Over at Catallaxy, Sinclair Davidson suggests that reductions in carbon emissions should be financed by bonds maturing in 2050, so that the cost is borne by the future beneficiaries. He ends with what is presumably intended as a snark
The real question is how these bonds should be priced? As an opening bid I reckon the ridiculously low discount rate proposed by the Stern Review should be used.
Looking up the latest data, 30-year US government bonds, the closest approximation to a 2050 maturity, are yielding 4.25 per cent. Assuming the Fed manages to hit the midpoint of its 2-3 per cent comfort zone for inflation, that’s a real interest rate of 1.75 per cent. That’s about typical in historical terms – the long run real bond rate has mostly been between 1 and 2 per cent.. Stern doesn’t propose an exact interest rate, but on standard parameters, his proposals imply a real rate of around 2.1 per cent. So, if Stern is ridiculously low, the market bond rate must be positively insane. Perhaps the Catallaxy crew can come up with some libertarian proposals to raise interest rates to a more sensible level.
Update The title was meant as a snark, but in an update, Davidson asserts that “we all know” that the rate of interest on US 30-year bonds is too low. He links to a piece on monetary policy in the mid 2000s, but, as I pointed out above, the current real interest rate is close to the average for the last 120 years. So, Catallaxy really doesn’t like bond markets.
To expand a bit on this point, there is a large literature suggesting that, because of capital market failures, the average rate of return to equity is too high, and the real bond rate is too low. Simon Grant and I have done a lot of work on this issue, and its implications, such as the fact that privatisation is often undesirable. However, correcting the market failure would only raise the bond rate to levels consistent with Stern’s estimates (there’s room to fiddle a bit with the parameters, but Stern’s default choices are pretty plausible).End update
fn1. He includes a suggestion that the bonds should be contingent on exact forecasts of
economic environmental outcomes at that date, but I’ll pass over this in silence.