Blog Post

Redefining European Union green bonds: from greening projects to greening policies

European Union green bonds, as promised by European Commission president Ursula von der Leyen, might be better linked to the bloc's achievement of its climate goals, rather than project-by-project green criteria.

By: Date: September 21, 2020 Topic: Energy & Climate

In her first State of the Union speech (16 September), European Commission President Ursula von der Leyen set a target of raising through green bonds 30% of the up to €750 billion that will be borrowed under the Next Generation EU recovery fund. Such large-scale EU green bonds issuance could reduce interest rates and contribute to kick-starting a global green bond market based on European rules.

The challenge, however, is to ensure that EU green bonds really are green. The standard approach is that green bonds should be earmarked for green projects that can conform to pre-defined ‘greenness’ criteria. But this is not straightforward because much of the Next Generation EU money will be spent by EU countries, which might find it quite intrusive if the European Commission stringently assesses each national-level spending decision. Furthermore, it remains difficult to determine what counts as green and what counts as additional spending. The assessment process would likely slow the speed of implementation – with speed being essential for an effective recovery programme.

One solution would be to link the green bonds to more general environmental and climate policy outcomes, rather than to the specific deployment of each individual euro. Thus, if the EU underperforms against a specific climate-related performance indicator, the bonds would pay proportionally higher interest, in effect penalising the EU for being too loose on climate policy. A performance indicator could be emissions under the EU emissions trading system. They are precisely measured, represent a significant part of EU emissions, and the EU has control over meeting the target.

This would have a number of advantages. Unlike assessing the greenness of each project, the administrative cost of ensuring the ‘greenness of a bond’ would be essentially zero. As the number of eligible projects is not limited, many more bonds might be generated quickly. Moreover, all sorts of complex issues of double-counting, policy overlaps and crowding-out, which are linked to project-based green bonds, would be avoided. Hence, the environmental integrity of pollution-linked bonds would be greater than that of individual project-based bonds – the whole would be greater than the sum of the parts. Such bonds could legitimately be called green as they would represent a strong financial commitment on the part of the EU that it will achieve its ambitious climate targets. Finally, if the case can be made convincingly, ethical investors might be willing to accept lower interest rates for these bonds, as long as the EU meets its ambitious targets.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

Read about event
 

Past Event

Past Event

Green bonds and green finance innovation

Invitation-only event to discuss innovations in green finance and sovereign and EU issuance of green bonds

Speakers: Dion Bongaerts, Niall Bohan, Monica Girardi, Zoe Knight, Moritz Kraemer, Alexander Lehmann, Michael Mainelli, Lucia Silva and Alexandre Vincent Topic: Energy & Climate, Finance & Financial Regulation Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: January 26, 2021
Read about event More on this topic
 

Upcoming Event

Feb
3
14:00

The geopolitics of the Green Deal

Join us to mark the launch of the eponymous paper co-written with the European Council on Foreign Relations.

Speakers: Anne Bergenfelt, Mark Leonard, Simone Tagliapietra and Guntram B. Wolff Topic: Energy & Climate Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read about event
 

Upcoming Event

Feb
4
13:00

Carbon Border Adjustment Mechanism: Greening the EU trade?

Assessing CBAM from a trade perspective.

Speakers: Luis Garicano, Emily Lydgate and André Sapir Topic: Energy & Climate, Global Economics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read about event
 

Upcoming Event

Feb
11
12:00

Building back greener: sustainable finance and the Green Deal

How could additional regulation incentivise investment while upholding the integrity of sustainable finance?

Speakers: Klaas Knot, Alexander Lehmann, Isabelle Mateos y Lago and Sean Kidney Topic: Energy & Climate, Finance & Financial Regulation Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read article
 

Opinion

A green industrial policy for Europe

A ‘green industrial policy’ able to promote economic growth, job creation and environmental goals altogether will be fundamental to Europe’s climate change ambitions.

By: Simone Tagliapietra and Reinhilde Veugelers Topic: Energy & Climate, Innovation & Competition Policy Date: January 13, 2021
Read article More on this topic More by this author
 

Podcast

Podcast

Green transformation: a Polish perspective

A conversation on green recovery with the Polish Minister of Climate and Environment, Michał Kurtyka

By: The Sound of Economics Topic: Energy & Climate Date: January 13, 2021
Read about event
 

Past Event

Past Event

A green industrial policy for Europe

The EU needs to develop a strong green industrial policy. What should Europe's strategy look like and how can we achieve it?

Speakers: Ann Mettler, Simone Tagliapietra and Reinhilde Veugelers Topic: Energy & Climate, European Macroeconomics & Governance, Innovation & Competition Policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: December 17, 2020
Read article Download PDF
 

Blueprint

A green industrial policy for Europe

This Blueprint examines how the European Union can develop a coherent green industrial policy that will serve the goals of the European Green Deal.

By: Simone Tagliapietra and Reinhilde Veugelers Topic: Energy & Climate, Innovation & Competition Policy Date: December 17, 2020
Read article More on this topic More by this author
 

Podcast

Podcast

The political economy of climate transition

Is the green deal a strategy for growth or simply a reallocation mechanism?

By: The Sound of Economics Topic: Energy & Climate Date: December 2, 2020
Read article Download PDF More on this topic
 

Working Paper

Understanding the European Union’s regional potential in low-carbon technologies

This research identifies existing and potential specialisation in green technologies in European Union regions, and proposes an approach to identify policies that can help to realise this potential.

By: Enrico Bergamini and Georg Zachmann Topic: Energy & Climate Date: November 26, 2020
Read article Download PDF
 

Policy Contribution

Green certificates: a better version of green bonds

"The current design of green bonds means they aren't fulfilling their potential. We propose an alternative: issuance of regular bonds with attached green certificates that ensure earmarking for green purposes. The new design would reduce financing costs and in turn would provide incentives to start a greater number of environmentally-friendly projects."

By: Dion Bongaerts and Dirk Schoenmaker Topic: Energy & Climate, Finance & Financial Regulation Date: November 26, 2020
Read article More on this topic
 

Blog Post

Targeted horizontal industrial policy: green, regional and European

Creating the conditions for the most promising low-carbon sectors to grow is the most efficient way to enable decarbonisation. As sector potential is regional and associated with regions' current strengths in related technologies, policy should aim to boost the growth potential of low-carbon technologies on a regional level.

By: Enrico Bergamini and Georg Zachmann Topic: Energy & Climate Date: November 23, 2020
Load more posts