Environmental Policy Bonds Injecting market incentives into the achievement of local, national and global environmental goals

Environmental Policy Bonds (EPBs ) EPBs do not bear interest Redeemable for fixed sum once objective has been achieved Government sets objective Issues EPBs by auction

Example: cleaning up a lake Local authority sets objective –concentration of pollutants, fish numbers, etc Local authority will redeem EPBs for $10 each when lake is clean Sell for $2 when floated Prospect of capital gain motivates people to clean up lake

How Bond prices change

Motivation Bond price will rise as targeted goal becomes closer Bondholders benefit from this price rise Bondholders invest in lake-cleaning projects Bondholders can sell Bonds at any time

Cascading incentives Bondholders have incentives to: –pay people and firms to pollute less –pay environmental groups to clean up –invest in lake-cleaning projects and technology –ensure that existing laws against pollution are enforced –co-operate with each other

Advantages (1) Efficiency –Tradability injects incentives to be efficient at all stages –Bond prices generate valuable information –Encourage new activities –More responsive to events and local situations

Advantages (2) Transparency about goals increases political support Transparency of costs makes trade-offs clearer Stable objectives Flexibility to cope with uncertainty

Potential disadvantage Incentives to achieve targeted objective at the expense of others Solution: –Specify objective carefully –Enforce existing legislation –Target broad outcomes

EPBs: when they work best to achieve broad objectives many sources of pollution sources and scientific knowledge changing rapidly uncertain causes

EPBs: summary Government sets objective Government is ultimate source of finance Bondholders achieve objective Bondholders have market incentives to be efficient