The name is bond...Green Bond: An instrument which has shaken and stirred clean project financing

Green bonds are a cheaper way to raise funds for environmental infrastructure investments that may be uneconomic using more expensive capital.

July 17, 2017 / 09:09 PM IST

After the Paris climate agreement in 2015, countries across the globe have ambitious targets to curb carbon emissions.

A major boost in green projects infrastructure has been budgeted by nations to decrease their dependency on fossil fuels and to adopt alternative sources of energy to meet growing power demand.

Though noble in nature, these targets are hard to achieve and financing of such long drawn projects, which offer limited profit margins, is a key issue.

Raising up to the challenge are something called green bonds. Below is an explainer on what these are and how they are helping the financing of clean projects.

What are green bonds?

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Green bonds are debt instruments where the capital raised is used exclusively to fund new and/or existing green projects such as renewable energy ventures, clean transportation systems etc.

Green bonds vs regular bonds: What’s the difference?

Green bonds are structured like any other traditional bonds but with a key difference; the proceeds from the issue must be used to support “green” projects.

What do Green Bonds fund?

As per the Climate Bonds Initiative (CBI), eligible projects may generally be classified under Energy, Energy Efficiency, Transport, Water, Waste Management, Land Use or Adaptation Infrastructure.

What are the benefits of green bonds?

Green bonds are a cheaper way to raise funds for environmental infrastructure investments that may be uneconomic using more expensive capital.

Considering the huge investment needed for green projects, existing traditional financing sources such as domestic bank loans may not be sufficient.

What is the green bond scenario in India?

India’s green bond market is still small. The Council on Energy, Environment and Water (CEEW) estimates that around USD 1.62 billion of green bonds were issued in India in 2016. Compared to the total issue of USD 81 billion that was issued globally, it’s a very small fraction.

India aims to install 175 GW of renewable energy by 2022, which will require an estimated USD 264 billion of investments. Green bonds could support deployment of renewable energy projects by providing broader access to domestic and foreign capital as well as better financing terms, including lower interest rates with longer lending terms.

How can policy action support green bonds?

Policy makers can provide several types of tax incentives to support green bond issuance. The incentives can be provided either to the investor or to the issuer. A few examples could be as follows:

-Tax credit bonds: Bond investors receive tax credits instead of interest payments, so issuers do not have to pay interest on their green bond issuances.

- Direct subsidy bonds: Bond issuers receive cash rebates from the government to subsidize their net interest payments.

-Tax exempt bonds: Investors are exempted from paying income tax on the interest they garner from green bonds.

Outlook

In the start of 2017, ratings agency Moody’s had estimated green bond issuance to jump to clock around USD 206 billion in 2017. After the first quarter of CY17, the agency has revised its forecast to USD 120 billion.

For Q1CY17, green bonds worth USD 29.5 billion were issued.

Sidhartha Shukla
first published: Jun 2, 2017 12:09 pm

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