Using Market-Based Instrumentsto Enhance Climate Resilience

Alex Baumber and Graciela Metternicht

Contents1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 What Is Climate Resilience? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Market-Based Instruments: Why Use Them? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 Types and Applications of Market-Based Instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85 Who Pays? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

5.1 MBI Complexity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116 Incorporating Resilience Principles into Market-Based Instruments . . . . . . . . . . . . . . . . . . . . . . . 147 Designing Market-Based Environmental Policy Instruments to Enhance Resilience . . . . . . 17

7.1 Principle 1: Value Reserves, Buffers, and Redundant Capacity . . . . . . . . . . . . . . . . . . . . . . 177.2 Principle 2: Enhance Diversity Rather than Oversimplifying Complex Systems . . . . 197.3 Principle 3: Implement MBIs at the Appropriate Scale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 197.4 Principle 4: Ensure Key System Variables Are Monitored and Essential

Information Is Shared . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 207.5 Principle 5: Support the Building of Trust, Leadership, and Collaboration . . . . . . . . . . 217.6 Principle 6: Consider Feedbacks, Indirect Impacts, and Perverse Incentives . . . . . . . . 22

8 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 239 Cross-References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

Abstract

Market-based instruments have been used extensively in areas such as carbontrading, biodiversity conservation, watershed protection, urban planning, andrenewable energy to address market failures, to increase the cost-effectiveness

A. Baumber (*)Faculty of Transdisciplinary Innovation, University of Technology Sydney, Sydney, NSW,Australiae-mail: alex.baumber@uts.edu.au

G. MetternichtSchool of Biological, Earth and Environmental Sciences, PANGEA Research Centre, UNSW,Sydney, NSW, Australiae-mail: g.metternicht@unsw.edu.au

© Springer Nature Switzerland AG 2020R. Brears (ed.), The Palgrave Handbook of Climate Resilient Societies,https://doi.org/10.1007/978-3-030-32811-5_7-1

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of public spending, and to leverage new sources of funding for social andenvironmental objectives. However, they are yet to be widely applied to climatechange adaptation, or to practices that enhance the resilience of communitiesdealing with climatic extremes and disasters. The potential exists to utilizemarket-based instruments to enhance climate resilience by promoting land usessuch as wetlands, mangrove forests, urban green space, and physical infrastruc-ture that can act as buffers against projected increases in storm surges, highrainfall events, heat waves, and wildfire. The role of market-based instrumentsin generating income, employment, and community engagement may alsoenhance the social capital needed for communities to cope with extreme events.

Previous experience with market-based instruments provides policy-makersworking on climate resilience with evidence on what has worked in other contextsand where problems have arisen around the use of such instruments. Combiningenvironmental economics and resilience theory also requires careful consider-ation to be given to the key assumptions that underpin these different approaches,such as the tension between efficiency as an overarching goal in market econom-ics and the value placed on redundancy and diversity by resilience scholars. Thischapter explores these tensions and outlines a set of principles for adaptingexisting market-based instruments or using them as models for the design ofnew instruments aimed at enhancing climate resilience.

Keywords

Market-based instrument · Resilience · Auction · Credit · Offset · Diversity ·Reserves · Efficiency

1 Introduction

At the time this chapter was begun, Australia was in the midst of a bushfire crisis thatfollowed one of its most severe droughts on record, with the state of New SouthWales having seen a record 5 million hectares burnt, more than 2000 homes lost, andall visitors evacuated from the state’s south coast during the peak summer holidayseason (DPIE 2020). This is a case in point of the need to consider not only climatechange mitigation but also the need to adapt to changes that are already beingexperienced and to address what the World Economic Forum has termed the“resilience deficit” most nations face at present (WEF 2020).

Heightened wildfire risks in several parts of the world are one of the manyprojected impacts of human-induced climate change, along with an increase inheat waves, extreme rainfall events, storm surges, and tropical cyclone activity insome areas (IPCC 2014). In this context, there has been an increased focus amongpolicy-makers and affected communities on building climate resilience, but rela-tively little attention has been given to the role that market-based instruments may beable to play in these processes of resilience-building. Used well, market-basedinstruments (MBIs) have the potential to enhance climate resilience by incentivizing

2 A. Baumber and G. Metternicht

practices that wouldn’t otherwise be adopted, providing new sources of funding forcommunity activities that build resilience, and ensuring that environmental exter-nalities are appropriately priced in decision-making across the economy. Usedpoorly, MBIs have the potential to decrease resilience by oversimplifying complexecosystems, reducing redundant capacity in the name of efficiency, and crowding outaltruistic behaviors.

MBIs have been promoted by environmental economists and policy-makers dueto their potential to address market failures such as unpriced externalities (e.g.,emitters of greenhouse gases passing on the costs of climate change to the rest ofsociety) and to enhance the cost-effectiveness of public funding for the delivery ofecosystem services (Hellerstein et al. 2015). However, MBIs have also been linkedto unintended consequences, such as biofuel targets in Europe driving deforestationin Southeast Asia (Gerasimchuk and Koh 2013) and biodiversity offset schemesleading to the legitimization of environmental destruction (Apostolopoulou andAdams 2017; Orr et al. 2017). Often, these negative consequences stem from overlysimplistic assumptions about which elements of a system should be valued (andwhich should not) and the extent to which one element of a system can be substitutedfor another (Baumber 2017b). These assumptions, designed to ensure the “efficient”delivery of valued services at the lowest possible cost, can at times be at odds withprinciples for enhancing resilience in complex socio-ecological systems, whichemphasize the importance of maintaining ecological buffers, social capital, and adiversity of response options (Carpenter et al. 2012; Erol et al. 2010; Armitage2007).

