What is the green bonds program| Governments sell sovereign green bonds to raise money for projects that help the environment or deal with climate change. But investors may want to know more about things like interest rates, liquidity, and trading.
In November of last year, the government put out the rules for sovereign green bonds. After the New Year, on January 6, the central bank announced when these bonds would be sold. This article talks about how green bonds work and when they will be issued.
What are sovereign green bonds?
The World Bank says that a green bond is a type of debt security that is sold to raise money for the climate or environmental projects. Governments sell sovereign green bonds to raise money for these kinds of projects.
Finance Minister Nirmala Sitharaman said in the Union Budget for FY23 that the government will issue green bonds.
As part of the government’s overall market borrowings in 2022-23, sovereign Green Bonds will be issued to raise money for green infrastructure. The money will be used to fund projects in the public sector that help the economy use less carbon.
What are the parts of the framework?
The government’s framework is based on the listed principles for issuing green bonds by the International Capital Market Association. These principles have four parts: the use of proceeds, the evaluation and selection of projects, the management of proceeds, and reporting.
The government said that the money from the bonds will go to projects that:
- Get people to use less energy
- Lessen the number of carbon emissions and greenhouse gases
- Help people deal with climate change and/or adapt to it.
- Improve natural ecosystems and biodiversity, especially in line with the principles of sustainable development goals.
The framework listed investments in solar, wind, biomass, hydro, and urban mass transportation projects like metro rail, green buildings, and pollution prevention and control projects.
The government did not include projects that used fossil fuels, made nuclear power, or burned waste directly.
The eligible government spending is limited to spending that happened no more than 12 months before the certificate was issued. Within 24 months of selling the bonds, the money should be put towards projects.
If a green project that is eligible gets put off or canceled, it will be replaced by another green project that is eligible.
How will projects that help the environment be judged and reported?
The Ministry of Finance has put together a Green Finance Working Committee made up of relevant ministries and led by the chief economic adviser.
The ministries will give the committee their plans, and the committee will meet at least twice a year to look at the plans and decide how to move forward.
After the projects have been evaluated, the final list will be given to the budget division of the ministry of finance. The division will then sell the bonds through the Reserve Bank of India, and the money from the sales will be used to pay for the chosen projects.
The government will put out an annual report on how green projects were chosen, how much money was spent on them, and how they affected the greening of the economy.
It will also keep a Green Register with information about the green bonds issued, how much money was made, where the money went, and what projects were eligible.
Besides green bonds, the government will also pay for green projects with tax money.
How are green bonds going to be made?
The government will tell the RBI how much green spending is allowed and how much money needs to come from green bonds. The government set aside Rs 16,000 crore for green bonds for FY23.
The RBI puts out a schedule every six months of how much the government will borrow from bonds. The government released the plan in November 2022, so the central bank put out the calendar in January.
The green bonds will be added to the general calendar next year.
The RBI calendar shows that the government plans to sell bonds on January 25 and February 9 in two parts of Rs 8,000 crore each.
The bonds will have terms of five and ten years, and they can be bought and sold like other government bonds.
What parts of green bonds are not clear?
The first problem is to keep these bonds liquid and allow them to be traded. The RBI said that green bonds will be eligible for statutory liquidity ratio and repo transactions.
These steps will help to keep the market for these bonds liquid and allow them to be traded.
Another way to make sure there is enough cash is to issue twin bonds like Denmark did. Under this system, two bonds that are the same and can be traded for each other are issued.
This lets investors switch from one bond to the other, which makes the market more liquid and encourages more trading. Earlier, the government and the RBI used the twin bond method to make market stabilization bonds.
The second thing is how much interest these bonds pay. Will investors pay more or less for green bonds than for other bonds with the same maturity?
The difference in price between green bonds and regular bonds has been called “geranium” by the markets.
The first green bonds were put out in 2016, and early research showed that the people who put them out get a small premium.
Economists at the US Federal Reserve have found that the yield spread on corporate green bonds is 8 basis points lower than the yield spread on regular bonds.
Will the government make a lot of money from green bonds?
First, investors will want to know more about green projects. At first, there could be a “green discount” because investors won’t know how things like liquidity and traceability will work.
The third part is to make sure that green bonds stay a part of the budget and the overall borrowing plan.
The government has often used these kinds of thematic bonds outside of the balance sheet, which makes it hard to get an accurate picture of how much it has borrowed and how much it owes.
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