(C) Daily Kos This story was originally published by Daily Kos and is unaltered. . . . . . . . . . . Using Greed to Save the Planet by imposing a cost for political cowardice by governments [1] ['This Content Is Not Subject To Review Daily Kos Staff Prior To Publication.'] Date: 2023-07-02 Peter Coy, in a NY Times subscriber newsletter brings up an intriguing idea for harnessing greed to stop climate change (although he doesn't use greed in the newsletter.) Robert Litterman is a legend on Wall Street. He earned a doctorate in economics from the University of Minnesota in 1980. In his 23 years at Goldman Sachs he oversaw quants, managed risk and developed, with the great applied mathematician Fischer Black, the Black-Litterman model for portfolio allocation. Now he’s a founding partner and the risk manager at Kepos Capital, a New York-based investment company with $2 billion under management. ...The problem Litterman is trying to solve is that many private investors are unwilling to invest heavily in climate solutions because they lack confidence that there will be a payoff. The government could promise that fossil fuels and other carbon sources will be very expensive in the future, making carbon-displacing technologies a safe bet. But governments are notorious for saying one thing and then doing another. They can’t be trusted. There’s a term for the problem Litterman is wrestling with: time inconsistency. The economists Finn Kydland and Edward Prescott won a Nobel in economic science for their exploration of it. In the case of climate change, investors understandably worry that the government will back away from its commitment to a high carbon price if there’s a substantial political backlash. It will, they fear, behave inconsistently over time. emphasis added Litterman’s proposal: Enter the carbon-linked bond. The yield on the bond — i.e., how much interest it pays — is linked to the actual government-imposed price of carbon at any given time. “The government would announce a target carbon price, and if the government fails to hit that target, it will have to pay the bondholder more, so it has an incentive to keep its promises,” Litterman wrote in an explainer. emphasis added This involves understanding how the bond market works, and who would issue these bonds, which I admit is not something I normally spend much time thinking about. This explainer on Green Bonds gives more background on this kind of finance, and provides a context in which carbon-linked bonds would operate. From the Times: In his explainer, Litterman acknowledged that “some opponents of carbon bonds might argue that greedy investors will just take advantage of this and buy bonds hoping that the government fails to meet its target.” “But that’s fine,” he wrote. “That’s the way markets work. Some may profit by betting against the government, but in doing so they will also be forcing the government to live up to its promises.” Coy’s newsletter links to an article by Litterman explaining the concept — but as we are dealing with financiers, it is behind a paywall. A bit more about how it would work can be found at Gro and Kepos Capital Partner, explaining the Gro-Kepos Carbon Barometer. To better analyze carbon emissions policies at the country level, along with the cost of compliance implied by each country’s CO 2 reduction policies, Gro and Kepos Capital have partnered to launch the Gro-Kepos Carbon Barometer™. Click here to explore the Gro-Kepos Carbon Barometer™ The Gro-Kepos Carbon Barometer™ tracks seven major CO 2 emissions reduction policy categories for more than 25 countries which make up over 83% of global emissions, using both public databases and government sources. It normalizes the policies into a “Carbon Barometer Price™” – the amount, in US dollars, that emitters must pay on average per ton of CO 2 emissions as an incentive to develop and leverage low-carbon drivers of economic growth. This makes it simple to analyze the financial incentive for each country to comply with policies designed to reduce carbon emissions. The “carbon barometer” concept was originally developed by world-renowned financial and quantitative investing experts Bob Litterman and Mark Carhart of Kepos Capital in consultation with climate economists and carbon policy experts. That concept has been operationalized by bringing together Gro’s and Kepos’s combined domain expertise in climate and economic research, and by leveraging Gro’s demonstrated success in the automated ingestion and organization of complex, global datasets. Throughout its development and on an on-going basis, this joint Gro-Kepos effort is supported by carbon policy thought leaders from academia, environmental non-profits, and the private sector who provide advice and feedback, serving as the Carbon Barometer™ Advisory Board. I’ll leave it to those with a better understanding of how financial markets work to unravel this, but this proposal sounds like it addresses the key problem of Climate Change. There are tremendous profits to be made from destroying the planet, but not so for saving it. It’s the Tragedy of the Commons. This is a problem that cannot be ‘solved’ by free markets without government action. If Litterman has developed a financial instrument that can make it happen, it's not too soon to give it a try. [END] --- [1] Url: https://www.dailykos.com/stories/2023/7/2/2177867/-Using-Greed-to-Save-the-Planet-by-imposing-a-cost-for-political-cowardice-by-governments Published and (C) by Daily Kos Content appears here under this condition or license: Site content may be used for any purpose without permission unless otherwise specified. via Magical.Fish Gopher News Feeds: gopher://magical.fish/1/feeds/news/dailykos/