De-risking of Green Investments through a Green Bond Market: Empirics and a Dynamic Model

48 Pages Posted: 22 Sep 2020

See all articles by Joao Braga

Joao Braga

New School for Social Research - Department of Economics

Willi Semmler

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

Dieter Grass

affiliation not provided to SSRN

Date Written: July 1, 2020

Abstract

A substantial increase of green investments is still required to reach the Paris Agreement's emission targets. Yet, capital markets to expedite green investments are generically constrained. Literature has shown that governments could de-risk such investments. Empirical beta pricing and yield estimates reveal some public involvement in the green bond market, especially for long maturity bonds. We provide empirical evidence that Governments and Multilateral organizations can de-risk green investments by supporting the issuance of green bonds in contrast to private green bonds - that show higher yields, volatility and beta prices - and conventional energy bonds, that are more volatile due to oil price variations. Since lower betas also mean lower capital costs, we use these empirical results and run a dynamic model with two types of firms, modeling the economic behavior of innovators (renewable energy firms) and incumbents (fossil fuel firms). The simulations of our model show that de-risked interest rates help to phase in renewable energy firms in the market and avoid a sharp debt increase. However, when the new entrants carry negative pay-offs for a longer time, it might not be sufficient to keep the debt low and to avoid a shake-out in the market. Subsidies and carbon taxation can complement the role of the de-risked interest rate and expedite the energy transition.

Keywords: green bonds, innovation, climate finance, de-risking

JEL Classification: C610, G120, 0380, Q580

Suggested Citation

Braga, Joao and Semmler, Willi and Grass, Dieter, De-risking of Green Investments through a Green Bond Market: Empirics and a Dynamic Model (July 1, 2020). Available at SSRN: https://ssrn.com/abstract=3669200 or http://dx.doi.org/10.2139/ssrn.3669200

Joao Braga (Contact Author)

New School for Social Research - 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 )

Universit├Ątsstra├če 25
Bielefeld, NRW
Germany

IIASA ( email )

Schlossplatz 1
Laxenburg/Austria, A-2361
Austria

Dieter Grass

affiliation not provided to SSRN ( email )

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