Solving the haze problem. Should Singapore issue “Clean Air Bonds”?

After years if not decades in which the Singapore government has perennially failed to solve the haze problem, it seems that the time for new ideas to address this complex challenge has arrived. Both Kenneth Jeyaretnam and Alex Au put forward innovative ideas that could help to alleviate the problem, which is a refreshing change from the usual diplomatic hectoring that has typically been deployed. In light of this I would like to put forward my own thoughts on a long-term solution to the problem – but instead of suggesting a new solution to and old problem, I would prefer to set up a mechanism that will enable an optimal solution to be found without any one person having to select the best way forward. This can be achieved through market forces – by creating a profit incentive which will hopefully drive all relevant parties to investigate and implement whatever may be the economically most efficient means to solve the haze problem.

My idea – “Clean Air Bonds” is inspired in fact by both Kenneth and Alex’s own suggestions. They both propose reasonable ideas which involve spending money on solving the problem. The question is which idea is best? Which is most likely to work? Which is going to be the economically most viable? Clean air bonds would seek to answer these questions by creating a marketplace for solutions to the problem which compete for financial reward. If the reward is meaningful, our best and brightest will all be inspired to attempt to resolve the haze problem once and for all and make a profit in the process. This is much better than the government seeking to pick an ideal solution up front and being faced with the politically difficult decision to change course if their initial decision is not optimal. Creating a profit motive for private entities ensures a concrete desire to truly solve the problem – otherwise those private entities do not get paid. Remember that the motivation to make a profit is very powerful – it is in fact this motive, through a desire to minimise land clearance costs, that causes the haze in the first place.

What are Clean Air Bonds?

So how does it work? The details are likely to be complicated, but let us start with a simple example to illustrate the point. A clean air bond can simply be a piece of paper, signed by the Prime Minister, stating the following words:

“The government of the Republic of Singapore will pay the person holding this piece of paper on 31 December 2015 five million dollars, if and only if, the 24 hour PSI reading published by Singapore’s NEA does not exceed 80 on any day in the preceding twelve month period.”

Obviously this piece of paper, the “Clean Air Bond”, has some value; but crucially the exact value will increase if we solve the haze problem. If no steps are taken and next year the haze returns this bond is likely to be worthless. However, if someone does solve the haze problem, this bond will quickly become very valuable. People or organisations with good ideas on how to solve the haze problem will be willing to pay for the right to own the bond, and people with good or cheap ideas are likely to be willing to pay more. Suppose that someone decides to implement Alex Au’s suggestion – which was to solve the haze problem with a fleet of hydrogen balloons which carry sea water up to a height of a few kilometers and spray it into the sky – wherein the ensuing mist would scrub haze from the air before it reaches Singapore. If someone designs and tests a means to implement this plan, they may estimate it will cost two million dollars to successfully set up, then assuming they want to make one million dollars in profit, they would be willing to pay up to two million dollars for the clean air bond:

Cost of solution: (2,000,000)
Cost of bond:     (2,000,000)
Revenue from Bond: 5,000,000
-----------------------------
Profit:            1,000,000

Through this process, anyone who has a viable and testable solution can bid for the bond, solve the haze problem and make a profit. However there are a few caveats. Multiple bonds would have to be issued in the first instance, to encourage multiple people or companies to work in parallel towards a solution. If multiple successful projects are launched then everyone can benefit. There also needs to be good oversight to prevent “gaming” of the system. Since the payout of the bond is a function of NEA’s PSI readings someone could potentially try to bribe their staff or tamper with their equipment for a favourable result – so an independent body following a transparent process would have to be responsible for managing the reporting system. There would have to also be caveats in place presumably to prevent the system being ruined by pollution outside the scope of the haze problem – a volcanic eruption elsewhere in Indonesia for example could make the bond worthless if the wording of the terms and conditions is not chosen carefully. The last question for now is how much should the bond pay out? Five million dollars – or more? This is something Singaporeans together need to consider. How much is clean air worth to you?

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3 Comments

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3 responses to “Solving the haze problem. Should Singapore issue “Clean Air Bonds”?

  1. Inspiring as always to see innovative ideas coming from you Andy. When you say, “Remember that the motivation to make a profit is very powerful – it is in fact this motive, through a desire to minimise land clearance costs, that causes the haze in the first place.” you hit the nail on the head.

  2. Jian

    Andy, I give you full credit for offering a constructive solution to the smog (err… haze) problem, but this problem is not solvable by the the PAP. The problem originates in Indonesia, a dysfunctional state that happens to be Singapore’s neighbor. Singapore has as much influence on Indonesia as Japan has on China, none.

    • Sorry but I have to disagree. It is too easy to just wash ones hands of the problem and suppose that it is unsolvable by us. Realistically there are many ways this could be solved, some of which we ourselves surely cannot imagine. By setting up a financial market which incentivises and rewards innovative solutions, we encourage people smarter than ourselves to try and find the answer. The best part is that setting up “clean air bonds” doesn’t cost anything if it doesn’t work, because the bonds just do not pay out. What is not to like? At least it is better than endlessly flying off to Jakarta and talking about this with the government of a country that doesn’t even like us.

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