This chapter outlines some of the principles to follow and pitfalls to avoid whendesigning MBIs to foster climate-resilient communities. The following section pro-vides an explanation of how resilience is conceptualized in this chapter. This isfollowed by a brief introduction to MBIs and an overview of the different types ofMBIs and examples of how they have been used to date. The chapter then exploreskey resilience principles identified through previous research into diverse socio-ecological systems, including a discussion of the tensions that can arise betweenresilience and efficiency when using MBIs. The final section presents a set of designprinciples to be followed when designing MBIs to build climate resilience.

2 What Is Climate Resilience?

Before delving into the various categories of MBIs, the ways in which they havebeen used, and the principles for applying them to climate resilience, it is importantto discuss how resilience is conceptualized here. This chapter follows the approachtaken by resilience researchers such as Buzz Holling, Brian Walker, Derek Armitage,and Steve Carpenter across a diversity of complex socio-ecological systems (Holling1973; Walker et al. 2004; Armitage 2007; Carpenter et al. 2012). Under thisconceptualization, resilience is not the same as resistance to disturbance, nor is itsimply about “bouncing back.” Rather, resilience is regarded to be “the capacity of asocial-ecological system to absorb disturbance, reorganize, and thereby retain

Using Market-Based Instruments to Enhance Climate Resilience 3

essential functions, structures and feedbacks” (Carpenter et al. 2012, p. 3249).Determining which functions and structures are “essential” is partly a question ofscience, especially where ecological functions are concerned, and partly a questionof human values, especially where cities, communities, and cultures come underthreat from a changing climate.

Complex adaptive systems may be regarded as operating within certain states, or“basins of attraction” (Walker et al. 2004). While climatic and other disturbancesmay act to push a system out of its current state, strong balancing feedbacks act topull it back toward a particular set of relationships and values that define its essentialfunctions and structures (Fig. 1). For example, a rangeland system may be charac-terized by a certain mix of grass, shrubs, livestock, and human management practicesthat interact with one another in a set of relationships that are relatively predictable(e.g., livestock eat grass, grass and trees compete for space, humans move livestockaround). Following a disturbance such as a drought, flood, or fire, balancing feed-backs help to pull the system back toward this mix of elements and relationships.Such feedbacks may include the persistence of seedbanks within the soil, adaptationsthat allow trees to resprout after fire, or human management practices such asproactive adjustment of stocking rates. Under such conditions, the present statemay be regarded to be fairly resilient, even if the system does not settle or stabilizefor any length of time due to the constant interplay between disturbance andrecovery.

While balancing feedbacks may help to maintain essential functions and struc-tures following a disturbance, resilience has its limits. Complex systems are charac-terized by nonlinear change, which means that a disturbance only slightly larger thana previous one may result in a fundamental shift from one state to another. Thresh-olds may be crossed, balancing feedbacks may be overcome, and reinforcingfeedbacks may kick in to produce runaway change (e.g., a flood that is slightlymore intense than the last one washes away a critical mass of topsoil, preventingvegetation from re-establishing, making the landscape susceptible to further erosion,and “locking” the system into a new degraded state). Moreover, the disturbance thatproduces this fundamental shift in states may not even need to be larger thanprevious disturbances if the resilience of the system has been eroded, such as by agradual loss of adaptive capacity among human managers of the system.

In the context of climate resilience, disturbances may take many different forms,including floods, droughts, storm surges, heat waves, tropical cyclones, or coldsnaps. The latest available evidence from the Intergovernmental Panel on ClimateChange (IPCC) is that there is “high confidence” that climate change can exacerbateland degradation processes, including through increases in rainfall intensity,flooding, drought frequency and severity, heat stress, dry spells, wind, sea-levelrise, wave action, and permafrost melt (IPCC 2019). While some of these climaticdisturbances may be regarded as weather extremes (e.g., extreme temperatures orrainfall near the high or low ends of observed values), others such as drought or floodrepresent an extreme accumulation of weather events (IPCC 2012). Furthermore,gradual climatic shifts, such as a progressive decline in seasonal rainfall in anagricultural region over many years, may not qualify as a disturbance in and of

4 A. Baumber and G. Metternicht

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Using Market-Based Instruments to Enhance Climate Resilience 5

itself, but can erode the resilience of the affected community to cope with futuredisturbances. For example, a gradual loss of rainfall may reduce ecological bufferslike ground cover and soil moisture and erode community reserves of wealth, humanhealth, optimism, and trust that are required to adequately respond to a future flood,drought, or storm.

Responding to the increased risks of extreme events resulting from climatechange has predominantly been framed as an adaptation challenge (IPCC 2019),and indeed adaptation is the primary focus of this chapter. However, it is important tonote that mitigation of climate change also has an important role to play in enhancingcommunity resilience to extreme climatic events – and failure to mitigate climatechange is likely to reduce resilience through various social and economic disrup-tions. Furthermore, given that many existing MBIs are aimed at climate changemitigation, such as renewable energy mandates and carbon trading, this chapter alsoconsiders the potential synergies between mitigation and adaptation and the potentialto tailor existing MBIs to incorporate adaptation objectives.

3 Market-Based Instruments: Why Use Them?

At its core, economics is “the study of the allocation of scarce means to satisfycompeting ends” (Becker 2017, p. 1), and markets represent a key tool for policy-makers to ensure that this allocation is as efficient as possible. However, environ-mental economists have long challenged the notion that our existing markets forgoods and services are indeed operating efficiently due to a range of “marketfailures,” including unpriced externalities, free rider effects, lack of competition,and imperfect information (Anderson 2010). MBIs aimed at addressing these marketfailures have been developed in many different contexts to deliver environmentaland social objectives – and these can serve as models for MBIs aimed at climateresilience. Moreover, a recent global assessment of land degradation and restorationhighlights the potential of coupling market forces with legal and regulatory instru-ments and locally evolved institutions for enhanced environmental governance,including resilience (Pandit et al. 2018).

