Tax incentives are attractive from a cost-efficiency perspective, as it can provide a big boost to investment with a relatively low impact on public finances.
Tax credit bonds have been a huge part of the development of bond markets in the United States. Notably, they have driven capital into oil and gas industries for 100 years and helped underwrite their expansion.
There are several types of tax incentives policy makers can put in place to support green bond issuance. The incentives can be provided either to the investor or to the issuer:
- Tax credit bonds: bond investors receive tax credits instead of interest payments, so issuers do not have to pay interest on their green bond issuances
An example of this in the area of clean energy is the U.S. federal government Clean Renewable Energy Bonds (CREBs) and Qualified Energy Conservation Bonds (QECBs) program. The program allows for the issuance of taxable bonds by municipalities for the purposes of clean energy and energy conservation, where 70% of the coupon from the municipal is provided by a tax credit or subsidy to the bondholder from the federal government.
- Direct subsidy bonds: bond issuers receive cash rebates from the government to subsidize their net interest payments.
Also this structure is used under the U.S. federal government Clean Renewable Energy Bonds (CREBs) and Qualified Energy Conservation Bonds (QECBs) program.
- Tax-exempt bonds: bond investors do not have to pay income tax on interest from the green bonds they hold (so issuer can get lower interest rate).
This type of tax incentive is typically applied to municipal bonds in the US market. In the green bond space specifically, an example to highlight is tax-exempt bond issuance for financing of wind projects in Brazil.