Governmental incentives for green bonds investment

TL;DR

This paper develops a model for government incentives to promote green bond investments, demonstrating that optimized, index-based incentives outperform traditional tax systems in increasing green bond holdings.

Contribution

It introduces a novel incentive scheme based on bond prices and variations, improving green investment strategies over existing tax incentives.

Findings

Optimized incentives outperform current tax systems in simulations.

Method is robust across different bond price models.

Applicable to large portfolios using standard optimization techniques.

Abstract

Motivated by the recent studies on the green bond market, we build a model in which an investor trades on a portfolio of green and conventional bonds, both issued by the same governmental entity. The government provides incentives to the bondholder in order to increase the amount invested in green bonds. These incentives are, optimally, indexed on the prices of the bonds, their quadratic variation and covariation. We show numerically on a set of French governmental bonds that our methodology outperforms the current tax-incentives systems in terms of green investments. Moreover, it is robust to model specification for bond prices and can be applied to a large portfolio of bonds using classical optimisation methods.