Fiscal Sustainability of Transition Finance: Implications for the GX Economy Transition Bonds in Japan

With growing concern about global warming, Green Transformation (GX) is becoming one of the world's biggest policy issues. This paper explores the feasibility of GX from a public finance perspective. Japan is the first country to issue the government-sponsored transition bonds, the GX Economy Transition Bonds. The bonds are designed to subsidize large-scale GX investments, with the future carbon pricing (CP) serving as the source of repayment. We investigate sustainability of the GX Economy Transition Bonds using the two-sector endogenous growth model that consists of dirty and clean sectors. Our simulation result shows that the optimal policy, which creates a virtuous cycle of economic and environmental progress, is unsustainable from a public finance perspective. Increasing the carbon tax rate would not improve the fiscal condition because of the Laffer curve. Decreasing the subsidy rate would improve the fiscal condition only if it sacrifices global warming. This implies that the government is facing a trilemma unless it finances the subsidies through other fiscal sources.