20 January 2007

Dealing with unknown unknowns: Social Policy Bonds

One of the big advantages of Social Policy Bonds, in my view, is that they can target problems whose magnitude is uncertain. People have wildly different views about, for instance, climate change or the likelihood of nuclear conflict. (I have wildly different views myself depending mainly on the line taken by the most recent material I have read.) How can policymakers, confronted with luminaries on both sides of an argument about what might be a huge threat, like climate change, best respond?

Issuing Social Policy Bonds is one way in which they could let the market, rather than a handful of government employees, make the judgement. Take Climate Stability Bonds: an enormous amount of valuable information about climate change and the direction in which the climate is moving could be gathered from the market value of the bonds, and from changes in their value. Assume Climate Stability Bonds are issued that would reward bondholders with $10m once the targeted definition of climate stability had been reached. Then even the initial information garnered from their float value would be extremely useful. If the bonds sold for $9m each that would mean the market considers climate change a less serious problem than if they sold for $1m each.

Such information would be continuously available. It would respond to our expanding knowledge of  the scientific knowledge and to the expected effectiveness or otherwise of actual and planned policies. Contrast that with the dead hand of Kyoto, where fossilised science and institutionalised cuts in greenhouse gas emissions will continue regardless of changes in the seriousness of the climate change problem.

Social Policy Bonds score heavily over Kyoto and other responses (or non-responses) to potentially serious challenges, because they give people incentives not only to find solutions to urgent problems, but for finding out how urgent these problems actually are.

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