The role of green bonds in reducing CO2 emissions: a case of developing countries

Abstract

PurposeThe global economy is growing very fast, and it is also facing environmental challenges. Due to increased economic activities, global warming is rising as a result of greenhouse gas emissions. Concepts like green finance and green investments are emerging to battle climate issues. The present study empirically examines the impact of green bonds on carbon dioxide (CO2) emissions in developing countries, as these countries are producing 63% of CO2 emissions around the globe.Design/methodology/approachTo check this impact, pooled ordinary least squares (OLS), fixed effect and generalized method of moments (GMM) techniques are applied using the annual data of 65 developing countries from 2008 through 2021.FindingsThe results indicate that the overall effect of green bonds on CO2 emissions is negative, as more issuance of green bonds reduces CO2 emissions, confirming results from the existing empirical literature. The study found that more foreign direct investment (FDI) and urbanization lead to more CO2 emissions, while increase in trade openness helps reduce CO2 emissions. It was found that promoting green bonds will help to promote environmentally friendly projects that will help to reduce CO2 emissions. Rapid urbanization has led to more energy demand for various industries like manufacturing, transportation and residential sectors, which leads to more CO2 emissions.Practical implicationsThe policymakers in these countries should make policies that help in reducing carbon emission by increasing green bonds and FDI in supporting projects that are environmentally friendly. Therefore, to mitigate such current and future issues, policymakers in developing countries need to give serious attention to this area to fulfill sustainable development goals.Originality/valueThis study presents a pioneering examination of green bonds and CO2 emissions in 65 lower- and middle-income countries (developing countries). We have tried to cover all developing countries that are causing more greenhouse gas emissions and need to shift to green finance strategies. It will be a contribution to the body of knowledge regarding the role of green bonds in reducing CO2 emissions. The present study will help in assessing the importance of green bonds in bringing low-carbon economies.