Environmental policy must be diverse and adaptive

It’s not at all clear whether oft-proposed shifts in the way we do things would actually benefit the environment. I’ve blogged already about the uncertainties over whether cloth nappies (diapers) are better for the environment than disposables, as is commonly assumed. In June 2004, ‘Modern Railways’ published an article (Rail loses the environmental advantage) pointing out that high-speed rail can consume more fuel per passenger than cars or even planes.

The current issue of the ‘Economist’ has published a letter questioning the environmental advantages of solar panels over fossil fuels:

Silicon fabrication factories are energy and water intensive and the manufacture of silicon wafers uses energy from traditional fossil-fuel power generators, with the same old pollution. Add the potential problems of disposal towards the end of a panel's life—they are frequently doped with toxic materials like arsenic—and solar power hardly seems like the environmentally benign solution it is often touted to be. Peijing The, ‘The Economist’, 9 December.

The sort of life-cycle analysis required to establish the environmental benefits or otherwise of shifts in our behaviour are bedevilled by boundary issues, measurement difficulties and the difficulty of weighting one type of environmental impact against another. They are better than blandly assuming that rail is ‘better’ than air travel, that solar power is better than coal-fired power stations, but for the making of robust policy they would need to be continually reassessed in the light of our ever-expanding knowledge of the environment and our ever-changing environmental priorities. Government policy cannot be so responsive: if government did use life-cycle analysis with the aim of altering our behaviour, it would probably do so on the basis of a one-time, necessarily limited, and possibly quite subjective assessment of environmental costs and benefits. It’s not good enough, but even worse would be what we largely have now: government environmental policy based on corporate interests, media stories and the launching of visually appealing initiatives that attract air time but otherwise achieve nothing.

Social Policy Bonds would take a different approach. They would subordinate environmental policy to targeted environmental outcomes. It might be, for instance, that society wishes to reduce its use of fossil fuels. A Social Policy Bond issue that rewarded achievement of such a reduction would generate incentives for bondholders to bring it about at least cost. They might well carry out life-cycle analyses in their attempt to do so. But there is an important difference between the way do they would conduct their research and the way government would do so: bondholders have incentives to achieve their goal efficiently. This is likely to mean responding to and stimulating: increased knowledge of scientific relationships, and technical advances.

A single environmental goal, such as reduction in fossil fuel use, entails diverse, adaptive responses. These are precisely the sort of responses that government does very badly. Government can and should articulate society’s environmental goals, and can help pay for their achievement: in the democratic countries it performs these functions quite well. But actually achieving these goals requires continuous, well-informed and impartial decisions to be made about the allocation of scarce resources. For that purpose, Social Policy Bonds, with their incentives to achieve targeted outcomes efficiently would, I believe, be far better than the current ways in which environmental policy is formulated.