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

Abstract

Purpose

The 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/approach

To 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.

Findings

The 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 implications

The 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/value

This 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.

Citation

Arshad, A., Parveen, S. and Mir, F.N. (2024), "The role of green bonds in reducing CO₂ emissions: a case of developing countries", Journal of Economic and Administrative Sciences, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/JEAS-09-2023-0242