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Financing Climate Policies Through Climate Bonds

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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.

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  • Michael Flaherty & Arkady Gevorkyan & Siavash Radpour & Willi Semmler, 2016. "Financing Climate Policies Through Climate Bonds," SCEPA working paper series. SCEPA's main areas of research are macroeconomic policy, inequality and poverty, and globalization. 2016-03, Schwartz Center for Economic Policy Analysis (SCEPA), The New School.
  • Handle: RePEc:epa:cepawp:2016-03
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    File URL: http://www.economicpolicyresearch.org/images/docs/research/climate_change/2016-3_Financing_Climate_Policies_through_Climate_Bonds.pdf
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    References listed on IDEAS

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    1. Harold L. Cole & Timothy J. Kehoe, 2000. "Self-Fulfilling Debt Crises," Review of Economic Studies, Oxford University Press, vol. 67(1), pages 91-116.
    2. Rabah Arezki & Patrick Bolton & Sanjay Peters & Frederic Samama & Joseph Stiglitz, 2016. "From Global Savings Glut to Financing Infrastructure; The Advent of Investment Platforms," IMF Working Papers 16/18, International Monetary Fund.
    3. Semmler, Willi, 2015. "The Oxford Handbook of the Macroeconomics of Global Warming," OUP Catalogue, Oxford University Press, number 9780199856978 edited by Bernard, Lucas.
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    Cited by:

    1. Francesco Saraceno, 2016. "When Keynes goes to Brussels : a new fiscal rule for the EMU," Sciences Po publications 2016-32, Sciences Po.
    2. Bizer, Kilian & Erlei, Alexander, 2018. "Ein intertemporaler Klimaschutzfonds zur Gebäudesanierung," Center for European, Governance and Economic Development Research Discussion Papers 342, University of Goettingen, Department of Economics.
    3. Anthony Bonen & Prakash Loungani & Willi Semmler & Sebastian Koch, 2016. "Investing to Mitigate and Adapt to Climate Change; A Framework Model," IMF Working Papers 16/164, International Monetary Fund.
    4. Wulandaria, Febi & Schäfer, Dorothea & Stephan, Andreas & Sun, Chen, 2018. "Liquidity risk and yield spreads of green bonds," Ratio Working Papers 305, The Ratio Institute.

    More about this item

    Keywords

    Cimate Bonds; Finance; NMPC;

    JEL classification:

    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications

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