This is a slightly edited version of the essay that was one of the final three competing for the US$25000 St Andrews Prize, run by Conoco and St Andrews University, UK, in May 1999. It is 1250 words in length
Deregulation of western economies and the freer operation of self-
I believe that many environmental problems persist because they are tackled in ways that do not stimulate or reward self-
Social Policy Bonds
My proposal is that a new financial instrument be created that rewards people only when they actually improve the urban environment. Social Policy Bonds would be issued by local or national government and auctioned to the highest bidder. Government would undertake to redeem these bonds for a fixed sum only when a specified environmental objective has been achieved. The bonds would be freely tradeable after issue, and their market value would rise and fall. With an uncertain redemption date, and because they would not bear interest, Social Policy Bonds would be quite different from conventional government bonds. What sort of urban environmental problems could Social Policy Bonds solve? In principle, any that can be reliably defined and quantified. Examples could fall in these areas:
Air, water or noise pollution
Long commuting times
The way the bonds work is to create a group of people, bondholders, who would have a strong interest in achieving the environmental objective efficiently, or in paying others to do so. Consider an example. Assume that an urban authority is prepared to spend a maximum of say £10 million to reduce the crime rate within its borders by 50%. It issues one million bonds that become worth £10 when the crime rate falls below 50% of current levels for a sustained period -
Who would buy the bonds?
Many people would purchase these bonds with the idea of holding on to them until they could sell them at a profit. These passive investors would have no intention of doing anything to reduce crime. They would want to become 'free-
would limit the opportunities for these passive investors. The more bonds they collectively own, the more remote the targeted objective becomes, the lower the market price of their bonds will fall, and the more they stand to lose as the aggregate value of their bond holdings falls. At some point, then, it would become worthwhile for passive investors either to become, or to sell their bonds to, active investors. These people, or institutions, would use their own capital, or borrow on the strength of the redemption value of their bonds, to initiate or facilitate crime-
Consider some of the measures that bondholders could put into operation:
encouraging neighbourhood watch schemes;
encouraging parents to monitor their children’s activity more closely;
subsidising recruitment of unemployed workers;
subsidising the employment of unemployed young men.
If air pollution in cities is targeted, the targeted indicator could be calculated as an average of reading as measured at many urban sites around the country. It is also important that progress toward the attainment of the environmental objective be regularly and reliably assessed by trusted bodies. Once an objective is close to achievement, government or urban authority can issue a new set of Social Policy Bonds aimed at maintaining or further improving the already improved urban environment. The cost of a new bond issue to the issuing body is likely to be lower because, during the lifetime of the first issue, people would have probably developed more efficient methods and systems for solving targeted environmental problems.
Advantages of a Social Policy Bond regime
The main advantage of Social Policy Bonds is that, by injecting self-
Because Social Policy Bonds focus on outcomes, which can be broad, they have informational advantages that make it easier to consider tackling problems that would otherwise be addressed only on an ad hoc basis. Air pollution in cities, for example, results from many sources and from many different processes. Immense quantities of information would be needed to establish and monitor a comprehensive system of pollution. Even worse, some programmes have perverse incentives: if a police force, for example, is too successful at cutting crime one year, it may find its budget cut the following year. Or at least, the possibility that that might happen could have some effect on performance.
Social Policy Bonds, on the other hand, are focused on outcomes. As such, they would command wider political support than activity-
Resources are always going to be limited and Social Policy Bonds will not change that. Priorities and choices will always have to be made: under the Social Policy Bond principle, governments will still decide on which problems to solve and on the sums allocated to their solution. But democratic governments are good at representing and articulating their people's wishes, and many goals would be focused on achieving minimal environmental standards for all. As such they would be politically popular. Where government is not so successful is in working out the most efficient ways of achieving these goals -
In the long run the widespread acceptance of the fact that self-