Financing Low-Carbon Transitions Through Carbon Pricing and Green Bonds

24 Pages Posted: 21 Aug 2019

See all articles by Dirk Heine

Dirk Heine

Erasmus University Rotterdam (EUR) - Rotterdam Institute of Law and Economics; University of Hamburg - Institute of Law and Economics; University of Bologna - Department of Economics; World Bank, Macroeconomics, Trade and Investment Global Practice

Willi Semmler

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

Mariana Mazzucato

University of York - Social Policy Research Unit (SPRU); University of Sussex

Joao Paulo Braga

New School for Social Research

Arkady Gevorkyan

New School for Social Research; Federal Reserve Bank of Cleveland

Erin Kate Hayde

World Bank

Siavash Radpour

The New School - Department of Economics

Date Written: August 20, 2019

Abstract

To finance the transition to low-carbon economies required to mitigate climate change, countries are increasingly using a combination of carbon pricing and green bonds. This paper studies the reasoning behind such policy mixes and the economic interaction effects that result from these different policy instruments. The paper models these interactions using an inter-temporal model that proposes burden sharing between current and future generations. The issuance of green bonds helps to enable immediate investment in climate change mitigation and adaptation, and the bonds would be repaid by future generations in such a way that those who benefit from reduced future environmental damage share in the burden of financing the mitigation efforts undertaken today. The paper examines the effects of combining green bonds and carbon pricing in a three-phase model and uses a numerical solution procedure that allows for finite-horizon solutions and phase changes. The paper shows that green bonds perform better when they are combined with carbon pricing. The proposed policy option appears to be politically more feasible than a green transition based only on carbon pricing, and it is more prudent for debt sustainability than a green transition that relies overly on green bonds.

Keywords: Green Issues, Climate Change Mitigation and Green House Gases, Science of Climate Change, Climate Change and Environment, Climate Change and Health

Suggested Citation

Heine, Dirk and Semmler, Willi and Mazzucato, Mariana and Braga, Joao Paulo and Gevorkyan, Arkady and Hayde, Erin Kate and Radpour, Siavash, Financing Low-Carbon Transitions Through Carbon Pricing and Green Bonds (August 20, 2019). World Bank Policy Research Working Paper No. 8991. Available at SSRN: https://ssrn.com/abstract=3440367

Dirk Heine (Contact Author)

Erasmus University Rotterdam (EUR) - Rotterdam Institute of Law and Economics ( email )

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University of Hamburg - Institute of Law and Economics ( email )

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University of Bologna - Department of Economics ( email )

Strada Maggiore 45
Bologna, 40125
Italy

World Bank, Macroeconomics, Trade and Investment Global Practice ( email )

1818 H Street, NW
Washington, DC 20433
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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 )

Schlossplatz 1
Laxenburg/Austria, A-2361
Austria

Mariana Mazzucato

University of York - Social Policy Research Unit (SPRU) ( email )

United Kingdom

HOME PAGE: http://www.sussex.ac.uk/spru/people/peoplelists/person/111262

University of Sussex ( email )

Sussex House
Falmer
Brighton, Sussex BNI 9RH
United Kingdom

Joao Paulo Braga

New School for Social Research

6 East 16th Street
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

Erin Kate Hayde

World Bank

1818 H Street, NW
Washington, DC 20433
United States

Siavash Radpour

The New School - Department of Economics ( email )

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

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