Human-induced climate change is a clear example of a negative externality,whereby various emitters such as factories, electricity generators, farmers, foresters,and consumers of transport fuels have been able to freely emit greenhouse gases intothe atmosphere and pass the costs of this onto the rest of society (and onto nonhumancomponents of the environment). Free rider effects represent the inverse of this,whereby businesses and individuals benefit from having access to public goods orecosystem services without having to contribute to the costs of maintaining them,such as a farm or housing development that benefits from the storm surge protectionprovided by a neighboring mangrove forest without having to pay for its mainte-nance. Lack of competition in markets can lead to consumers paying higher pricesfor products or services, such as renewable energy or insurance, that they mightconsume more of in a truly efficient market. Information asymmetries may lead

6 A. Baumber and G. Metternicht

consumers to overconsume risky products like homes in areas prone to bushfires orsea-level rise because they lack sufficient information about the risks.

MBIs that have been used to address these kinds of market failures can be assimple as providing funding for desirable actions, like government grants forreforestation, which stimulate demand and create incentivizes to supply the goodsand services needed to deliver these outcomes. Conversely, undesirable actions suchas clearing land or emitting pollutants may be subject to taxes or financial penalties,which place a price on the negative externalities these actions cause and createdisincentives to undertake them. It is also possible to design more complex MBIs,such as reverse auctions, offset schemes, and tradable certificates, which have thepotential to create entirely new markets for ecosystem services and socially desirablepublic goods, including the sequestration of carbon in vegetation and soils, theprovision of habitat for biodiversity, and the protection of watersheds to preventerosion and improve water quality (Baumber et al. 2019a).

MBIs are often promoted due to their capacity to efficiently deliver environmentaloutcomes in a manner that imposes the lowest possible costs on private industry orpublic funders. The cost-effectiveness of MBIs for environmental protection andrestoration has previously been demonstrated in diverse contexts such as the UnitedStates, Costa Rica, Australia, and Indonesia (OECD 2010; Porras et al. 2013;Hellerstein et al. 2015). However, MBIs can also carry risks of perverse outcomes,particularly where simplistic assumptions are applied to complex systems to achieve“efficiency.” Examples include biodiversity offset schemes that permit new restora-tion in one location to be “traded off” against destruction of old-growth vegetationelsewhere (Maron et al. 2016) and the potential for carbon pricing schemes to replacebiodiverse ecosystems with monocultures due to the value placed on a singleecosystem component (carbon) at the expense of other components (Lindenmayeret al. 2012).

Beyond the immediate incentives they can create, MBIs can also lead to shifts insocietal values over time, which again may have either positive or negative conse-quences. For example, Berry et al. (2019) report on how the potential to sell creditsfrom “carbon farming” in Australia may be increasing the perceived value of woodyvegetation among graziers who have traditionally placed a higher value on grasscover. Conversely, Chervier et al. (2019) detail how payments for forest protection inCambodia can “crowd out” nonmonetary motivations for protecting ecosystems, andOrr et al. (2017) caution that offset schemes can legitimize environmental destruc-tion as just another business cost. As such, a key challenge in using MBIs to buildclimate resilience is not to focus solely on economic incentives, but to consider theways that MBIs might impact on the shared beliefs, social norms, and worldviews ofaffected communities.

Before considering how best to design MBIs to enhance rather than detract fromresilience, it is important to review the various ways that MBIs have been used todate to deliver environmental and social objectives. This is the focus of the followingsection.

Using Market-Based Instruments to Enhance Climate Resilience 7

4 Types and Applications of Market-Based Instruments

The term market-based instrument (MBI) is a broad-ranging one that can be appliedto diverse measures such as grants, subsidies, auctions, taxes, charges, penalties,tradable permits, public-private partnerships, and certification programs. In thecontext of climate change, MBIs may be used for a wide range of purposes,including to discourage emissions-intensive activities (e.g., burning fossil fuels,clearing forests), to incentivize the use of low-emissions technologies (e.g., renew-able energy), to promote land uses that sequester carbon (e.g., reforestation), or toenhance the adaptive capacity of communities affected by climate change (e.g.,livelihoods, housing, food security). There is also the potential for MBIs withother objectives, such as biodiversity conservation or watershed protection, to bemodified to focus on synergies related to climate change adaptation.

MBIs can be classified in a variety of ways. They may be classified based on whatthey cover (e.g., carbon, biodiversity), the source of demand (public payments,compliance-based, or voluntary), and how complex they are (e.g., single- vs multiple-buyer schemes). Across the range of existing MBIs, those relating to carbon sequestra-tion, biodiversity conservation, watershed protection, and bioenergy have greatestrelevance to climate resilience. While climate change adaptation has not been theprimary goal of these MBIs, synergies exist between their various objectives andbuilding climate resilience and they offer models that could be applied to future schemes(Baumber et al. 2019a).

MBIs aimed at biodiversity conservation are highly relevant to climate resiliencedue to their potential to promote the maintenance and restoration of specific habitattypes that could act as buffers against climatic disturbances, such as wetlands,forests, and urban green space (Fig. 2). This can be promoted using simple grants

Fig. 2 Linkages and positive feedbacks between MBIs promoting biodiversity conservation andenhanced resilience to climate change

8 A. Baumber and G. Metternicht

or stewardship payments, as well as more complex approaches involving auctions(to distribute payments cost-effectively) or offset schemes that allow developers todegrade certain types of habitat provided that they compensate for this and achieve“no net loss” overall (Doswald et al. 2012). Watershed protection to provide cleanwater and reduce erosion has been successfully promoted under both public andprivate schemes, with nearly 400 schemes operating worldwide as of 2018(Capodaglio and Callegari 2018). It is also possible to design multifunctionalschemes that aim to promote biodiversity conservation, watershed protection, andother goals simultaneously, such as the US Conservation Reserve Program (CRP).

