Green bonds, transition to a low-carbon economy, and intergenerational fairness: Evidence from an extended DICE model

Orlov, S., Rovenskaya, E. ORCID: https://orcid.org/0000-0002-2761-3443, Puaschunder, J., & Semmler, W. (2018). Green bonds, transition to a low-carbon economy, and intergenerational fairness: Evidence from an extended DICE model. IIASA Working Paper. IIASA, Laxenburg, Austria: WP-18-001

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Abstract

Perceived intergenerational unfairness is one of the obstacles for a rapid transition to a low carbon economy whereby current generations have to carry the burden of paying for mitigation, while the next generations will enjoy the benefits for free. Green bonds are believed to be able to distribute the burdens over generations more evenly. In this paper, we examine whether green bonds can indeed resolve the intergenerational inequity challenge. To do so, we employ the DICE model and supplement it with bonds and green tax through which future generations repay the debt. We show that bonds can reduce but cannot completely eliminate the intergenerational inequities. Lower interest rates shorten the initial time period when the society is worse off if a mitigation policy is implemented. Additional compensation mechanisms ensuring that the current generation retains the consumption level equal to the one without mitigation are needed to achieve a Pareto improvement of the mitigation scenario for all generations.

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