Markets better than Kyoto at minimising costs

Markets are good at allocating scarce resources. This is not just a conclusion from economic theory, but accords with all the historical evidence. That said, it’s unfortunate that policy decisions that entail the expenditure of colossal resources, are taken without reference to the market.

Take climate change: under the Kyoto Protocol the resources spent on trying to prevent it will be decided largely by national governments. They will be a negotiated outcome based partly on today’s current knowledge of the scientific relationships, but mostly on what politicians think they can get away with. The political process will attenuate any the relationship between the magnitude of the climate change problem and the global response.

Now consider what would happen were Climate Stability Bonds to be issued. The main decisions about the likelihood of climate change, the magnitude of the efforts required to prevent it, and the probabilities of doing so successfully would be taken by the market, when it decides how much the bonds are worth. This, in my view, is vastly superior to the bureaucratic process. As with central planning, bureaucrats make mistakes. Their systems are cumbersome, uniform and cannot adapt – even if the bureaucrats are well meaning. Contrast this with a Climate Stability Bond market: there, the decisions as to how much need be spent on stabilising the climate will be taken by those with powerful incentives to minimise the cost. They will be people (or institutions) who stand to benefit if they get their sums right and particularly, if they are cost-effective in reducing climate change. Contracting out the achievement of climate stability in this way vastly expands the pool of people with an interest in researching and minimising its costs.