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Pricing Green Bonds Under Externalities: How do market signals and government intervention affect project emission reduction and bond pricing?

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  • Huang, Huiling
  • Tian, Yixiang

Abstract

Green bond pricing is distorted by unpriced positive externalities, leading to suboptimal investment. To correct this market failure, we develop an integrated framework that incorporates green reputation, carbon quota trading, and subsidies to internalize these externalities. We quantify operational boundaries for these policy instruments, establishing a prioritized market-led, trading-regulated, subsidy-supported intervention sequence. Numerical results reveal a clear hierarchy: for low-cost projects, reputation mechanisms are sufficient for effective pricing. For projects with moderate costs, carbon quota trading becomes the dominant mechanism, while subsidies provide essential support for the highest-cost projects. This suggests that effective pricing depends on a targeted approach, leveraging different market and policy instruments according to the cost structure.

Suggested Citation

  • Huang, Huiling & Tian, Yixiang, 2026. "Pricing Green Bonds Under Externalities: How do market signals and government intervention affect project emission reduction and bond pricing?," Finance Research Letters, Elsevier, vol. 92(C).
    • Handle: RePEc:eee:finlet:v:92:y:2026:i:c:s1544612326001108
    DOI: 10.1016/j.frl.2026.109579
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