This is a slightly
edited version of an article appearing in Economic Affairs, 22 (3), September
2002, published by the
The evidence that the global climate is changing is substantial and growing. That said, scientists are divided as to (a) how fast climate is changing, (b) the effects of climate change (c) how much we can do about it, and (d) how much we should do about it. Despite these uncertainties, climate change has the potential to inflict serious harm on large populations, so there is a strong argument for doing what we can to minimise its adverse effects.
The December 1997 Kyoto treaty (‘Kyoto’) saw 159 nations commit themselves to reduce the global output of carbon dioxide and five other gases thought to contribute to the ‘greenhouse’ effect. Thirty-eight industrialised countries agreed to reduce emissions by 2012 to an average of 5.2 per cent below their 1990 levels, and in July 2001, 180 countries reached a broad political agreement on the operational rules that will govern the Protocol.
Such a reduction may be significant as
a gesture, or as a first step to more meaningful measures, but most scientists
would say that it is far from what is required to reach the goal of stabilising
the concentration of greenhouse gases in the atmosphere. And some fear that
governments will cite the modest cutbacks as an excuse for doing nothing
further. Even if all industrialised countries honour their commitments to
reduce pollution, the quantity of heat-trapping greenhouse gases in the
atmosphere will continue to grow.
An ideal way of addressing climate change would not embody the assumption that it knows exactly how the Earth’s climate is changing, what is causing it to change, and what is the best way of dealing with any change. It would not ignore a potentially catastrophic problem, but it would try to be as cost-effective as possible, especially because of the colossal expenditures that will inevitably be incurred. An ideal policy would encourage innovative solutions, stimulating the investigation and adoption of promising new technologies, and be open to new information about the causes and effects of climate change. It would most probably seek to constrain the negative effects of climate change, while doing little to discourage positive effects. Ideally too, it would use markets, the best way yet devised of allocating society’s scarce resources, to channel people’s self-interest into the solution of the climate change problem.
If such a solution could be found, it would be bound to attract more
support from world leaders, non-governmental organisations,
and the public in general than
Climate Stability Bonds would be a new globally backed, financial instrument, designed to achieve climate stability, rather than to regulate emissions, activities or institutions. These Bonds would be issued on the open market and would become redeemable for a fixed sum only when the climate had achieved an agreed and sustained level of stability. In this way there is no need for the targeting mechanism to make assumptions as to how to stabilise the world climate - that is left to bondholders.
Normal bonds are redeemable at a fixed date, for a fixed sum, and so yield a fixed rate of interest. Climate Stability Bonds would not bear interest and their redemption date would be uncertain. Bondholders would gain most by ensuring that climate stability is achieved quickly.
Internationally backed Climate Stability Bonds would be issued by open tender, as at an auction; those who bid the highest price for the limited number of Bonds would be successful in buying them. A fixed number of Bonds would be issued, redeemable for, say, £10 million each, only when climate stability, as certified by objective measurements made by independent scientific bodies, has been achieved and sustained. Once issued, the Bonds will be freely tradeable on the free market.
What will determine the price of the Bonds? Most obviously, the market’s assessment of how close climate stability is to being achieved. Interest rates on alternative investments will also be a factor. The Bonds would sell for small fractions of their issue price if people thought there were virtually no chance of climate stability being achieved in their lifetime. People will differ in their valuation of the Bonds, and their views will change as events occur that make achievement of a stable climate a more or less remote prospect. They would also change as new information about climate, and about the causes of climate change, is discovered. But the Bonds, once issued, would be transferable at any time. Bondholders, having done their bit to achieve climate stability, could sell their Bonds, realising the capital gain arising from the higher market price of their Bonds. These market prices would be publicly quoted, just like those of ordinary bonds or shares.
Assume that Climate Stability Bonds, redeemable for £10 million each, have been issued, and that they each sell for £1 million. People, or institutions, now hold an asset that can give them a return of 900 percent once a stable climate has been achieved. It is this prospect of capital gain that gives bondholders a strong interest in bringing about a stable climate, as cost-effectively as possible.
Climate Stability Bonds could be issued by a world body, perhaps one supervised by the United Nations or World Bank. This body would undertake to redeem the Bonds using funds that could perhaps be obtained from all countries, in proportion to their Gross National Product. It would be up to individual countries to decide how to raise funds, presumably from taxation revenue. Importantly though, no Bonds will be redeemed until the objective of a more stable climate has been achieved and sustained.
There are obvious difficulties
involved in defining what a stable climate actually is, but the same difficulties apply when attempting to monitor the success
or otherwise of
How might bondholders aim to accelerate the achievement of a stable climate? They could:
· help finance countries’ or companies’ greenhouse gas emission control programmes;
· subsidise countries or companies to set up carbon sequestration plantations;
· attempt to increase radiation from the Earth by raising the planet’s albedo;
· carry out, or subsidise, research into the causes of climate change.
