In addition to economic efficiency, combining carbon pricing with green bonds is more politically feasible. The introduction of carbon pricing continues to be far too slow to meet the internationallyagreed objective of limiting climate change to well below 2°C, and this delayed policy action causes significant economic harm. Stabilizing the climate later is dramatically more expensive than it would be earlier. If a sufficient level of carbon pricing is currently politically unattainable, it is better to use secondbest policy instruments than to do too little too late. Where policy makers shy away from incurring shortterm costs for long-term gains, bonds could make climate policy incentive-compatible by shifting some of the costs of today’s climate policy into the future (Sachs 2015).

Such a shift reduces problems of intergenerational equity. Climate policy invariably involves intergenerational transfers; the mitigation of emissions today benefits future generations. The current generation may then wish to let future generations share in the cost of today’s efforts. Green bonds, especially government issuances with longer maturities, are an instrument for achieving such burdensharing when they are used to finance today’s mitigation actions and are repaid by future generations. Such burden-sharing is Pareto superior to a business-as-usual scenario with insufficient mitigation today (Sachs 2015, Orlov et al. 2018).

Notwithstanding these potential benefits, the use of green bonds can be problematic in countries with existing high public or private debt. Debt levels are rising in many low-income countries (Essl et al. 2019), and in such circumstances it is optimal for climate policy to be financed by taxation or budget reallocation instead of deficit spending (Forni et al. 2019). However, the greatest mitigation effort should be borne by the largest carbon emitters, which are mostly high and middle-income countries that have already issued green bonds.<sup>10</sup> And public debt levels are presently a smaller concern in that income group (Blanchard 2019), suggesting that for countries with sufficient fiscal space, green bonds might help improve the climate policy mix.

The relation of green bonds to debt levels also depends on their cost relative to traditional bonds. A critique has been that green bonds may be more expensive than conventional bonds and thus raise debt. But this finding may be driven by sample selection bias. To evaluate climate financing strategies, it is important to control for the types of investment projects and investor characteristics when comparing yields of green and vanilla bonds. The relevant point of comparison for a country which is considering the use of green bonds for financing climate projects is the yield of vanilla bonds that are used in financing these same climate projects, and not the yield of conventional bonds averaged across the broader market. With these controls, green bonds are paying lower yields (Flammer 2018; Baker at al. 2018; Karpf and Mandel, 2018, Partridge and Medda, 2018). So, given that a country is seeking to finance investments in its climate transition, green bonds appear cheaper than vanilla bonds. There is also evidence that the act of certifying a green bond through a third party reduces its yield (Bachelet et al. 2019) and that

> invested in adaptation projects. The authors also analyze the Bloomberg Green Bonds Database and find that only 2% of the certified issuers (from 2010 to 2018) declared that the volume leveraged should be used only for adaptation projects. The expected use of proceeds of each certified green bond is published by a third-party report at the time of issuance. 10Among the largest emitters, the Russian Federation was the last country to enter the green bond market in January 2019.

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