The Underpants Gnomes


Richard Murphy thinks that this idea from the Sustainable Development Commission is a very good one. So clearly there is less to it than meets the eye:

A further option would be to fund specific elements of a sustainable new deal through ‘green bonds’ – bond issues which are targeted directly at low-carbon investments. This idea has a strong rationale under current conditions for a variety of reasons. In the first place, it is clear that many of these investments offer considerable returns, at a point in time when the returns on conventional savings (particularly household savings) are disappearing. 

This has an air of the Underpants Gnomes from South Park to it:

The Underpants Gnomes are businessmen of sorts, and they know a lot about corporations, and explain them to the boys in their underground lair. Their business plan is as follows:

Phase 1: Collect Underpants
Phase 2: ?
Phase 3: Profit!

What's missing from the green bonds idea is that stage 2. How do we get the investments in these green bonds to turn a profit?

Assume for a moment, however strange it might be, that the SDC is correct in that these investments offer considerable returns. By their own numbers they do, yes. But not, you'll note, to the investors in them. The returns are societal. Reduced emissions and the damage they will cause (look, I know, but we're playing pretend their figures are correct). There is no mechanism by which those societal returns are to be paid to the investors.

This is the exact mirror image of the original point about the emissions themselves. They are externalities, outside the prices that prevail in the market. With our bonds, the returns to the society at large are outside the returns to the investors. So just as we get too many emissions because they are not priced so we will get too little investment as the returns are not included in prices.

We do know how to get externalities internalised. We can do it through Pigou Taxation for example. And we could indeed, in fact we're already trying to do so, get the costs of the emissions properly reflected in market prices. And having those costs, thus the profits to be made from minimising them, properly reflected would be a solution to our problems.

But if we do get these costs and thus potential profits properly included in market prices, then what is the justification for "green" bonds? None at all is the answer to that question. For investment in these sorts of green projects will be a money making opportunity just like any other.

What we come to in the end is that the structural changes, the incentives, required to make green bonds work obviate the need to have green bonds in the first place.

Yes, we do pay for the Sustainable Development Commission out of our taxes. Aren't we the lucky ones?