Social Policy Bonds and the Polluter Pays Principle

There are some quite elegant economic solutions to social and environmental problems. Take the example of a lake polluted by the run-off of nearby farms. Where the lake is grossly polluted and the farmers are wealthy, the political process would probably demand that the farmers pay to clean it up or have their polluting activities legally restrained or taxed. 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 pay for it to be cleaned up, or to compensate farmers for reducing their polluting activities. Note that in this instances, which is in microcosm that of many larger environmental issues, the debate about who pays generally precedes the cleanup.

Now simply assume that the lake is polluted and either a local authority of a group of nearby residents on their own initiative, decide to issue their own Social Policy Bonds: 'Lake Health Bonds'. These would be redeemable for a fixed sum only when the lake's water quality had reached a target level for a sustained period. The local authority or the residents could contribute to the redemption funds used to redeem the bonds. Bondholders could then begin the cleanup operation immediately. Part of the cleanup could entail lobbying one or other tier of government to impose taxes on the polluters or the beneficiaries – whichever is most cost-effective. In other words, the issue of who pays would be secondary to that of the cleanup.

Social Policy Bonds are therefore quite compatible with the use of the Polluter Pays Principle, or indeed pollution taxes or the principle that beneficiaries pay. Such instruments, and others such as straight regulation, should be seen merely as tools to reach society’s environmental goals. Social Policy Bonds, rather than being merely another economic instrument, are a means by which the most efficient economic instruments, or combination thereof, will be deployed.