Quantitative Easing and Green Bonds – Should a Central Bank Be Involved in Fostering Transition Towards Low-Carbon Economy?

Abstract

Over the recent years, the discussions around climate change have started dominating the political sphere at different levels. The need to reduce the emissions of greenhouse gases as soon as possible has forced politicians and scholars to seek new ways of incentivising and financing zero- and low-emitting technologies along different sectors of a modern economy. One of such instruments is “green bonds” – debt instrument issued to finance projects that are considered to be environmentally friendly. These instruments can be issued by a government, international institution or private entities, offering fixed income to the investors. The article discusses the proposal to allow the central banks to purchase green bonds in course of their asset purchasing programmes and preferential treatment of these assets by prudential supervisors in order to enhance the investments in environmentally-friendly technologies. The aim is to evaluate whether preferential treatment of green bonds could increase the desired investment scope without jeopardising the statutory tasks of the central bank. Critical literature review on both the green bonds market and prudential supervision is presented. Available statistics are also reviewed in order to analyse the attractiveness of green bonds and the risk that may be associated with them. Early reactions of experts to the proposal of involving the central banks and prudential regulators in fostering the transition towards low-carbon economy are also reviewed before conclusions are drawn. The study results indicate that the credibility of green bonds may be undermined in a number of ways, potentially leading to major value losses of entire bond portfolios, which suggests that their preferential treatment is inadvisable from the perspective of financial stability.