Greening the future: a case for environmental impact bonds

A central puzzle for environmental economics is how to integrate long-run costs and benefits into present-day decision making. Commonly this puzzle is described in terms of externalities. These occur when ‘an activity or transaction by some party causes an unintended loss or gain in welfare to another party, and no compensation for the change in welfare occurs’ (Daly and Farley, 2011, p.184). For example, the millions of tonnes of carbon dioxide that a large coal-fired power plant releases annually contributes to the cumulative problem of climate change, yet those who profit from producing electricity do not bear the burden of the negative consequences. Rather, these costs fall disproportionately upon future generations and communities uniquely vulnerable to the impacts of climate change. Thus, the emission of greenhouse gases creates a negative externality, because its costly impacts are external to the accounting of the actors who emit them.