Climate disasters are occurring with ever higher frequency, threatening the lives and livelihoods of millions of people worldwide. Climate risks not only cause sudden economic and social destruction, but can push countries onto a lower-growth path characterized by greater financial instability, fiscal constraints, and poverty traps. This is especially true for more vulnerable developing countries, many of which have been hardest hit by the economic impacts of COVID-19.

In responding to the threats of global warming and climate risks, governments must use a full suite of tools. Fiscal policy can play an essential role. This report makes an important contribution to our understanding of which fiscal policies work best and can be a guide to policy makers as they consider the most effective ways to achieve a low-carbon future. The report finds clear evidence that green bonds can support carbon taxation by acting as a bridge financing instrument, smoothing the path toward a low-carbon transition and overcoming financial market practitioners’ and governments’ short-termism…