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Economics is all about incentives and contracts are designed to influence and align them. But asymmetric information between the contracting parties leads to design imperfections and potentially enforcement failures. For example, in the workplace, firms can use pay-for-performance contracts to incentivize employees to exert effort, but they are rarely used in practice because it is hard to measure the exact performance, especially if an employee’s task portfolio is multifaceted. It might even be costly if it distracts attention from valuable but hard to measure tasks towards easily measured tasks that are less important for the company. Take the example of a manager who should focus more on the environmental impact of his company. The best incentive may be to take away the focus from easily observed metrics and pay a fixed wage.

Relying on what can be measured may even induce dishonesty if the metrics are poorly structured. Indeed, firms have a much larger “motivation arsenal”—think of job or workplace design; simple appreciation for performance; clear articulation of expectations; the culture; the association with overall firm values and goals. It is a challenge, however, to design such contracts in a coherent way.

As societies grow richer, they have fewer kids.

In the past children provided essential insurance for their parents. Today, having children has become relatively more expensive while social safety nets and insurance markets are taking over their role, essentially creating a free rider problem

We are in some ways less dependent on each other today than we were in the past, relations are weaker, and the community has lost value. At the same time social security systems still depend on children to fund them—fewer children undermine their solvency and overburden the young. Such systems have to adapt in the presence of fewer children and more private insurance.

Ultimately, younger generations will always have to provide for the older ones. If it is not directly as it was in the 20th century and before, it will be indirectly, through higher taxes and other government-imposed redistributive transfers. This creates tensions. Some say that the transfer of wealth from old to young, via inheritance, will address the issue, which may be true in aggregate, but at the individual level it is not a solution. Part of the solution to the generational challenge is a rise in the value of the local community—which could happen if there is a major shock.

Localizing the problem will be key to success.

Governments need to bring the issue closer to their citizens. Only if the problem is tangible for the individual and the community will they care to address it. The Paris Agreement, the Glasgow Climate Pact, these are great initiatives, but apart from not being binding it is hard for governments to convince their people that they are important—it’s just too far removed from their own lived experiences. The same is true for the goal of no more than 1.5 degrees Celsius surface temperature warming. Talking in multi-decade, tenths of a degree terms does not create a sense of urgency on the ground.

Leaders should go for the low-hanging fruit. The local olive grove that is threatened by drought, or the wildfires destroying livelihoods, is much more likely to galvanize local action than global agreements. Another problem with those high-level agreements is that they agree to solve the problem over the next 50 years. But they don’t come back to check how they are performing on achieving the goal.

Markets are unbeatable in assessing value and while it took some time to establish pollution markets, they are an integral part of the Net Zero strategy.

Today, polluting assets can be sold, but their polluting potential is not reflected in the selling price. Pollution markets should be used to appropriately factor in the polluting liabilities of old technologies. Financial accounting-like mechanisms could be developed to make this operational.

Next, we also need to develop much deeper and more credible offset markets. These are currently almost entirely in private hands and apply very heterogeneous technologies, not all of which have proven to achieve real abatement. There are new technologies that are yet unproven, and which shouldn’t be given the same weight as their tried and tested counterparts. If the tech does not work in the end, what happens to the offset that was sold off the back of it? These questions need to be answered.

I would look at it almost entirely from the measurement side. If we want to steer the economy into less polluting solutions, then we need to be able to measure and adequately price pollution. Banks have various measures to help set the price. Their other role is to invest in new technologies and innovative companies. This comes back to the basic market principle and banks’ role within it to help allocate capital efficiently and effectively.

Leave no measure untested. The problem is huge and there is no panacea, so we need to try everything we can possibly think of. We should push boundaries and be experimental—not everything will work, but some things will.

The interviewee is external to ��ţ�������� and the answers provided do not necessarily reflect ��ţ��������’s view.

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