Carbon Pricing Initiatives and Green Bonds: Are They Contributing to the Transition to a Low-Carbon Economy?

Abstract

High rates of carbon dioxide (CO2) emissions accumulating in the atmosphere are one of the root causes of climate change. Policymakers around the globe have implemented policies that seek to reduce emissions and prevent the worsening of global warming. Key instruments used to make the transition to a low-carbon economy include carbon pricing initiatives, such as carbon taxes and cap-and-trade policies, and, more recently, green bonds. Some theoretical models find that the combination of carbon pricing initiatives and green bonds allows intergenerational burden-sharing of the costs of addressing climate change and provides better results on emissions reductions than the separate use of these instruments. This thesis uses annual data for 148 countries between 1990 and 2018 to examine how the use of carbon pricing initiatives and green bonds relate to CO2 emissions. This paper makes four contributions. First, my study examines how two climate instruments, carbon pricing initiatives and green bonds, relate to CO2 emissions. Second, it empirically analyzes whether there are interaction effects of the two instruments on emissions. Third, it uses a more comprehensive database than previous research. And finally, it applies recently developed econometric diagnostic tests and estimator to deal with bias in two-way fixed effects estimations that arise from heterogeneous effects of policies. My results show that both instruments might contribute to the transition to a low-carbon economy. The implementation of nationwide carbon pricing initiatives is associated with a 10% reduction in CO2 emissions. Green bond issuances are associated with an 8% reduction in emissions. No statistically significant interaction effects between carbon pricing initiatives and green bonds were observed.