Bondholders can also be expected to finance other climate stabilising initiatives, the precise nature of which we cannot, and need not, know in advance. Of course, governments, research institutes and others are already carrying out many of these activities. But there is a crucial difference. Under a Climate Stability Bond regime, the motivation arises from the self-interest of bondholders, who have the incentive to seek out those ways of achieving a stable climate that will give them the best return on their outlay. Their outlay, of course, is the taxpayers’ outlay. But note that it is only when the targeted degree of climate stability is achieved that governments end up paying for it. Until then, it is bondholders who have to finance the initiatives that they think will achieve climate stability. The issuing body will, in effect, be contracting out the achievement of climate stability to the private sector. It does, though, stipulate the degree of climate stability that it wants, and it does undertake to pay bondholders when the objective has been achieved.
Many will be skeptical that bondholders can actually do anything to combat climate change. It is true that too large a number of small bondholders would probably do little in isolation to bring about climate stability. If there were many such small holders, it is likely that the value of their bonds would fall until there were aggregation of holdings by people or institutions large enough to initiate effective problem-solving projects. As has happened with share privatisation issues, the Bonds would mainly end up in the hands of large holders - probably institutions, brokers, or governments.
Even then, each such body would probably not be big enough, on its own, to achieve much without the cooperation of other bondholders. They might also resist initiating projects until they were assured that other holders would not be ‘free riders’. But note that they will have a strong incentive to cooperate with each other, and to do so as cost-effectively as possible. If they did not, the market value of their Bonds would fall. Their common interest in seeing climate stability achieved quickly means that they would share information, trade Bonds with each other and collaborate on climate-stabilising projects. They would also set up payment systems to ensure that people, bondholders or not, would have an incentive to perform efficiently. Large bondholders, in cooperation with each other, would be able to set up such systems cost-effectively. Governments holding bonds would benefit by enacting legislation aimed at achieving climate stability, while large bondholders could lobby for such legislation, targeting their lobbying energies at those governments who will respond most readily.
There are two critical advantages that
Climate Stability Bonds have over
The other major advantage of a Climate
Stability Bond regime is that bondholders will support whichever climate
stabilising projects will give them the best return for their outlay. These may
involve controlling greenhouse gases, but they could also mean furthering
research into such ideas as atmospheric mirrors to reflect radiation back into
outer space, or genetically engineered cyanobacteria
that can soak up carbon dioxide from the atmosphere (New Scientist 1997). The
more efficient bondholders are in achieving climate stability the more they
will gain from appreciation in the value of their Bonds. This efficiency
maximises the degree of climate stability that can be achieved per pound
outlay. Because of the colossal sums involved, the benefits that Climate Stability
Bonds offer in comparison to activity-based regimes, such as
Further advantages of a Bond regime are:
the Bonds have considerable informational
advantages over such measures as
· governments pay up only when a stable climate has been achieved - any risk of failure or of undershooting the climate stability target is borne by bondholders, rather than taxpayers;
· funds for global climate stability could bypass corrupt or inefficient governments or, by appealing to their financial self-interest (if they were bondholders, or bribed by bondholders) could effectively modify their behaviour in favour of achieving climate stability; and
· formulating the redemption terms for Climate Stability Bonds will entail clarifying of what is actually wanted. In global terms, climate change - as distinct from climate variability - could actually be a good thing. It could lead to longer growing seasons and higher yields in some regions. Others point to the boost to crop productivity given by higher levels of atmospheric carbon dioxide (Wittwer 1997). ‘Climate Stability’ as targeted by Climate Stability Bonds, could be defined such that bondholders tackle only the negative effects of climate change.
Achieving a stable climate will
unquestionably require a wide range of diverse, responsive projects. Reducing
greenhouse gas emissions or sequestering carbon may be helpful ways, but they
are not necessarily going to be the most cost-effective. Other ways yet to be
discovered may be far cheaper.
Of course, the Climate Stability Bond concept involves
surrendering of policy instruments to the private sector, and this may be
difficult for politicians to swallow, even though, under a Bond regime, they
would continue to set, and be the ultimate source of finance for, the targeted
objective. But the potential benefits should not be ignored. In economic theory, and on the evidence of
recent history, market forces are the most efficient means yet discovered of
allocating society’s limited resources. Many believe that market forces
inevitably accentuate extremes of wealth and poverty and accelerate the
despoliation of the planet. So it is important to remind ourselves that a
market economy is consistent with many different outcomes and that market
forces can serve public, as well as private, goals. Climate Stability Bonds are
intended to channel the market’s incentives and efficiencies into the
achievement of society’s overriding environmental objective. By
appealing to people’s self-interest, Climate Stability Bonds could be far more
effective at achieving climate stability than
Ronnie Horesh, December 2001
New Scientist (1997), Beach bugs make for a cooler world, Peter Hadfield, New Scientist, 12 July 1997 (page 17).
Economist (2001), The truth about the environment Bjorn Lomborg, ‘The Economist’, 4 August 2001 (pp71-73).
Wittwer (1997), The great promise of the ‘Greenhouse Effect, Sylvan H Wittwer, Consumers Research, June 1997.
Better than Kyoto: How Climate Stability Bonds can inject market incentives into the achievement of a stable climate, Ronnie Horesh, ISBN 0-595-21164-X, Writers Club Press, USA, January 2002.
Injecting incentives into the solution of
social problems: Social Policy Bonds (September 2000), Ronnie Horesh, Economic
Affairs, 20 (3), Institute of
Injecting incentives into the solution of
social and environmental problems: Social Policy Bonds (January 2001), Ronnie Horesh, iUniversity
‘Investing for the
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