US President Barack Obama talks about post-
An explanation of climate change from a Nobel Prize-
But science isn't a consensual process though, so even if the majority of scientists agree on something, whether it's CO2 emissions causing climate change, or saturated fats causing heart disease, that should carry no more weight than the collective wisdom of experts in other fields, such as economists or opinion pollsters. There is a genuine problem here and it goes beyond climate change: how should we make policy when the relationship between cause and effect in our ever more complex societies is impossible to identify? We cannot simply follow the opinions of existing bodies, which often are backed by vested interests, but nor should we reflexively ignore them: they might after all be right as well as self interested. Nor should we simply identify a problem then mindlessly dole out funds to organizations whose stated objective is to solve it, but whose over-
We should instead recognize that resolving complex social and environmental problems, cannot wait for our definitive information about causal relationships, but nor can we afford to delay making decisions until such information becomes available -
How Social Policy Bonds work
We could use the Social Policy Bond idea, first to identify exactly what we want to achieve; and second to channel the market's incentives and efficiencies into achieving it. With climate change, we need to clarify whether we are more concerned about the climate, or about the impacts of climate change on human, animal and plant life. In other words, we define the outcomes that we wish to achieve, then let the market decide how best to go about achieving them. Most social and environmental goals will embody an array of conditions that have to be satisfied for the goal to have been deemed met and the Social Policy Bonds redeemed. Our climate change goal should embody measures of physical, biological, social and financial variables that shall have to fall within a targeted range for a sustained period before the redemption of the Social Policy Bonds that target climate change.
Assume that collectively governments, philanthropists and ordinary members of the public contribute to a global climate change fund of $1 trillion. These funds are put into escrow, to be paid out to the holders of bonds only when our climate change goal has been reached. It then issues one million bonds that each will be worth £1 million on redemption. Because the market is likely to see this objective as unlikely to be achieved in the near future, it may value the bonds when they are floated at as little as $100,000 each. (This sum would be used by the authority partially to offset the cost of future redemption of the bonds.) Now, the purchasers of the bonds hold an asset that could appreciate in value by 900 percent once our climate change goal has been achieved.
This does not mean that investors in the bonds have to hold them to maturity to see their holding appreciate in value. As people work toward achieving the targeted goal, the bonds will become more valuable Because the bonds would be tradeable, they can do their bit to achieve the targeted goal, and sell their bonds to people who, because they will be more efficient at taking the goal-
The bonds inject the market’s incentives and efficiencies into the achievement of our social and environmental goals: they create a coalition of interests, whose structure and composition will be constantly changing, but whose goals are exactly congruent with those of society.
This leads to several major advantages over the way current policy is made:
Nothing is paid out until the result has been achieved.
Bondholders have incentives to achieve the goal as efficiently as possible
Bondholders have incentives to explore and undertake or finance diverse, adaptive solutions to problems about which our scientific knowledge is constantly expanding.
Under a Social Policy Bond regime governments – national or supranational – could still do what they are best at: articulating society’s goals and raising the funds necessary to achieve them. But they would in effect be contracting out the actual achievement of these goals to the private sector, which in economic theory and on all the evidence, it does much more efficiently than any government.
And as with climate change so with other major, complex challenges: crime, for instance, or war. Importantly, the Social Policy Bond principle works even when the facts about what causes these problems are disputed. As such, Social Policy Bonds are the perfect policy instrument in today's post-