MBIs aimed at climate change mitigation may also be modified to incorporateobjectives that assist with adaptation, such as habitat protection, erosion control, andlivelihood support for vulnerable communities. In relation to carbon trading,Australia provides a prominent example of a country that has sought to capitalizeon the synergies between mitigation and adaptation by promoting “carbon farming”as means of both sequestering carbon and assisting ecological restoration (Evans2018). Bioenergy provides another example of an activity that has been promoted forthe purposes of climate change mitigation in many jurisdictions but can also enhanceadaptation. Examples include the EU Renewable Energy Directive’s bonuses toencourage degraded land to be restored for biofuel production and Brazil’s use oftargeted tax breaks to promote feedstock production by small family farmers inpoorer regions (Baumber 2017a).

Aside from environmental MBIs, there are also examples of socially orientedMBIs that could be drawn on in designing MBIs for climate resilience, particularly inthe field of urban planning. In the United Kingdom, planning obligations often requiredevelopers to build affordable housing or contribute to critical infrastructure – or pay alevy to have someone else build it (Garton Grimwood and Barton 2019). Transferabledevelopment rights (TDRs) have also been used in various US cities, such asNew York’s “air rights” scheme which places caps on vertical development to limitshadowing and density but allows developers to exceed these limits by purchasingunused air rights from landowners in another part of the city (Kaplowitz et al. 2008).While such MBIs have not been developed with climate change adaptation in mind,they could provide models for future MBIs to promote climate resilience in urbanareas. Options include obligations placed on developers to contribute to criticalinfrastructure required to protect against floods, storm surges, or fires and tradablecredit schemes to increase urban green space to mitigate an intensification of the urbanheat island effect.

5 Who Pays?

MBIs used to promote land-based activities that maintain or enhance the provision ofecosystem services can be divided into three main types based on the source ofdemand within the markets they create (Mercer et al. 2011):

Using Market-Based Instruments to Enhance Climate Resilience 9

1. Public payments: Governments are the main source of demand.2. Compliance-driven transactions: Governments place obligations on private enti-

ties to purchase or invest in ecosystem services.3. Voluntary transactions: Demand stems from private entities who voluntarily seek

to enhance ecosystem service delivery.

Public payments may take the form of government grants or stewardship schemessuch as those run by the US Environmental Protection Agency (EPA) or the GlobalEnvironmental Facility (GEF), a partnership of 18 United Nations agencies, multi-lateral development banks, national entities, and international NGOs. Examples ofgrants schemes aimed at enhancing the delivery of social services include interna-tional aid programs, national-scale community development grants (e.g., inAustralia), and government support for charities or social enterprises providinghousing, food, or other social services.

Subsidies and tax breaks are an alternative to grants in cases where eligibility isrelatively simple to assess and payment levels are fixed. Examples include the use ofsubsidies and tax breaks to develop biofuel industries in the United States and Brazil(a climate change mitigation measure) and the tax concessions used to encourage thecreation of Voluntary Conservation Easements in the United States (a climate changeadaptation measure). Other concessions that may be offered instead of tax reductionsinclude access to credit or insurance, for example, in Brazil to encourage Amazonlandholders to comply with forest protection laws (Butler 2011).

Compliance-based approaches involve governments creating a system of rightsand obligations through regulation and then allowing these to be traded orexchanged for payment. This approach may be used to allocate resources that aresubject to natural limits (e.g., water in a river basin), to discourage actions that areseen as undesirable (e.g., deforestation), or to encourage activities that are seen asdesirable (e.g., placing obligations on energy companies to supply renewable energyor on urban developers to provide affordable housing). Such approaches mayprovide models for building climate resilience but require careful consideration ofwho should have such obligations placed on them and what they should receive inexchange.

Voluntary demand is the third main type of demand for MBIs and may bemotivated by consumer guilt, an altruistic desire to contribute to a better world, orbusinesses being pressured by customers, shareholders, or other stakeholders. Car-bon represents one of the most prominent environmental markets where voluntarydemand has been significant, with a range of certification schemes established tofacilitate voluntary transactions between buyers and sellers of carbon credits, includ-ing Gold Standard, Verified Carbon Standard (VCS), CCBA (Climate, Communityand Biodiversity Alliance), SocialCarbon, and Plan Vivo. CCBA and SocialCarbonin particular have sought to incorporate factors that enhance adaptation and resil-ience into their standards, including criteria relating to community development,biodiversity, and land degradation (Baumber et al. 2019b).

Voluntary demand has been significant in protecting habitat in many countries forthe purposes of watershed protection (Capodaglio and Callegari 2018) and could

10 A. Baumber and G. Metternicht

provide a model for protecting areas that provide essential buffers against extremeclimate events. For example, the owners of the Vittel brand of bottled natural mineralwater in France decided in the 1980s to develop their own scheme for paying farmersto improve upstream water quality (Perrot-Maître 2006). This involves farmersentering into contracts to sell their land to Vittel or modify land managementpractices in return for annual payments and investment in equipment.

Even in cases where voluntary demand is significant, governments still have animportant role to play by providing information, supporting verification and certifi-cation processes, and providing platforms for exchange. For example, the AustralianGovernment has sought to facilitate voluntary trade in carbon credits by recognizingcertain voluntary standards under its National Carbon Offset Standard andsupporting the development of Australia’s Carbon Marketplace to enabling tradingin voluntary credits (Baumber et al. 2019b). Similarly, Costa Rica has been success-ful in stimulating voluntary payments from private companies for carbon, biodiver-sity, watershed protection, and landscape amenity through the creation of acertification system and trading platform (Porras et al. 2013).

5.1 MBI Complexity

Two key factors in determining the complexity of MBIs are the level of competitionthey involve and the extent to which the key units of trade are directly substitutablefor one another (Fig. 3). As competition and efficient exchange are two fundamentalprinciples of market economics (Anderson 2010), schemes that feature greater

Fig. 3 Degree of competition and substitutability in common environmental MBIs

Using Market-Based Instruments to Enhance Climate Resilience 11

competition and substitutability could be considered more “market-based.” Schemesthat involve a single buyer (e.g., grants or subsidies) or a single seller (e.g., taxes orlevies) involve less competition than schemes with multiple buyers and sellers (e.g.,offsetting and cap-and-trade schemes). Similarly, substitutability may be greater forsome schemes (e.g., carbon cap-and-trade schemes where CO2 equivalent is thecommon unit) than for others (e.g., biodiversity offset schemes with complex rulesaround what can be offset against what).

