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What Are Carbon-Linked Bonds?

Jun 28, 2023

Welcome to episode 76 of English for Economists. Today, we will be looking once again at an issue related to climate change, and the role economics can play in reducing air pollution. We’ll be diving into these terms: ‘Carbon pricing’,  ‘Carbon-linked bonds’, ‘Political backlash’, ‘Flaw’, and the idiom ‘Hands are tied’.

Listen to the headline of an opinion piece published by the New York Times and written by Peter Coy. It was published on June 26, 2023. The headline reads, “Carbon-linked bonds could save carbon pricing from its fatal flaw.” This headline suggests a new financial tool called “carbon-linked bonds” could address an inherent problem in carbon pricing.

Now, listen to the headline again: “Carbon-linked bonds could save carbon pricing from its fatal flaw.”

[Text Extracts and Vocabulary]

First thing to learn and understand is the meaning of carbon pricing. Carbon pricing is when governments or regulatory bodies charge companies for the carbon they produce and emit into the atmosphere. Carbon pricing creates an incentive for companies to reduce their environmental impact. It is an important tool to change behavior, but it has it’s flaws, and its problems.

Now, ‘Carbon-linked bonds’ are bonds whose yield is connected to carbon prices set by the government.

Next word: Flaw. ‘Flaw’ refers to a shortcoming or weakness. Here, it points to the inability of governments to respect their future carbon pricing arrangements.

Now, listen to the headline again: “Carbon-linked bonds could save carbon pricing from its fatal flaw.”

Here is some more vocabulary you should know before I provide a short summary of the article.

‘Political backlash’ means strong public reaction against government decisions.

And here is an idiom that is relevant. It is ‘to have one’s hands tied’.  This means being unable to act due to restrictions or obligations. To ‘have one’s hands tied’.

Let me provide you with a short summary of the article. It discusses how a man called Robert Litterman, who happens to be a pretty well-known Wall Street figure and economist, has proposed the concept of carbon-linked bonds which he hopes will fix a flaw in carbon pricing. This flaw emerges when governments encounter resistance for raising carbon prices – in other words,  raising the amount they charge companies for the carbon they emit. The resistance can be in form of pressure from companies and even from citizens who may be faced by rising costs as a consequence of increased carbon pricing. In other words, the government can face so-called ‘political backlash’.  Of course, governments are sensitive to these pressures and this might cause them to not keep their promise to increase the carbon pricing in the future. And that is the flaw. Litterman proposes a solution: that the government emit carbon-linked bonds, whose returns are based on the changes in carbon prices. The more the goverments deviate from what they promised to do, the more they need to pay bondholders.    You could say that with this type of bond in the market, the government’s ‘hands become tied’, since their option to break their promise regarding carbon pricing, becomes much more limited. Their hands are tied. They are restricted.   

You can find a link to this article about carbon-linked bonds and the script for this podcast at englishforeconomists.com. If you are interested in this topic, be sure to check out podcast #44 about India’s Tech Sector and the Carbon Footprint, and podcast #18 where I discusses climate change and the COP-26 conference. Don’t forget to sign up to the newsletter so you never miss a lesson.

And speaking of lessons, here is some exciting news! I want to let you know about my upcoming 12-part video course, ‘Economists in Action’. The  course covers  a dozen key areas of language all economists will require if they need to function professionally in English. Basic, functional skills that will equip you with the language tools for describing trends, forecasting conditions, explaining policy impacts, presenting data, negotiating agreements, and so on, and so on. This course covers a lot, so stay tuned.

Friends, in conclusion, today, we explored ‘Carbon pricing’, ‘Carbon-linked bonds’, ‘Political backlash’, ‘Flaw’, and the idiom ‘Hands are tied’.  All very useful words and expressions for this day and age.


Image credit: Jacek Dylag in Unsplash

 

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