Carbon pricing initiatives and green bonds: are they contributing to the transition to a low-carbon economy?

Transitioning to a low-carbon economy while promoting sustainable development requires behavioural changes and mobilization of significant investments. Key instruments being used for that include carbon pricing initiatives, such as carbon taxes and cap-and-trade policies, and, more recently, green bonds. Although the literature has provided some evidence on emission reduction associated with carbon pricing initiatives, there is a lack of investigations on the environmental performance of green bonds; and only theoretical models describe the potential benefits of combining both. Aiming to fill this gap, this study uses regression analysis and annual data for 150 countries between 1990 and 2019 to assess how carbon pricing initiatives and green bonds relate to carbon dioxide (CO2) emissions. This paper makes two main contributions. First, it examines how two climate instruments, carbon pricing and green bonds, relate to CO2 emissions. Previous research has focused only on individual instrument assessments and mainly on carbon pricing. Second, this paper empirically analyses whether there are interaction effects of the two instruments, an assessment not previously undertaken. The results suggest that the implementation of nationwide carbon pricing initiatives is associated with an 11% reduction in CO2 emissions on average. By comparison, green bond issuances are associated with an average 14% reduction in CO2 emissions. Further, no statistically significant interaction effects between carbon pricing initiatives and green bonds were observed. The results must be cautiously interpreted and cannot be attributed solely to the instruments studied since heterogeneous effects, biases from distinct sources, and the existence of complementary policies might influence the results.Carbon pricing initiatives, such as carbon taxes and cap-and-trade schemes, and green bonds are being used to promote the transition to a low-carbon economy.Investigation into green bonds and their impact on emissions is scarce and to date, only theoretical models analysed potential interaction effects of their combination with carbon pricing.The results show an average of 11% reduction in CO2 emissions associated with carbon pricing initiatives and of 14% reduction in CO2 emissions associated with green bonds issuances.While the results show promise in the emission reduction performance of these two instruments, caution in interpreting these results is advised as complementary policies, biases from distinct sources, and evidence of heterogeneous effects make it challenging to disentangle the effect of individual policies.