Single-buyer or single-seller schemes can be simpler to manage than schemeswith multiple buyers and sellers, and they can give government agencies morecontrol over eligibility rules and market prices. However, they inevitably involvemonopoly conditions and create the risk of too much or too little production orconsumption of environmental services (Freebairn 2008). A common way toenhance competition under single-buyer MBIs is the use of reverse auctions,whereby multiple providers of ecosystem services bid to supply them at the lowestcost to government or private funders. Auction-based approaches have been shownto enhance the cost-effectiveness of grants and stewardship payments in a range ofcontexts (OECD 2010).

Economic theory suggests that MBIs that involve multiple buyers and multiplesellers should result in more efficient allocation of resources by enhancing compe-tition (Anderson 2010). Cap-and-trade approaches represent one way of creatingmarkets with multiple buyers and sellers, particularly where strict limits exist, suchas on the trading water rights within a river basin, fishing rights within a fishery, orthe right to emit pollutants to the atmosphere or a river system. Under such schemes,rights may be sold to the highest bidder or allocated for free, often based on historicusage or access levels (known as “grandfathering”). The most prominent applicationof cap-and-trade approaches to climate policy is in relation to the mitigation ofgreenhouse gas emissions, such as under the EU Emissions Trading Scheme. Underthis approach, entities with entitlements to emit pollutants or utilize resources mayelect to use these entitlements or sell them to other parties.

Offsetting mechanisms can also create markets with multiple buyers and sellersand may be suitable for situations where it is possible to overcome strict limits byundertaking actions that compensate for environmental harm, such as by plantingtrees or restoring habitat. Biodiversity offsetting schemes are perhaps the mostprominent examples, whereby developers wishing to degrade biodiversity withoutan existing right to do so are permitted to purchase offsets to compensate for theimpact of their actions. In the Australian state of New South Wales, developers whocannot find a suitable offset themselves or through a broker also have the option ofpaying money to a Biodiversity Conservation Trust who then takes responsibility forsourcing suitable offsets (OEH 2018). It is also possible to combine cap-and-tradeand offsetting by setting caps (e.g., on greenhouse gas emissions) but allowing theseto be exceeded if suitable offsets can be sourced (e.g., carbon sequestration throughtree planting).

The degree of substitutability in a scheme (i.e., the extent to which there arecommon units of exchange) can vary independently of the level of competition (e.g.,single-buyer vs multiple-buyer). Auction-based approaches involve a single buyer

12 A. Baumber and G. Metternicht

(generally government) but require a high degree of substitutability in order tofunction. For example, the BushTender biodiversity auction scheme in theAustralian state of Victoria uses a “habitat hectares” metric to weigh up bids on acommon scale. This is calculated by multiplying the expected habitat improvement(on a scale from 0 to 1) by the area of land being protected or restored (Fig. 4). TheUS Conservation Reserve Program (CRP) is one of the most prominent reverseauction schemes used to distribute government land conservation payments, and itsEnvironmental Benefits Index (EBI) is notable for the fact that it weighs up a varietyof factors on a common scale, including soil health, water quality, and wildlifehabitat (Hajkowicz et al. 2009).

Cap-and-trade schemes involve multiple buyers and sellers and require a highdegree of substitutability to function. In environmental terms, complete substitut-ability may be a reasonable assumption for units such as CO2, for which a commonglobal pool exists in the atmosphere, oceans, and biosphere, but can be moreproblematic where locally specific impacts are involved, such as in relation tobiodiversity, soils, water quality, and social impacts. As such, MBIs for biodiversityare more likely to employ principles such as “no net loss” and “like-for-like” thatoffer greater flexibility than a cap-and-trade approach. For example, the biodiversityoffsets scheme in the Australian state of Victoria has different types of credits thattake account of whether rare or threatened species are affected and the strategic valueof biodiversity based on its location (ELWP 2017).

While substitutability is important for facilitating trade in environmental MBIs, itremains controversial, particularly for factors like biodiversity, soil health, and waterquality. Biodiversity offsetting has been criticized for allowing trade-offs that are notgenuinely like-for-like (Maron et al. 2016) and for legitimizing environmentaldestruction (Orr et al. 2017). Similarly, for schemes that weigh up different envi-ronmental factors on a common scale, such as the US CRP, opinions will inevitably

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Fig. 4 Cumulative hectares under BushTender agreements and gain in habitat hectares 2001–2012.(Source: DEPI (2014))

Using Market-Based Instruments to Enhance Climate Resilience 13

vary on the relative value of different ecosystem components. For example,Lichtenberg (2019) argues that wildlife habitat and its associated value for huntingplay an “outsize role” relative to other values in the CRP’s EBI formula. It isimportant to recognize these controversies before considering how resilience prin-ciples can be further incorporated into MBIs of this nature.

6 Incorporating Resilience Principles into Market-BasedInstruments

While the previous section outlined various types of MBIs and ways in which theyhave been used to date, the examples given were not explicitly designed to enhanceresilience of socio-ecological systems. In some cases, existing MBIs can help tobuild resilience by protecting or restoring important elements of environmental orsocial capital that enhance the diversity and buffering capacity of a system over thelonger term. In other cases, MBIs may overlook elements of environmental or socialcapital that are important over the longer term due to the tendencies of markets topromote actions that are profitable in the short term. To understand the interplaybetween MBIs and resilience-building, it is important to review what is alreadyknown about how to enhance resilience in complex socio-ecological systems.

