Social Policy Bonds: the past and the future

In the past year there has been a rise in the number of issues of Social Impact Bonds - the non-tradable variant of Social Policy Bonds, about which I have had mixed feelings. They essentially function as performance-related bonuses to service providers. Because they aren't tradable, they favour existing bodies and so, in my view, can be gamed or manipulated more readily than could Social Policy Bonds. However, there are social services that are currently so poorly provisioned that SIBs could well represent an improvement over existing policy. And they might be a first step - perhaps even a necessary first step - to the issuing of Social Policy Bonds. Tradability would greatly expand the range of goals that could be targeted, and I discuss this and other advantages of Social Policy Bonds over SIBs here and here. (You could also search for "SIBs" on this blog.) This wikipedia page summarises where SIBs are being issued and other details.

As far as I know, Social Policy Bonds are not being issued anywhere. I believe, though, that the need for outcome-based policy is becoming increasingly urgent. Society grows ever more complex, and its problems ever less amenable to solution with our existing government machinery. As ever, there is a much broader consensus about the outcomes we wish to see than the possible means of achieving them. The gap between governments and the people they are supposed to represent keeps widening. The recent Paris meeting, which was supposed to address climate change, is the example par excellence of policymaking entirely disconnected from citizens. It will fail for several reasons, foremost of which is the total absence of buy-in from ordinary people - that is, people who aren't involved in policymaking or lobbying. With efforts to address global problems, there would be huge benefits arising from a market-based solution, which in economic theory and on all the evidence would optimise resource allocation.

For reasons of both buy-in and efficiency, then, and because of our increasingly interlinked world, I remain optimistic that Social Policy Bonds will play a role in achieving social and environmental outcomes in the future. Perhaps not in 2016 but, I think, within the next ten years.

Paris will fail

Why I think the Paris deal on climate change, which concluded on 12 December, will fail.

• It may not be enough. It targets, using ossified science, cuts in greenhouse gas emissions. But what if that achieves nothing? What if the climate continues to change much more than expected, because the deal's underlying calculations and assumptions are wrong? What then? The emission cuts are a supposed means to unspecified, but crucial, ends. It would be preferable to do the hard work of identifying exactly and explicitly what those ends are, expressed in terms of impacts on human, animal and plant life, perhaps combined with social and financial targets. Then we could target those ends directly and, importantly, measure progress toward them more accurately.


• It may be too much, in the sense that resources could be diverted into reducing gas emissions and away from projects that could have a much more positive impact on human, animal and plant life. 


• No buy-in. Ordinary people don't know or care about greenhouse gas emission volumes. What we do understand is adverse climatic events, and their effects on humanity and the environment. If we were to target those directly not only would we be solving real problems more efficiently, we'd also have more public understanding and commitment to the process. In short, you would get buy-in from the public, which is as essential as it is absent from the Paris agreement.

That said, the $100 billion to be transferred from the rich countries (that is, their taxpayers) to the developing countries (that is, their governments) to adapt to climate change could be useful - if that's where the money actually ends up. But, on past form, what isn't spent on luxury goods or otherwise squandered will end up in Swiss bank accounts.

To read more about how Social Policy Bonds could be applied to climate change see my paper here, or recent blog posts here, here and here.

Metrics for climate change

The Economist discusses metrics for climate change:

[T]aking the world’s temperature is not as easy as it sounds. Different parts of the planet warm at different rates, as do different layers of the atmosphere, so all sorts of corrections have to be applied to arrive at a single number. A truly simple, and arguably better, approach would be to use concentrations of greenhouse gases—the cause of the warming—as putative maxima. These gases mix rapidly into the atmosphere, so are easily sampled in ways that brook little dissent. Goal difference, 'the Economist, 5 December

I disagree, partly because greenhouse gases are not the sole cause of warming: we do not know, for instance, how big are the relative contributions of deforestation (through changes in albedo as well as carbon emissions) or different cloud types. Some proportion of climate change also comes from natural (non-anthropogenic) events. At least as importantly, our views about the greenhouse gases' relative contributions change dramatically with our growing scientific knowledge. There would, then seem to be a pragmatic basis, as well as the case for broader public engagement, for instead targeting for reduction the impacts on human, animal and plant life of adverse climatic events.

Climate Stability Bonds could set such impact reduction goals. If, in time, and with the market's incentives on offer, bondholders decide that the best way of achieving such goals is to reduce certain greenhouse gas emissions, then that is what they will do. But it would seem hubristic and inefficient for governments or UN bodies to assume that that this is the best way of achieving meaningful reductions in those impacts. There are too many uncertainties, and the science upon which such a policy is based is inescapably ossified. See also my other recent posts on this question.

But who allocates the funds?

From 'the Economist', in a feature about climate change:

Energy firms do not spend a lot on research because there is no product differentiation in energy (electrons are electrons) and thus nothing exciting to sell until the price falls below that of the existing technology. So taxpayers will have to stump up most of the cash. If more money were forthcoming, a good deal of it would be wasted on dead-end projects. But that is the nature of research and development. Second-best solutions, 'the Economist', 28 November

I'm not sure whether funding research into alternative ways of generating electricity is a goal that ordinary people would find meaningful. But putting that aside, and assuming that 'taxpayers will have to stump up most of the cash', there are better ways of allocating that funding than via the usual activity-based, outcomes-don't-matter, formula that typifies government research programmes.

My proposal would be for the government to do what it's good at: (1) raising the necessary funding and (2) specifying a goal to be achieved, but then to bow out and allow a motivated private sector to allocate the funding to its chosen projects - something that economic theory, and all the evidence, suggest it can do more efficiently than the central planners in government. Social Policy Bonds could directly target cleaner electricity production, though I'd prefer they target broader and more obviously meaningful goals. Either way, a bond regime would lead to diverse, adaptive projects and bondholders would have powerful incentives to back only the most efficient ways of achieving whatever goal is specified. When government allocates funding, all sorts of criteria other than maximising returns per taxpayer dollar creep in. And we don't need to go beyond the energy sector to see that.