Green bonds as an instrument to finance low carbon transition

Abstract

The present paper examines the role that green bonds can play in financing the transition to low carbon economy. We first establish the need for central banks to respond to climate change challenges, and we present the main ways in which they can get involved. We explain why green bonds should be used as an instrument of choice for financing the low carbon transition, based first, on the theoretical argument of intergenerational burden sharing and second, on the practical need for large, long-term infrastructure investments. After defining green bonds, we present their main characteristics. We then summarize the main developments in the green bonds market during the last decade. We conclude by presenting existing challenges and barriers and ways to overcome them so that the green bonds market develops further.