Climate stability bonds
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If enough countries ratify it, the Kyoto treaty will force about 38 developed countries to reduce their production of greenhouse gases to 5.2% below their 1990 level by 2012.  Most environmentalists support the treaty, as a first step towards international action to reduce the threat of global warming.  Many even argue for even tougher limits. 


iGreens disagree.  We donít deny that the world is currently getting hotter, or that the actions of man are probably partly responsible.   Nor do we deny that there will probably be some harm from climate change, which may well outweigh any fortuitous benefits.   We even accept that reducing the production of greenhouse gases along the lines imposed by Kyoto will probably go some way to limit the temperature rise.   


Our problem is that the dangers of doing nothing and the hoped for benefits of imposing the treaty are both wildly uncertain.   The net harm from climate change may be tiny, delayed many years and altered little by the Kyoto treaty.  The costs of enforcing the treaty are real and have to be paid right now.


The delay before any treaty benefits appear is important.  The benefits will accrue to our grandchildren and their descendants, people who will probably be richer than us, and scientists will learn much more about how to combat climate change in the meantime.   Actions that seem sensible now may turn out to be useless or even harmful.   If the treaty is to encourage the best methods of climate stabilisation it will need constant revision.  Governments are bad at treaty revisions, for the simple reason that once a treaty like Kyoto is in place a large enforcement bureaucracy develops with a vested interest in keeping it unchanged.   


Governments may fail in other ways.   Anything that depends on governments delivering on their promises must have a high risk of failure.  Short-term electoral considerations often override fear of long-term consequences.  The governments that first signed up to Kyoto were those that had either few treaty obligations or could see an easy way to achieve them naturally.  Friends of the Earth noted recently that during the present Labour government the falling trend in greenhouse gases during the early 90s has been reversed.  


However, there is an alternative to Kyoto.  Enlist the private sector to work towards climate stability by issuing bonds that pay out when it is achieved. 


The idea of issuing bonds to encourage the private sector to work to improve social policy comes from a New Zealand economist Ronnie Horesh.  He called the general concept social policy bonds.   Click here for his website.  


Climate stability bonds (CSBs) are a special type of such bond.   They solve the problem of lack of government will by placing the incentive for achieving climate stability in the private sector.   They work like this.  


Governments get together, perhaps under the auspices of the United Nations, and issue pieces of paper, which promise to pay the bearer a large sum of money, say $100M when a certain level of climate stability is achieved.  Such bonds would be sold on the open market for values well below their redemption price.  Let us say $50M, £10M, or perhaps only a few thousand pounds.  Who knows?  The price would depend on the chosen definition of climate stability and peopleís judgment as to when and how easily it could be achieved.   The idea is not for government to raise any money now, but for the private sector to be encouraged to make the necessary investment.


Governments would issue a huge number of such bonds, to a total value of many trillions of dollars.  Remember the costs of complying with Kyoto were estimated to be $300 billion per year for the US alone.  A price that has to be paid now and may not even work.    The advantage of CSBs is that the price only has to be paid if and when climate stability is achieved.  


What would happen next?  If the bonds were held by thousands of individuals not much.   Individuals acting alone cannot affect climate, and getting all the bondholders to act together would be difficult.  Efforts by the few would benefit all including free riders.    Holders of small numbers of bonds would want to sell them on cheaply, and those with large holdings would have an incentive to accumulate them so that they could collaborate with other large holders to intervene to raise their price.  Any intervention that actually worked to stabilise climate would do this.   Once a few huge corporations owned most of the bonds the free-rider problem would be small and co-operation would be easier. 


No-one knows what the large bondholding corporations do?   Thatís the beauty of bonds.  If a new idea appears resources can be directly towards it.  However, there is a long list of possibilities even now.  


  1. Subsidise nuclear, wind or wave power.

  2. Pay people to create carbon sinks.

  3. Lobby for laws to reduce energy waste, such as home insulation, road charging etc.

  4. Fund research into the causes of global warming


These are all things that governments would probably do anyway to achieve their Kyoto targets.  The advantage of bonds is that special pleading, political pressure and all the other things that steer governments off course, wonít waylay private companies.  Bondholders will only see a return on their investment if they actually achieve climate stability.   They will look unsentimentally at windmills, nuclear power and carbon sinks.   If any of them turn out to be an expensive way to stabilise climate the bondholders will quickly move their investment elsewhere. 


I predict they will encourage nuclear power in the short term, but I may be wrong.  If bondholders decide that investment in wind power is more likely to achieve global climate stability then Iíll believe them.   They will be putting their money where their mouth is.  


Bondholders will do better than governments for another reason.   Often the best judges of what is likely to work are those closest to the area.   If nuclear power, gas or wind power were likely to be the best way to achieve our aims, the relevant utilities might decide to buy the bonds.   They will know better how to alter CO2 emissions than any government bureaucrat. 


Critics will ask whether any one group will ever be able to achieve the ultimate aim.  Of course they wonít.  It may not even be achieved in the lifetime of anyone living now.  The point is simply that to earn money bondholders only have to bring eventual global climate stability a little nearer.  Insofar as they do that the price of bonds will rise and they can realise a profit.  Perhaps in the early years wind power utilities will own many bonds but as convenient hillsides get saturated with wind farms they might sell them on to say nuclear utilities. 


CSBs would be fairer between the generations, because the rich from the future pay for the benefits.   One of the problems of asking present day taxpayers to pay to prevent global warming is that people in the future are likely to be richer. Taken over time compliance with Kyoto is a tax on the present poor to benefit the future rich.  


Some questions and answers.


Will inflation erode the value of the bonds? 

Yes.  This gives bondholders an incentive to achieve climate stability quickly.    If they fail to do this and the face value of the bonds was eroded to such an extent that no bondholders were willing to make any effort to work towards redemption, new bonds could be issued. 


How will the bonds be funded?  

Private institutions such as environmental charities could issue them but it is more likely that CSBs would be funded from taxation.  


What if future governments default? 

This is unlikely if the bonds have been successful because governments will wish to issue new bonds to encourage other public goods.  If the bonds have failed the issue wonít come up.   If governments really do default the people left holding them on that unsuccessful redemption day will just have to take the hit.  The risk of default will always be included in the price of current bonds.   The global climate will have been stabilised.  

What if the global climate stabilises naturally? 

The bondholders will get a windfall and governments will have wasted their money.   However, this problem also applies to the Kyoto treaty.  We may be spending money on a problem that will solve itself anyway.   Governments may wish to delay issuing bonds until climate science is a little more certain.   Alternatively various clauses might be written in to the redemption rules.   


Jim Thornton Nottingham 30 November 2002


Click here for a review of Ronnie Horeshís books, and here for more on social policy bonds and climate stability bonds.  Ronnie Horesh also has a blog here.



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Last modified: September 26, 2006