26 December 2004

Polluter Pays Principle

The Polluter Pays Principle (PPP) says simply that those who pollute the environment must pay for the damage they have caused. The idea originated in the 1970s when members of OECD countries sought a means by which pollution control costs would be financed by the polluters rather than the public in general. Its principal defect is that it does not guarantee efficiency of pollution control and environmental protection.

The PPP assigns environmental rights to those who benefit from environmental improvement, so polluters pay. The Beneficiary Pays Principle (BPP), on the other hand, says that whoever benefits from a cleaner environment should bear the costs of pollution control.

Social Policy Bonds are not concerned with who pays for solutions but with efficiency in achieving them. But some have asked me whether Social Policy Bonds targeted at environmental goals (Environmental Policy Bonds) would be compatible with the PPP. The answer is yes.

Where polluters can be clearly identified, and where society believes that the PPP should apply, then the polluters could be taxed and their proceeds used to redeem the bonds.

Take, for example, a lake is polluted by activities of farms surrounding it. Assume that the local authority thinks a bond regime would be the most cost-effective way of improving the lake's health. It could issue 'Lake Health Bonds', which would be redeemable for a fixed sum only when the lake's water quality had reached a target level for a sustained period.

Who would contribute to the redemption funds used to redeem the Bonds? Where the lake is grossly polluted and the farmers are wealthy, the political process would probably demand that the farmers pay. But where the lake is already healthy, though not quite healthy enough to attract fee-paying fishers, then the beneficiaries of a clean-up - would-be tourist operators around the lake, perhaps - could reasonably be asked to contribute. They might, on their own initiative, decide to issue their own Lake Health Bonds.

The crucial points are that the Social Policy Bond principle:
  1. maximises efficiency, expressed as maximum reduction in pollution per dollar spent; and
  2. is versatile enough to encompass the PPP and the BPP, or any combination.

20 December 2004

Literacy in the UK

Twenty-six million people of working age have levels of literacy and numeracy below those expected of school leavers. People with the lowest levels of skills – those expected of a 9 to 11 year old or below – can experience practical difficulties in their every day lives.

This is the main conclusion of a report released on 15 December by the UK's National Audit Office. Another conclusion:

More providers need to engage in creative development of flexible learning that people want because it meets both their practical requirements and personal needs.

My take: would-be providers must have incentives to be creative. The UK Government is right to have identified 100 per cent basic literacy and numeracy as a valid social goal, and to devote funds to its achievement. The Government has set the goal, and is prepared to finance its achievement. Democratic governments are good at articulating their society's needs and raising the necessary funds. But they are terrible at actually achieving social goals. The UK Government should bypass the entrenched lobbies of the educational establishment and reward people for achieving its literacy goal however they do so.

The private sector can play a role too, and its intervention is perhaps more urgently needed in the developing countries. If you are interested in issuing your own bonds, click to see how Female Literacy Bonds could work for improving the literacy of girls and women in Pakistan. (This is a 250kB pdf file.)


The entire focus of Kyoto is to reduce anthropogenic emissions of what are currently thought to be greenhouse gases. But we simply don't know whether reducing such emissions will mitigate climate change. We certainly don't know that reducing such emissions will be the most cost-effective way of stabilising the climate. A Climate Stability Bond regime would not prejudge how the climate is to be stabilised. They instead would reward people for achieving climate stability however they do so. So a bond regime would reward efficiency, rather than adherence to a conclusion based on the fossilised science of the 1990s. Click to see a short article describing Climate Stability Bonds.


Kyoto, computers in schools, Concorde: the list of expensive, wasteful policies goes on. Social Policy Bonds are a new financial instrument. They can be issued by governments or private individuals, and are redeemable for a fixed sum only when a targeted social goal has been achieved. So:
  • they inextricably tie rewards to outcomes, rather than activities or institutions; and
  • they inject market incentives into the achievement of social and environmental goals.

This blog looks at the failures of existing policies and will suggest how Social Policy Bonds could radically improve the efficiency, stability and transparency of policymaking. For more information about the bonds, click on What are Social Policy Bonds? in the right-hand column, or go to the main Social Policy Bonds website. Your comments and suggestions are very welcome.