Strategies for enhancing the resilience of socio-ecological systems to potentialfuture disturbances can be divided into specified and general strategies (Carpenteret al. 2012). Specified resilience refers to situations where the likely disturbances arerelatively well understood in terms of their type, size, and frequency. Examplesinclude regions that are prone to hazards such as bushfires, floods, storm surges, orearthquakes, and it is possible to predict the likely size and scale of impact based onpast events. In such cases, resilience can be enhanced by monitoring hazards,communicating risk (e.g., early warning systems), protecting critical infrastructure(e.g., electricity, water supply), diversifying supply chains, establishing ecologicalbuffers (e.g., mangroves to protect against storm surges), sharing financial risk (e.g.,insurance), and preparing communities for potential disasters through training andstockpiling food and medicine (World Economic Forum 2008; Metternicht et al.2014; Simison 2019).

In relation to climate resilience, some possible disturbances to a system may berelatively well understood, either from past experience or from modelling the likelyfuture impacts of climate change. For example, 13 US federal agencies havecollaborated through the US Global Change Research Program to establish the USClimate Resilience Toolkit, which provides advice on range of specified resiliencestrategies in different contexts, including coastal regions, terrestrial ecosystems,cities, energy systems, and transportation (US Climate Resilience Toolkit 2020).Box 1 provides an example of the guidance the toolkit offers for enhancing resiliencein coastal regions against identified risks that include sea-level rise, coastal erosion,and storm surges.

14 A. Baumber and G. Metternicht

Box 1: Enhancing Climate Resilience for Coastal Regions• Explore climate threats: Includes calculating predicted sea-level rise in

your area, assessing impacts on flood frequency and duration, and factoringin projected changes in urban extent, population, and infrastructure

• Assess vulnerabilities and risks: Includes identifying vulnerablepopulations, important assets, critical infrastructure, and essential ecosys-tem services

• Investigate options: May include protection, replacement, or redesign toflood-proof or flood-protect critical infrastructure, as well as reviewingplanning rules, relocating vulnerable people or buildings, and maintainingecological and physical buffers against flooding and storm surges

• Prioritize actions: Includes consideration of maintaining critical connec-tions to other regions, investing in infrastructure upgrades and ecosystemrestoration, and addressing institutional, political, social, and economicobstacles to action

Source: US Climate Resilience Toolkit 2020

While specified resilience strategies are important and practical in relation tospecific threats like sea-level rise that are well understood and modelled, many otherimpacts of climate change are subject to high levels of uncertainty. For example, theIPCC has cautioned that, for large-scale patterns of natural climate variability, suchas El Niño-Southern Oscillation, uncertainty in projections “remains large” due toinconsistencies between climate models and low confidence in the ability to predictchanges in these highly complex climatic systems (IPCC 2012, p. 113). Thisuncertainty can make it difficult to rely on specified resilience-building strategiesand creates a need for strategies that build general resilience to range of possibledisturbances of uncertain nature and scale. This is particularly important for MBIsthat operate across a range of different ecological and social systems and incorporatea range of objectives. For example, it may be difficult to incorporate specifiedresilience-building strategies into a carbon trading scheme that operates at a nationalor multinational scale, or a biodiversity offsetting scheme that covers many differentecosystem types across a wide geographic area.

In response to concerns about the limitations of specified resilience strategies,resilience researchers have identified a range of factors that have been shown toenhance general resilience, for use in strategic planning by policy-makers, busi-nesses, communities, and individuals. Table 1 outlines nine key enabling factorsidentified by Carpenter et al. (2012), with some of the descriptions and terminologymodified based on insights from Armitage (2007) and Erol et al. (2010).

In the following section, the general resilience factors in Table 1 are used as thebasis for a set of guiding principles for the design of MBIs to enhance climateresilience. Many of the factors in Table 1 are synergistic with market-based princi-ples. For example, good information flows can enable resilience (Erol et al. 2010) as

Using Market-Based Instruments to Enhance Climate Resilience 15

well as help to overcome market failures arising from information asymmetries(Anderson 2010). Efforts to increase competition within a market may simulta-neously increase diversity and provide a greater range of future ways in which thesystem may be able to respond to disturbances. Self-organization is both an enablingfactor for resilience (Armitage 2007) and a key market principle that sets marketeconomies apart from command economies.

While synergies exist between resilience-building and market economics, it isimportant to highlight one factor that does not appear in Table 1 – efficiency. Thiscontrasts with the principles of market economics where efficiency is regarded as the“guiding light in decision making” and even environmental economists who arguefor major market reforms often do so on the basis that they will make markets moreefficient (e.g., Anderson 2010, p. 1). Adopting a resilience-based approach to MBIdesign may require an alternative paradigm in which efficiency is no longer the“guiding light,” but simply one objective that needs to be balanced against factorssuch as redundancy, diversity, and the building of social capital.

Walker and Salt (2006, p. 7) argue that being efficient in a narrow sense (i.e., seekingto optimize the allocation of scarce resources to competing ends) can actually reduceresilience by “keeping only those things that are directly and immediately beneficial.”Where resources such as food, habitat, infrastructure, or social capital exceed what isbelieved to be necessary to withstand expected disturbances, a market economy is likely

Table 1 Enabling factors for general resilience. (Sources: Carpenter et al. (2012), Armitage(2007), and Erol et al. (2010))

Enabling factor Description

Reserves/buffers/redundancies

Extra capacity or buffers that are held in reserve and can be mobilizedafter a disturbance (e.g., labor, capital, food, seedbanks, social memory,goodwill)

Diversity Includes cultural diversity, biological diversity, and response diversity(i.e., having a range of possible options to respond to a disturbance)

Monitoring/information flows

Capacity to gather information in a shared, transparent, and regularfashion

Modularity/self-organization

Independent or autonomous units within the whole. These allow forself-organization at the local level and quarantine threats to stop themspreading across the system

Openness Strong connections between your system and neighboring systems.These may enable trade or act as buffers against external shocks. Trade-offs may be required openness (to allow benefits to spread into asystem) and modularity (i.e. closing system boundaries to preventthreats entering a system)

