby current generations have to carry the burden of paying for mitigation, while the next generations will enjoy the benefits for free. Green bonds are believed to be able to distribute the burdens over generations more evenly. In this paper, we examine whether green bonds can indeed resolve the intergenerational inequity challenge. To do so, we employ the DICE model and supplement it with bonds and green tax through which future generations repay the debt. We show that bonds can reduce but cannot completely eliminate the intergenerational inequities. Lower interest rates shorten the initial time period when the society is worse off if a mitigation policy is implemented. Additional compensation mechanisms ensuring that the current generation retains the consumption level equal to the one without mitigation are needed to achieve a Pareto improvement of the mitigation scenario for all generations.

Keywords: climate change mitigation, green bonds, green tax, intergenerational fairness, dice model

JEL Classification: H23, O44, Q54

Suggested Citation

Orlov, Sergey and Rovenskaya, Elena and Puaschunder, Julia M. and Semmler, Willi, Green Bonds, Transition to a Low-Carbon Economy, and Intergenerational Fairness: Evidence from an Extended DICE Model (December 12, 2017). Available at SSRN: https://ssrn.com/abstract=3086483 or http://dx.doi.org/10.2139/ssrn.3086483

Sergey Orlov (Contact Author)

International Institute for Applied Systems Analysis (IIASA) ( email )

Schlossplatz 1
Laxenburg, A-2361
Austria

Moscow State University - Faculty of Computational Mathematics and Cybernetics ( email )

Moscow, 119991
Russia

Elena Rovenskaya

International Institute for Applied Systems Analysis (IIASA) ( email )

Schlossplatz 1
Laxenburg, A-2361
Austria

Julia M. Puaschunder

Harvard University ( email )

24 Oxford Street
Cambridge, MA 02138
United States

New School for Social Research ( email )

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New York, NY 10003
United States

Columbia University ( email )

3022 Broadway
New York, NY 10027
United States

Princeton University ( email )

22 Chambers Street
Princeton, NJ 08544-0708
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George Washington University Center for International Business Education and Research ( email )

2023 G Street NW
Washington, DC 20052
United States

The New School - Bernard Schwartz Center for Economic Policy Analysis (CEPA) ( email )

80 Fifth Ave.
5th Floor
New York, NY 10027
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 )

Universit├Ątsstra├če 25
Bielefeld, NRW
Germany

IIASA ( email )

Schlossplatz 1
Laxenburg/Austria, A-2361
Austria

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