The green bond market is emerging as an impactful financing mechanism in climate change mitigation efforts. The effectiveness of the financial market for this transition to a low-carbon economy depends on attracting investors and removing financial market roadblocks. This paper investigates the differential bond performance of green vs non-green bonds with (1) a dynamic portfolio model that integrates negative as well as positive externality effects and via (2) econometric analyses of aggregate green bond and corporate energy time-series indices; as well as a cross-sectional set of individual bonds issued between 1 January 2017, and 1 October 2020. The asset pricing model demonstrates that, in the long-run, the positive externalities of green bonds benefit the economy through positive social returns. We use a deterministic and a stochastic version of the dynamic portfolio approach to obtain model-driven results and evaluate those through our empirical evidence using harmonic estimations. The econometric analysis of this study focuses on volatility and the risk–return performance (Sharpe ratio) of green and non-green bonds, and extends recent econometric studies that focused on yield differentials of green and non-green bonds. A modified Sharpe ratio analysis, cross-sectional methods, harmonic estimations, bond pairing estimations, as well as regression tree methodology, indicate that green bonds tend to show lower volatility and deliver superior Sharpe ratios (while the evidence for green premia is mixed). As a result, green bond investment can protect investors and portfolios from oil price and business cycle fluctuations, and stabilize portfolio returns and volatility. Policymakers are encouraged to make use of the financial benefits of green instruments and increase the financial flows towards sustainable economic activities to accelerate a low-carbon transition.

Carbon dioxide removal (CDR) has become a focal point for legislators and policymakers who are pursuing strategies for climate change mitigation. This paper employs a policy framework of collective biophysical need to examine two broad categories of CDR methods being subsidized and advanced by the United States and other countries: mechanical capture and biological sequestration. Using published data on these methods, we perform a biophysical input-outcome analysis, focusing on the U.S., and compare methods on the basis of three criteria: effectiveness at net carbon removal, efficiency at a climate-relevant scale, and beneficial and adverse co-impacts. Our findings indicate that biological methods have a superior return on resource inputs in comparison to mechanical methods. Biological methods are both more effective and more resource efficient in achieving a climate-relevant scale of CO2 removal. Additionally, the co-impacts of biological methods are largely positive, while those of mechanical methods are negative. Biological methods are also far less expensive. Despite their disadvantages and a track record of failure to date, mechanical CDR methods continue to receive large subsidies from the US government while biological sequestration methods do not. To achieve more optimal CDR outcomes, policymakers should evaluate CDR methods’ effectiveness, efficiency, and biophysical co-impacts. We present tools for this purpose.

This chapter argues that a new, permanent EU fiscal capacity can contribute to meeting the green-transition challenges and providing countercyclical macroeconomic stabilisation. While the Recovery and Resilience Fund (RRF) is not large enough to address the current challenges, its introduction was an essential step forward in providing an operational blueprint for a permanent EU investment fund. The reform of EU fiscal rules is set to provide insufficient scope for the additional public climate investment required to meet the climate targets. Furthermore, the EU sovereignty fund proposed by the European Commission in the form of the Strategic Technologies for Europe Platform (STEP) adds little new money, focuses on green-tech subsidies instead of public investment, and falls short of providing a realistic vision of meeting public investment