Journal of Applied Finance & Banking

Making Green Bonds Greener: Proposals to Increase the Efficiency of Green Bonds

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  • Abstract

     

    The Paris Climate Agreement requires tremendous investments into a radically new energy supply, into buildings, transport, mobility and climate-resilience. It was estimated that between USD 5 and 7 trillion of public and private capital would have to be raised each year between now and 2050. Green Bonds are hoped to become one of the main financial vehicles to generate this amount of capital. The Green Bond market, so far, has not been able to stimulate additional green investments. To change this pattern, this paper presents several proposals. The most important one is to implement a disagio in the repayment of the principal if the investment has led to a reduction in greenhouse gas emissions. The value of this reduction would be determined by the market prices for emission certificates. With this mechanism an existing market for certificates could be easily exported into countries that do not have such a market. High multiplier effects from climate mitigation investments could be expected so that these disagio payments would finance themselves. Other important proposals are a support for asset-backed and covered bonds, a credible third-party certification of the greenness of a bond and a clarification of the criteria to determine a Green Bond.

     

    JEL classification numbers: G23, G24, G28.

    Keywords: Sustainable finance, Green bonds, Carbon markets, Emission rights, Multiplier effects.