Nestedness Strong connections to higher system levels (e.g., a local entity that islinked to national- and global-scale support systems)

Feedbacks Balancing feedbacks that push back against a disturbance (e.g., peoplewho defend an entity when shocks arise). Reinforcing feedbacks thatkeep the system moving in the desired direction (e.g., incentives thatreward desired behavior)

Leadership Leaders who recognize and act on barriers to, and enablers of, resilience

Trust Trust enables people to collaborate effectively in the presence ofuncertainty

16 A. Baumber and G. Metternicht

to assign them no value and create incentives to reallocate these resources to otherpurposes. Diversity may also be reduced in a similar manner and complex systems maybe simplified in order to produce more of the things that are valued at the expense ofthose that are not. A loss of diversity and redundant capacity can be particularlyproblematic for systems that are undergoing change and encountering disturbancesthat are different in nature and scale from those encountered before, as it is difficult toknow which seemingly unimportant elements of the system may become critical toeffectively responding to unknown disturbances in the future.

Given the divergence between the priorities of market economics, where effi-ciency is a “guiding light,” and resilience theory, which emphasizes factors such asdiversity and redundancy, it is reasonable to question whether market-based instru-ments are compatible with resilience-building at all. However, a resilience-buildingparadigm does not require that efficiency goals be jettisoned altogether. Rather, itrequires a broader notion of efficiency that accepts that full optimization isunachievable due to uncertainties within complex system and that a truly efficientallocation of resources must involve some resources being allocated to redundanciesand diverse elements that do not appear valuable in the short term but act as a form ofinsurance against unknown future disturbances. MBIs designed in this manner maynot ever achieve full optimization or efficiency, but they can still help to priceexternalities, create incentives for desirable actions, and leverage new sources ofinvestment for resilience-building activities.

7 Designing Market-Based Environmental PolicyInstruments to Enhance Resilience

Working on the basis that there are both potential conflicts and potential synergiesbetween efficiency and resilience, the design principles outlined in this section forthe use of market-based instruments to enhance resilience are based on three pre-mises shown in Fig. 5.

7.1 Principle 1: Value Reserves, Buffers, and Redundant Capacity

There are a range of ways that environmental MBIs can help to build up reserves andbuffers to cope with extreme climate events, particularly through the protection andrestoration of key habitats. Examples include mangrove forests that buffer againststorm surges, wetlands that act as reserve water storages to mitigate flooding, urbangreen space to mitigate heat island effects, and low-intensity land uses that can act asbuffers between urban areas and fire-prone forests. Investment in ecological resto-ration in such areas may also help to build reserves of social capital by providingemployment, increasing savings, and enhancing community engagement(US Climate Resilience Toolkit 2020).

Habitat protection and restoration can be promoted through simple grants andstewardship payments, potentially using reverse auctions to enhance cost-

Using Market-Based Instruments to Enhance Climate Resilience 17

effectiveness. Voluntary demand could also be mobilized to supplement governmentand NGO payments. Offset schemes may be suitable in some cases, but may createrisks of perverse outcomes if they allow mature, well-functioning habitat to betraded-off against immature habitat with lower functionality. To ensure that offsetschemes build rather than deplete reserves of natural capital, metrics based onecological function rather than area should be used, with multiplying ratios appliedsuch that developers are required to deliver a “net gain” rather than simply “no netloss” (Doswald et al. 2012).

To combat the urban heat island effect, developers wishing to remove trees orgardens could be required to pay for the creation of new green spaces several timeslarger than the area lost. Tradable credit systems could be used to enhance the speedand efficiency of transactions, but careful consideration would need to be given tothe tradable unit (e.g., heat-reducing capacity vs area of green space vs habitatquality vs recreational opportunities). The United Kingdom’s planning obligationsystem provides a model for how developers could be required to contribute toessential infrastructure that enhances climate resilience or to provide affordablehousing in lower-risk areas for vulnerable people who may need to relocate due tosea-level rise or flood risk. Drawing on the example of renewable energy obligations,

A. Where possible, market-based instruments should be designed to simultaneously correct for market failures

and enhance enabling factors for resilience

B. Market-based instruments designed to

enhance efficiency without enhancing resilience should be used in conjunction with other policies that ensure

that key enablers of resilience are maintained

C. Market-based instruments that enhance

efficiency at the expense of resilience should be avoided

Fig. 5 Premises for the use of market-based instruments to enhance resilience

18 A. Baumber and G. Metternicht

energy providers could be required to maintain a set amount of redundant capacity todeal with potential power outages due to climate-related disasters.

7.2 Principle 2: Enhance Diversity Rather than OversimplifyingComplex Systems

As discussed in the previous section, MBIs with a narrow focus on the efficientdelivery of a single ecosystem component, such as carbon, can create perverseincentives to simplify complex ecosystems and eliminate diversity. However, thereare also a range of ways to promote diversity within the design of MBIs. One is toplace a greater value on components of an ecosystem that are most depleted, such asbiodiversity metrics that assign a high weighting to habitat for threatened species.Another approach is to ensure that multiple values are considered when allocatingfunds or awarding credits, such as under the US Conservation Reserve Program,which considers soil health, water quality, biodiversity, and other factors.

Even in cases where MBIs are aimed at a single ecosystem component such ascarbon, it may be possible to promote a diversity of solutions through eligibility rulesor weightings that preferentially support underrepresented activities. For example, tosupport its Emissions Reduction Fund, the Australian Government has developedmultiple methodologies and calculation tools to enable diverse carbon farmingpractices across different contexts (e.g., tree planting, assisted regeneration, soilcarbon). Lessons may also be taken from the renewable energy sector, whereimmature technologies with future potential may be assigned more credits perMWh than mature technologies and tax breaks have been structured to promoteforms of energy with greater social benefits (Baumber 2017a).

