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Financing Climate Policies Through Climate Bonds

Michael Flaherty, Arkady Gevorkyan, Siavash Radpour () and Willi Semmler ()

No 2016-03, SCEPA working paper series. SCEPA's main areas of research are macroeconomic policy, inequality and poverty, and globalization. from Schwartz Center for Economic Policy Analysis (SCEPA), The New School

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 disccussed 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 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 NPMC 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: Cimate Bonds; Finance; NMPC (search for similar items in EconPapers)
JEL-codes: Q54 F37 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ene and nep-env
Date: 2016-03
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