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Summary: To finance the transition to low-carbon economies required to mitigate climate change, countries are increasingly using a combination of carbon pricing and green bonds. This paper studies the reasoning behind such policy mixes and the economic interaction effects that result from these different policy instruments. We model these interactions using an intertemporal model, related to Sachs (2015), which proposes a burden sharing between current and future generations. The issuance of green bonds helps to enable immediate investment in climate change mitigation and adaptation, and the bonds would be repaid by future generations in such a way that those who benefit from reduced future environmental damage share in the burden of financing mitigation efforts undertaken today. We examine the effects of combining green bonds and carbon pricing in a three-phase model. We are using a numerical solution procedure which allows for finite-horizon solutions and phase changes. We show that green bonds perform better when they are combined with carbon pricing. Our proposed policy option appears to be politically more feasible than a green transition based only on carbon pricing and is more prudent for debt sustainability than a green transition that relies overly on green bonds.

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This study explores macroeconomic implications of the sovereign bond rush that has been taking place in sub-Saharan Africa since 2006. The focus is on the sub-Saharan sovereign bond yields as proxies for the region's ability to raise new funds on international markets. Despite the subcontinent's tour-de-force entrance to the international bond market, this paper reveals that recent (since early 2000s) borrowing in foreign currency is not without macroeconomic risk. Empirically this paper finds that sovereign bond yields are significantly influenced by global volatility, commodity prices and global liquidity-all factors that are out of the control of the sub-Saharan economies in question. These findings suggest that portfolio repositioning by institutional investors prompted by improved growth prospects and implicit monetary policy tightening in the advanced economies or heightened risk perceptions, are likely to result in increased borrowing costs for the sub-Saharan bond issuers and affect their ability to raise funds in international markets. Furthermore, a change in borrowing costs might lead to higher debt-service costs and policy uncertainty, which in turn could lead to suboptimal investment levels and, ultimately, hinder economic development.