Green bonds, transition to a low-carbon economy, and intertemporal welfare allocation: Evidence from an extended DICE model

Sergey Orlov; Elena Rovenskaya; Julia Puaschunder; Willi Semmler; Sergey Orlov; Elena Rovenskaya; Julia Puaschunder; Willi Semmler

doi:10.3934/environsci.2024031

AIMS Environmental Science

2024, Volume 11, Issue 4: 628-648. doi: 10.3934/environsci.2024031

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Green bonds, transition to a low-carbon economy, and intertemporal welfare allocation: Evidence from an extended DICE model

1.
International Institute for Applied Systems Analysis, Schlossplatz 1, Laxenburg 2361, Austria, Present address: Faculty of Computational Mathematics and Cybernetics, Lomonosov Moscow State University, GSP-1, Leninskie Gory, Moscow 119991, Russia
2.
Faculty of Computational Mathematics and Cybernetics, Lomonosov Moscow State University, GSP-1, Leninskie Gory, Moscow 119991, Russia
3.
Columbia University, 116th and Broadway, New York, NY 10027, United States
4.
Hamburg University, Institute of Law & Economics, Alsterterrasse 1, Hamburg 20354, Germany
5.
The New School for Social Research, 6 East 16th Street, New York, NY 10003, USA
6.
Bielefeld University, Universitätsstrasse 25, Bielefeld 33615, Germany

Received: 25 March 2024 Revised: 19 June 2024 Accepted: 25 June 2024 Published: 13 August 2024

Short-term reductions in social welfare, expected to be caused by a currently imposed carbon tax, are among the obstacles to a rapid transition to a low-carbon economy. Using an extended DICE model, we studied the potential of green bonds to both accelerate this transition and smoothen welfare losses and gains in a socially optimal way. We showed that green bonds can indeed accelerate the transition to a low-carbon economy and that lower interest rates on bonds speed up this acceleration. Moreover, bonds can reduce short-term welfare losses; however, to eliminate welfare losses, additional compensation mechanisms are needed. For example, bonds at a 3% interest rate can decrease the peak atmospheric carbon concentrations by about 20% and shorten the initial time, during which society is worse off from 75 to 45 years. Retaining at least the same consumption level as in the no-mitigation scenario, without using bonds, is possible only through a decrease in abatement efforts. Green bonds of sufficiently low interest rates allow improving intertemporal welfare as well as achieving a more pronounced climate change mitigation with respect to both mitigation and no-mitigation scenarios without bonds.
- climate change mitigation,
- green bonds,
- intertemporal welfare allocation,
- welfare optimization,
- DICE model
Citation: Sergey Orlov, Elena Rovenskaya, Julia Puaschunder, Willi Semmler. Green bonds, transition to a low-carbon economy, and intertemporal welfare allocation: Evidence from an extended DICE model[J]. AIMS Environmental Science, 2024, 11(4): 628-648. doi: 10.3934/environsci.2024031

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Abstract

Short-term reductions in social welfare, expected to be caused by a currently imposed carbon tax, are among the obstacles to a rapid transition to a low-carbon economy. Using an extended DICE model, we studied the potential of green bonds to both accelerate this transition and smoothen welfare losses and gains in a socially optimal way. We showed that green bonds can indeed accelerate the transition to a low-carbon economy and that lower interest rates on bonds speed up this acceleration. Moreover, bonds can reduce short-term welfare losses; however, to eliminate welfare losses, additional compensation mechanisms are needed. For example, bonds at a 3% interest rate can decrease the peak atmospheric carbon concentrations by about 20% and shorten the initial time, during which society is worse off from 75 to 45 years. Retaining at least the same consumption level as in the no-mitigation scenario, without using bonds, is possible only through a decrease in abatement efforts. Green bonds of sufficiently low interest rates allow improving intertemporal welfare as well as achieving a more pronounced climate change mitigation with respect to both mitigation and no-mitigation scenarios without bonds.

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