As climate impacts worsen, countries will require more focused approaches to capital borrowing and deployment aimed at reducing emissions, increasing renewable energy distribution, and other climate mitigation and adaptation options, as well as creating long-term green jobs for a stable economy.
Recovery bonds bind a country’s borrowing to a specific capital allocation, allowing for a low-carbon, long-term recovery that combines economic, social, and environmental goals. This report focuses on two types of bonds: sovereign green bonds issued as part of recovery-related issuances, and bonds related to fossil fuel subsidy reform (FFSR).
Sovereign Green Bonds
Sovereign green recovery bonds are similar to typical green bonds in that the revenues are used to fund qualified projects with environmental or climatic advantages, but they are issued by national or subnational governments to fund a long-term recovery.
Countries might also use them to show their commitment to long-term economic recovery and long-term improvements associated with sustainable growth. Investors in sovereign green bonds typically seek reasonably safe assets that are also environmentally good. Most common investors are Pension funds, life insurance funds, commercial banks, central banks, and debt funds.
Green bonds are also in high demand among official institutions. Central banks are the most important of them, with worldwide foreign currency reserves of USD 12.7 trillion in 2020.
Steps in Issuing a Sovereign Green Bond
The steps involved in issuing a sovereign green bond which includes:
- Market exploration
- Post-issuance Stages
Solar power plants, canal maintenance, landscape conservation, and trash management have all been funded through previous sovereign green bonds. Since 2016, 20 sovereign green bonds totaling USD 89.7 billion have been issued in response to strong investor interest.
Fossil Fuel Subsidy Reform (FFSR) Bond
In a Fossil Fuel Subsidy Reform (FFSR) Bond, a government pledges to FFSR and cuts (if not removes) fossil fuel consumption subsidies. According to the International Energy Agency (IEA), the world spends USD 320 billion on fossil fuel subsidies (FFS) each year, virtually all of it on consumption in emerging nations.
Proceeds from such a bond might be used for green activities, much like a standard green bond, but they might also be used to fund other needs, such as strengthening a country’s safety net or building health infrastructure.
There are various economic and environmental benefits to phasing out FFS:
- World fossil fuel subsidies were responsible for 36% of global carbon emissions between 1980 and 2010. If adopted immediately, FFSR has the potential to cut world carbon emissions by 6.4 percent by 2050.
- FFSR can result in significant financial rewards. It has the potential to generate USD 3.2 trillion in income on a worldwide scale.
- FFSR may boost investment in greener technology.
- FFSR has the potential to improve social wellbeing. According to the International Monetary Fund, just 7% of the FFS benefit reached the lowest 20% of the population in developing nations.
- FFSR might reduce the danger of stranded assets by directing more resources toward renewable energy projects rather than fossil fuel initiatives.
Steps in issuing a fossil fuel subsidy reform bond
The steps involved in issuing a fossil fuel subsidy reform which includes:
- Undertake Fossil Fuel Subsidy Reforms
- Post Issuance
For the market opportunity for FFSR bonds, there are three key conditions to consider:
- The amount of FFS that might realistically be phased out
- The country’s alignment with the FFSR
- The availability and availability to a sufficient financial market to allow the issuing of FFSR bonds.
To date, no country has yet issued an FFSR bond. Estimating the proper energy pricing and subsidies, controlling the impact of changes on present and future energy costs as experienced by consumers, and developing political and social support are all known issues for FFSR bonds.
Although the contractual evolution of sovereign green recovery bonds and FFSR bonds differs, both yield a climate-beneficial result. While green bonds are concerned with the use of proceeds set aside for eligible projects, a bond tied to the removal of fossil fuel subsidies is concerned with how bondholders might be repaid.
Sovereign green recovery bonds work by reserving revenue for projects that improve the environment or the climate, such as renewable energy and energy efficiency, and are thus primed to maximise the economic multiplier impact.
The bond backed by fossil fuel subsidy reform might be a powerful tool for economic recovery, with the added benefit of making both the notional source of repayment and the use of revenues environmentally friendly.
Both sovereign green bonds and FFSR bonds provide a promising framework for providing long-term recovery funding. There are huge investment opportunities, as well as the opportunity to minimise reliance on fossil fuels, in critical industries such as renewable energy, clean water supply, and waste management.