This is a slightly edited version of an article that appeared in Economic Affairs, 22 (3), September 2002, published by the Institute of Economic Affairs, London: click here for a link to the journal. This article is about 3000 words: a shorter article was published in a New Zealand newspaper, the Dominion. A Powerpoint presentation (ten frames) of a talk about climate change that I gave at the Institute of Public Affairs in Melbourne is available here.
My focus has shifted over the years towards targeting for reduction the negative impacts of climate on plant, animal, and human life. For my recent writings about applying the Social Policy Bond principle to climate change, see posts on my blog: especially this, and these examples from recent years. My post explaining why I think the December 2015 Paris agreement will fail is here.
A more recent (March 2019) essay suggesting that we issue Environmental Policy Bonds to target all environmental goals, whether or not we now think them to be caused by climate change, can be seen here.
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-
The Kyoto targets are far lower than those that some environmentalists had hoped for and that some countries, most notably the European Union, had been advocating. The treaty will slow, but not stop, the build-
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-
So Kyoto, in summary, is an agreement that is certainly divisive and is likely to have little chance of success in achieving a significant reduction in greenhouse gases. It will be expensive to administer and will impose large and incalculable costs on the world's economies, especially if its provisions were to be extended to the developing countries.
Kyoto suffers from the same conceit as government approaches to many other environmental and social problems. It embodies the assumption that government knows the best way of achieving its goals. But with climate change the biological and physical relationships involved are many and complex. Even specialists in climatology disagree about the degree to which the multitude of biological and physical variables causes climate change. It would therefore appear to be poor policy to impose expensive controls on certain activities on the basis that they might help bring about a stable climate.
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-
If such a solution could be found, it would be bound to attract more support from world leaders, non-
Targeting outcomes, not activities: Climate Stability Bonds
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 -
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-
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, or what our climate goals actually are, but the same difficulties apply when attempting to monitor the success or otherwise of Kyoto. Presumably scientists will measure the effects of the cuts by monitoring such objectively verifiable indicators as temperature, change in temperature, rate of change of temperature, precipitation, frequency of extreme climatic events, and many other variables, at a wide range of locations. But the focus could also be on the negative impacts of climate change on plant, animal and human life.
What would bondholders do?
How might bondholders aim to accelerate the achievement of a stable climate? They could:
help finance countries’ defences against adverse climatic events;
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-
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-
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-
Advantages of Climate Stability Bonds
There are two critical advantages that Climate Stability Bonds have over Kyoto. One is that the Bonds do not rely on the robustness of our existing scientific knowledge. Kyoto aims to reduce emissions of a small range of gases. But there may be other causes of climate change or its negative impacts that are far more important, of which we are currently unaware. And these need not be man-
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-
Further advantages of a Bond regime are:
the Bonds have considerable informational advantages over such measures as Kyoto, which target activities rather than outcomes. Greenhouse gases are emitted from many sources. About half of carbon dioxide emissions, for instance, come from dispersed sources, such as cars and home heating systems. Immense quantities of information would be needed to establish and monitor a comprehensive system of control using taxes or tradeable emission permits. By contrast, Climate Stability Bonds would target and monitor a much smaller number of global indicators.
governments pay up only when a stable climate has been achieved -
funds for global climate stability could bypass corrupt or inefficient governments or, by appealing to their financial self-
formulating the redemption terms for Climate Stability Bonds will entail clarifying of what is actually wanted. In global terms, 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-
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-
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-
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-
Injecting incentives into the solution of social problems: Social Policy Bonds (September 2000), Ronnie Horesh, Economic Affairs, 20 (3), Institute of Economic Affairs, London, UK.
Injecting incentives into the solution of social and environmental problems: Social Policy Bonds (January 2001), Ronnie Horesh, iUniversity Press, USA. ISBN: 0-
‘Investing for the Future’, UK CEED Bulletin No 35 (September-