19 October 2008

Climate change and long-term planning

.... Franco Frattini, the Italian foreign minister and former European commissioner, called for "flexibility" over the EU's ambitious plans to reduce planet-warming emissions by 20 percent by 2020, pointing out that such measures would cost 1.14 percent of his country's gross national product. Speaking in Rome, Frattini called for the proposals to be accompanied by an "impact study on the real economy," .... Germany is arguing for protection against foreign competition for sectors like steel, cement and aluminum, and Poland says it should have to shoulder less of the burden of combating global warming. Huge fight looms in EU over climate change 'International Herald Tribune', 14 October
One of the advantages of targeting outcomes, rather than the supposed means of achieving them, is that outcomes are more stable over time. So long-term objectives, like climate stability, can be targeted. Consider the likely reaction of investors to the debate reported on above. Added to all the daunting scientific uncertainties about solutions to climate change now comes a policy uncertainty: will governments continue to give climate change the priority they gave it when the economy was in a better state? Any long-term planning becomes fraught with difficulties in such a policy environment. But long-term investment is exactly what is needed if climate change is indeed occurring.

A Social Policy Bond regime would have many advantages over the current policymaking framework; efficiency, transparency and greater buy-in, to name some of the most important. But, from the standpoint of potential investors in bonds targeting remote objectives, another huge advantage is stability. A global consortium issuing Climate Stability Bonds would be declaring its intention to reward the achievement of climate stability regardless of what happens in other policy areas. Events, such as a banking crisis, could assume a higher priority for policymakers, but as far as would-be investors in the bonds were concerned, that would not affect their investment decisions. Policy goals are much more stable over time than the supposed or best means of achieving them and much more stable than the views or indeed the composition of governments.

The Social Policy Bond principle enlarges the scope of policy goals that we can effectively target to embrace a range of very long-term objectives, including not only climate stability, but the eradication of world poverty and the ending of violent political conflict. Even if they take decades to achieve, bondholders would not be deterred from doing their best to help bring them about by the sort of uncertainty about policy that plagues today's decision-making environment.

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