Ontario’s government this week announced a plan to issue so-called “green bonds” to finance environmentally beneficial transit projects. While more details are still to come, as it stands this is a plan that lacks a purpose—and carries hidden dangers.
In the announcement Premier Kathleen Wynne describes a need to find new “revenue sources” to pay for public transit. Unless there is some wrinkle to the green bond plan that has yet to be revealed, this appears to be just a way for the province to load up on debt. Wynne may be using debt and revenue as synonyms, but they’re not—just as having your credit card limit raised is not a new source of income. (Mechanically speaking, the plan appears to be to have a third party certify transit projects as meeting a standard for being “green,” following which the government will issue bonds to finance those projects.)
So why not finance these projects with regular government debt, as governments have done for hundreds of years?
It is not as if Ontario is having problem finding takers for its debt and yields on the province’s bonds are competitive with other provinces. It is possible there is enough of a demand for “green” debt investments that the province can sell this debt for a higher price than it would get for non-green bonds, thereby reducing their borrowing costs. If so, then I would be highly supportive of the green bond plan, as lower borrowing costs would be a windfall for the province. However, there does not appear to be much evidence that the demand for these investments is sufficient to create a yield gap between green and non-green bonds; tellingly, the province has not attempted to provide any information showing that a yield gap exists.
It is tempting to think there’s still no harm in marketing green bonds even if they behave no differently from regular bonds, but in fact there are risks. At least two significant drawbacks come to mind:
- The third-party certification and disclosure processes for these bonds are not cost free and create an added level of bureaucracy that does not exist with regular bond issues. There are additional transaction costs in having the debt certified, marketing the debt as green and meeting the necessary disclosure requirements.
- It creates an artificial distinction between “good” and “bad” government debt. Transport Minister Glen Murray advocates green bonds as “debt with a purpose, and an outcome,” implying that regular provincial debt lacks a purpose and outcome. What if the next project that needs to be funded is not green, but is badly needed, such as a new school or hospital? We do ourselves no favours by stigmatizing government debt used to finance other worthwhile projects.
Ultimately these green bonds will only truly be successful if they allow the province to finance transit projects at a lower interest rate than would otherwise be the case. Given that the Finance Minister’s spokesperson has said, “[r]ates for green bonds are expected to be in line with our current borrowing rates,” I am not overly optimistic that the province has found a way to reduce its borrowing costs. But here’s one case where I hope to be proven wrong.
Mike Moffatt is an assistant professor in the Business, Economics and Public Policy group at the Richard Ivey School of Business, University of Western Ontario.