How can we design a solution to climate change?

What do plunging global markets have to do with climate change? The need to step in first, by designing mechanisms that prevent such crises, says Nobel economist Eric Maskin.

24 Jul 2020

One example is the financial crisis of 2008, the effects of which the world is still feeling even as it endures the economic crash associated with the spread of the COVID-19 coronavirus.

“One thing that this crisis established quite clearly is that financial markets by themselves don’t always produce the outcomes that we would like,” says Maskin, an American economist and 2007 Nobel Laureate, recognised for having laid the foundations of mechanism design theory along with Leonid Hurwicz and Roger Myerson.

“Particularly when there is a financial meltdown that affects the global economy adversely, this goes to show that somehow we have to modify financial markets.”

Regulation of the financial system as one of the global warming solutions

Modifying free market systems - by designing financial regulation that limits leverage, for example – can produce better results. As Maskin explains, this mechanism design theory takes people as they are and tries to reconcile their individual goals with the goals we have as a society.

These principles are particularly relevant regarding global warming, where free markets alone will not provide a solution and there is a need to induce countries to commit to reducing emissions.

“Climate change is not likely to lead to disaster in the next few years, although we are already beginning to see the possible repercussions. But there is a significant risk that if we do nothing, it will lead to catastrophic outcomes down the road, in 50 years’ time, possibly less.

So doing something about climate change is a high priority for the world,” Maskin says.

Reducing carbon emissions working back from the result

The key when designing good mechanisms is to understand the goals, inclinations and behaviors of all these participants – that is, you start with the result you would like and work backwards to figure out how you get there.

Working back from a result of lower greenhouse gas emissions brings us to a mechanism, in the form of an international agreement under which countries commit to reduce their greenhouse gas emissions.

“It’s through such a mechanism that we’ll ultimately solve the global warming problem. So, the potential implications of mechanism design are really quite broad and important,” Maskin says. “In fact, we saw what the free market produces. It produces occasionally a meltdown. We have to modify free market systems, using our mechanism design tools, by for example designing financial regulation that makes sense.”

UBS Asset Management in the United States

The website contains general information about UBS Asset Management (Americas), Inc., UBS Hedge Fund Solutions LLC, and UBS O'Connor LLC, collectively known as "UBS Asset Management". The information contained on this website does not constitute investment advice or a recommendation to purchase or sell any securities or other financial instrument or any particular strategy or fund. Market commentary, product information and related performance data available on this website has been compiled from sources believed to be reliable and is provided in good faith for informational purposes only. UBS Asset Management does not guarantee the accuracy, suitability or completeness of information contained on this website, and all such information, including but not limited to performance data and related metrics, is subject to change without notice. Certain content on this website is intended for institutional investors and their financial representatives only, and should not be relied upon by retail investors or members of the general public.

Market commentary and similar statements contained herein are based on current expectations and may be considered “forward-looking statements.” Actual future results, however, may prove to be different from expectations. The opinions expressed are a reflection of UBS Asset Management’s best judgment at the time of posting, and any obligation to update or alter any forward-looking statement as a result of new information, future events, or otherwise is disclaimed.

Investments involve risks, are not guaranteed and may not return the original principal amount invested. Past performance is no guarantee of future results. Investors should read all available product information carefully before making an investment decision, including information about applicable risks, fees and expenses. This website does not address the investment objectives, risk tolerance or financial needs of any particular investor. In addition, any statements regarding investment performance expectations, risk and/or return targets do not constitute a representation or warranty that such expectations or targets will be achieved.

This website is not intended for persons located in any jurisdiction where the availability of this website is prohibited or contrary to local law or regulation or would subject any UBS entity to any registration or licensing requirement in any such jurisdiction.

Please confirm you are a US resident to proceed.

Please select at least 1 checkbox

SI Foresight


Asset Management services and solutions in your location

Please select your region


For further information on what we can offer you, please get in touch.