What’s in a name? Market-based instruments for biodiversity

An article written by Emma Broughton (IFRI) and Romain Pirard (IDDRI) about market-based instruments devoted to biodiversity conservation.

Background paper prepared for the international conference "Market-based instruments for biodiversity: Nature at any cost?" (June 8, 2011) organised within the IDDRI-Fondation d'entreprise Hermès seminar.

Highlights:

MARKET-BASED INSTRUMENTS EMERGE RAPIDLY
Market-based instruments (MBIs) have emerged rapidly in documents and discourses devoted to biodiversity conservation and the provision of ecosystem services (B&ES), and include fiscal policies, subsidies, payments for ecosystem services, tradable rights and permits, and others. Their prominence is due to three reasons at least that rely heavily on assumptions: they are assumed to correct market failures, they implement the theory of incentives, and they have (for some of them) the potential to help filling the funding gap.

MBIs HAVE CONSTRASTED LINKS WITH MARKETS
MBIs for B&ES constitute an extremely heterogeneous group that makes little sense from an economic theory perspective as it mixes apples and oranges. These instruments do not share many characteristics and show a very loose relation to markets as defined by standard economic theory. MBIs as a category look more like an asylum country for all tools with a price component, and reveal a trend toward the commodification of nature, understood here as the process of putting a value on nature for the purpose of trade or payments more broadly speaking.

SIX CATEGORIES OF MBIs BASED ON ECONOMIC SPECIFICITIES
Drawing the lessons from this confusion around the notion of MBIs and the co-existence of a number of conceptions, we propose to use six categories based on their characteristics: (i) Regulations changing relative prices, (ii) Coasean type agreements, (iii) Reverse auctions, (iv) Tradable permits, (v) Specific markets for environmental products, and (vi) Premium capture on existing markets. These categories have different advantages and weaknesses, and various scopes for application.

MOST MBIs HAVE TIGHT LINKS WITH PUBLIC POLICIES
The links between MBIs and public policies are strong and refer to all stages from their elaboration to their implementation and control. They are definitely policy instruments for most of them, and should be used as complementary approaches to more traditional modes of intervention in the hands of policy makers. We distinguished between three levels of decision-making processes to assess the shift between public to private agents that would be triggered by the use of MBIs as policy instruments: definition of objectives, choice and design of instruments, and concrete decisions on the ground. Apparently only the latter level shows such a shift.

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