24 September 2016

Polluter Pays Principle: Social Policy Bonds as a meta-system

The Polluter Pays Principle (PPP) says simply that those who pollute the environment must pay for the damage they have caused. The idea originated in the 1970s when members of OECD countries sought a means by which pollution control costs would be financed by the polluters rather than the public in general. Its principal defect is that it does not guarantee efficiency of pollution control and environmental protection.

The PPP assigns environmental rights to those who benefit from environmental improvement, so polluters pay. The Beneficiary Pays Principle (BPP), on the other hand, says that whoever benefits from a cleaner environment should bear the costs of pollution control. 

Especially for diffuse sources of pollution, it's not always obvious who should pay: the polluter or the beneficiary. One of the virtues of a Social Policy Bond regime is that it would leave it to holders of Environmental Policy Bonds to decide how to allocate the costs of a cleanup. They would do so not according to the the subjective and possibly divisive criterion of 'fairness', but on the basis of which principle will be more efficient at ensuring the maximum reduction in pollution per dollar spent. 
Social Policy Bonds are versatile in that respect; they also scale up. So: assume that we want to target global levels of air pollutants, according to their lethality. A global fund, backed by contributions from governments and possibly non-governmental organization, could be set up to reward bondholders once a targeted reduction in global air pollution levels has been achieved and sustained. No single approach - PPP or BPP or any other - will work best over the entire planet for a period of (say) decades. Instead, a mosaic of approaches, varying with time and space, will maximise the pollution reduction per dollar spent by our global fund. There will be some circumstances, especially when polluters can be clearly identified, where the PPP will work best. But even under very similar circumstances, politics might make that approach unacceptable.

The crucial points are that the Social Policy Bond principle:
  1. is versatile enough to encompass both the PPP and the BPP, or any combination; and
  2. maximises efficiency, expressed as maximum reduction in pollution per dollar spent.
Social Policy Bonds are, then, a meta-system. They do not dictate how goals shall be achieved, nor who shall achieve them. They do require some source of funding, but raising funds for widely agreed environmental outcomes is likely to be less contentious than the current system, whereby contributors and beneficiaries have to be identified in advance of projects that for the most part reward activity rather than success.

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