Slide 1

Policy Performance Bonds

Policy performance bonds are a simple, and somewhat subversive, idea that yet might encourage governments to deliver on their policies. In the case of carbon emissions reduction targets, for example, a policy performance bond (also called index-linked carbon bond) is a government issued bond where, in its simplest form, interest payments are linked to the actual greenhouse gas emissions of the issuing country against published targets. An investor in this bond receives an excess return if the issuing country’s emissions are above the government’s published target.

A policy performance bond thus provides a hedge against the issuing country’s government not delivering on its commitments or targets. Policy performance bonds can be issued against carbon emissions reduction targets but also forest preservation targets and any other area where policy risk is significant. In the case of index-linked carbon bonds, the ability to hedge enables the same investor to invest more confidently in projects or technologies that pay off in a low-carbon future because if the low-carbon future fails to arrive the government too bears direct costs of having to pay higher interest rates on government debt. Index-linked carbon bonds eliminate the one risk that differentiates clean tech projects from other energy projects, the uncertainty of government policy actually being directed at a low carbon future. Examples of potential indices that address this unique risk are:

  • levels of greenhouse gas emissions;
  • levels of feed-in tariffs for renewable energy or percentage of renewable energy in overall energy supply;
  • prices of emission (reduction) certificates in a trading system;
  • levels of taxes on fossil fuels or fossil fuel end-user prices.

Related articles

Media coverage

Further reading