GHG levels increase indefinitely. Capital grows initially but thereafter declines as climate change damage is realized. This scenario is also modeled and calibrated in DICE (see Nordhaus 2008).

Scenario 2 explores the effect of green bonds but does not include carbon taxation. In this scenario, investment in green infrastructure is immediately undertaken in the first stage and scheduled to be repaid by future generations in a second stage. While GHG levels drop, capital continues to accumulate, and a debt burden accumulates in the first time period, repaid by taxes in later time periods. Note that the two periods are modeled as consecutive stages, which do not overlap.

Scenario 3 introduces a carbon tax in addition to green bonds. The second stage of this scenario is similar to that of the second scenario, as carbon tax revenues fall in the shift to a greener economy. The third scenario (green bonds with complimentary carbon tax) reduces GHG emissions and allows for a higher steady-state level of capital, while minimizing debt repayment by the second generation, as bond repayment is phased in earlier. In this scenario, the transition to a low-carbon economy is accelerated in consecutive stages.

Initial values and model parameters at each stage are presented in Appendix B. We run the simulation for each scenario separately, but the results for scenarios 2 and 3 are presented together to facilitate a comparison of the two policy choices.

In the business-as-usual scenario, there is a brief period of economic growth, propped up through the continued use of carbon-intensive processes. After a short period however, the economic damages caused from the accumulated greenhouse gases lead to economic losses and a low steady-state capital accumulation. Greenhouse gas accumulations level off at a high level, as no transition is achieved.

Scenario 2 has two distinct phases: the green transition of the economy and the sustainable economy. During the greening phase, economic growth is accompanied by the accumulation of debt and the diminishing of greenhouse gas levels. This represents the transition from carbon-based fuels and production processes towards sustainable practices. Low-carbon infrastructure and technology requires investment and as it becomes more prevalent, greenhouse gases begin to dissipate from the atmosphere. In the absence of carbon taxation, the transition is paid by issuing debt. In the sustainable economy, economic production produces negligible emissions, and the debt accumulated during the transition period is re- paid. Over the course of the two phases, capital accumulation is maintained at elevated levels, greenhouse gases shrink to negligible levels, and debt accumulates for a time and is subsequently repaid entirely.

Scenario 3 mirrors the dynamics of Scenario 2 very closely, with the inclusion of a complimentary

> et al. (2015), this procedure allows solving models with finite time decision horizons, avoids the information requirements of infinite horizon models, allows for limited-information agents, and permits changes of stages and regimes in model variants. It also resembles human decision-making based on short-term interests instead of optimization over the long run or infinite horizon. We perceive the stages in scenarios 2 and 3 as separate regimes, in which thresholds for switching between the regimes are exogenous. We make several simplifying assumptions. Note that the switching time could also be a decision variable, but this approach is not pursued here. For a regime-switching model of this type, see Orlov et al. (2018). Another aspect not addressed in the model is a calculation of optimal levels of green bonds and tax rates as well as the endogenous regime-switching from one stage to another required to achieve emissions mitigation in the most welfare-improving manner. The model formulae and specifications are detailed in Appendix A.

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