DC Accepted Papers Paper:
A Theory of Impact Bonds As an Alternative to Pigouvian Tax and Public Provision: Application for Climate Change
*Names in bold indicate Presenter
This presentation summarizes research I published in a 2019 paper, offering an innovative approach to economic externalities and a promising policy for reducing the negative effects of climate change.
The climate change policy currently popular among economists involves applying a per-unit tax or subsidy to every ton of carbon emitted into the atmosphere. The problems with this approach are (1) the negative effect of each ton of carbon emission is difficult to accurately price, (2) per-unit government interventions involve high transaction costs, and (3) a tax on energy consumption will disproportionately affect low-income Americans and merely shift emission-producing activities to other countries.
This article introduces a better solution. Compared to per-unit interventions like taxes and subsidies, policymakers are much better equipped to estimate the aggregate, big-picture economic impacts of carbon emission and sequestration. So, instead of taxing energy consumption, the federal government should operate in aggregate prices and offer a $10 billion R&D prize/impact bond for a technology breakthrough than can reduce the long-term costs of climate change by trillions of dollars.
If the U.S. federal government offered a contingent prize or impact bond worth $10 billion for a climate change solution, venture capitalists would organize a market around finding this solution. Investors would bear the risk, and taxpayers would experience a cost only if investors produce technology that would save society considerably more money.
This policy is promising, given recent activity in the budding carbon capture industry. The estimated social cost of emitting a ton of carbon is $20-50 between 2020 and 2050. In 2011, experts estimated that the cost of capturing atmospheric carbon could not get under $600 per ton. However, with $15 million in investment, one company claimed to have reduced this cost to $90-250 per ton in 2018. Additional investment spurred by a $10 billion prize could allow this industry to create an efficient process for reducing atmospheric concentration of carbon.
For a better illustration of this idea, see the 60-second animation I created (and would use in my presentation to APPAM): https://www.youtube.com/watch?v=CyMC5moNXP8
Furthermore, my article on this topic (with more detail) was published in the Journal of Applied Business and Economics here: https://www.articlegateway.com/index.php/JABE/article/view/2274
The climate change policy currently popular among economists involves applying a per-unit tax or subsidy to every ton of carbon emitted into the atmosphere. The problems with this approach are (1) the negative effect of each ton of carbon emission is difficult to accurately price, (2) per-unit government interventions involve high transaction costs, and (3) a tax on energy consumption will disproportionately affect low-income Americans and merely shift emission-producing activities to other countries.
This article introduces a better solution. Compared to per-unit interventions like taxes and subsidies, policymakers are much better equipped to estimate the aggregate, big-picture economic impacts of carbon emission and sequestration. So, instead of taxing energy consumption, the federal government should operate in aggregate prices and offer a $10 billion R&D prize/impact bond for a technology breakthrough than can reduce the long-term costs of climate change by trillions of dollars.
If the U.S. federal government offered a contingent prize or impact bond worth $10 billion for a climate change solution, venture capitalists would organize a market around finding this solution. Investors would bear the risk, and taxpayers would experience a cost only if investors produce technology that would save society considerably more money.
This policy is promising, given recent activity in the budding carbon capture industry. The estimated social cost of emitting a ton of carbon is $20-50 between 2020 and 2050. In 2011, experts estimated that the cost of capturing atmospheric carbon could not get under $600 per ton. However, with $15 million in investment, one company claimed to have reduced this cost to $90-250 per ton in 2018. Additional investment spurred by a $10 billion prize could allow this industry to create an efficient process for reducing atmospheric concentration of carbon.
For a better illustration of this idea, see the 60-second animation I created (and would use in my presentation to APPAM): https://www.youtube.com/watch?v=CyMC5moNXP8
Furthermore, my article on this topic (with more detail) was published in the Journal of Applied Business and Economics here: https://www.articlegateway.com/index.php/JABE/article/view/2274