Flexibility is an important consideration for maintaining “response diversity,”which refers to the variety of different future pathways that actors within a systemhave to choose from when responding to a disturbance. MBIs that “lock” land-holders into long-term contracts may enhance certain environmental factors valuedby policy-makers, such as carbon sequestration, but can also reduce resilience if theylimit future land use options (Cowie et al. 2019). For example, while permanence hasbeen a key objective in the design of MBIs for climate change mitigation, MBIs forenhancing climate resilience may require a greater focus on maintaining flexibilityand response diversity rather than assuming that any given land use activity will bepermanent.

7.3 Principle 3: Implement MBIs at the Appropriate Scale

This principle relates to the resilience-enabling factors of modularity, openness, andnestedness shown in Table 1, which often involve trade-offs against one another(Carpenter et al. 2012). Deciding on an appropriate scale requires consideration ofthe geographic area that might be affected by future droughts, floods, or stormsurges, as well as various social and ecological factors that affect responses to

Using Market-Based Instruments to Enhance Climate Resilience 19

such disturbances (e.g., nation-states, cities, islands, biogeographic zones). Devel-oping small, weakly connected markets for ecosystem services aligns with theresilience-enabling principle of modularity (Carpenter et al. 2012), whereby smallerautonomous units within a system are likely to possess greater potential for self-organization and rapid responses to disturbances that are best suited to local condi-tions (Armitage 2007). However, for policy-makers designing MBIs, moving from alarger scale to a smaller one may require policy-makers to accept some reduction incompetition (i.e., fewer participants in the market) and/or reduced substitutability(i.e., credits created in one area not being direct substitutes for credits inanother area).

When seeking to build resilience, there can often be a tension between modularityand other enabling factors such as openness (strong interconnections betweenneighboring systems) and links to higher system levels (e.g., a city linked to anation-state and a global community). Strong links to neighboring systems andhigher system levels can provide vital support following a disturbance (e.g., neigh-boring communities and national governments providing disaster relief after a flood,drought, or storm). However, at times it may also be important for a local system tobe quarantined from neighboring systems to prevent disturbances spreading (e.g.,fire spreading between vegetation types, climate-driven conflict spreading acrossnational borders). Similarly, overly strong links to higher system levels may result in“top down” responses that do not reflect local conditions.

In relation to MBIs, carbon trading provides a model of how autonomy can bebalanced against global- or national-scale support. Carbon trading schemes operat-ing at national, state, or city levels with weak interconnections between them allowpolicy-makers to set rules that are relevant to local conditions while still ensuringthat overarching governance is consistent across different countries and that localproviders of carbon abatement are exposed to outside competition. For example, theEU allows some overseas credits to enter its emissions trading scheme but has beenreluctant to allow reforestation credits to enter due to concerns about weaker rules inother jurisdictions (European Commission 2012). Conversely, Australia hasdesigned its scheme to encourage abatement through carbon farming based onlocal conditions. Similarly, MBIs aimed at climate adaptation are likely to requireconsistency in governance and certification to tap into voluntary markets whileallowing for local rules that take into account local vulnerabilities and needs.

7.4 Principle 4: Ensure Key System Variables Are Monitoredand Essential Information Is Shared

Australia’s National Strategy for Disaster Resilience (COAG 2011) highlights arange of information types that should be established and shared to enhance resil-ience to disasters. These include risk assessments (including vulnerabilities andcapabilities), information on lessons learned, risk reduction education, emergencywarnings, and information on the costs and benefits of hazard management. Impor-tantly, this is not a one-way flow of information but rather requires sharing of

20 A. Baumber and G. Metternicht

information across a variety of scales and stakeholder groups (government, business,community organizations, and individuals). Parsons and Thoms (2018) also empha-size this need for “cogeneration” of knowledge around disasters and how best torespond to them, including the need for local people to be able to engage withscientists and policy-makers and for local and Indigenous knowledges to be incor-porated into resilience planning.

Moving from general to specified resilience, it may be possible to identify specificvariables to be measured for particular socio-ecological systems and thresholds that,if crossed, may lead to a shift in system state and a loss of essential functions andstructures. For example, in the drought-prone rangelands of western NSW, Cowieet al. (2019) apply the RAPTA (Resilience, Adaptation Pathways and Transforma-tion Approach) framework to identify a number of critical thresholds for systemchange, including ground cover falling below 50% and total grazing pressureexceeding 30% utilization of perennial grass biomass. Monitoring critical variablessuch as these, making the information available to multiple stakeholders, and linkingthese thresholds to management actions and appropriate market-based incentivesmay enhance the resilience of the system to drought and other climatic disturbances.

While monitoring key variables and sharing information widely are importantstrategies for dealing with climatic disturbances, a central principle of resilience-building in complex systems is acceptance that decisions must be made in thepresence of uncertainty. As such, it is important that information flows are used inconjunction with other resilience principles, such as maintaining redundancies andresponse diversity, rather than an overreliance of having sufficient information toguide decision-making when disturbances arise.

7.5 Principle 5: Support the Building of Trust, Leadership,and Collaboration

While market economics has traditionally been underpinned by the assumption thatpeople act according to rational self-interest, resilience-based approaches emphasizethe importance of trust, leadership, and collaboration in building “social capital”(Walker 2019). Australia’s National Strategy for Disaster Resilience emphasizes thattrust is particularly important in relation to information sources and that leadership issomething that can be enacted by a wide variety of stakeholders within their ownsphere of influence, rather than being the responsibility of political or institutionalleaders (COAG 2011).

One challenge that can arise around MBIs is their potential to reduce trust andcollaboration by “crowding out” altruistic behavior and creating divisions beingthose who get paid and those who do not. Crowding out refers to the phenomenon bywhich people who see others getting paid for something that was previously beingdone for free, such as maintaining or restoring forests, can become less willing tocontinue providing these services without similar payments (Chervier et al. 2019).Social divisions between the “haves” and the “have-nots” within a community canalso arise, especially if the allocation of payments is seen as unfair or the land use

Using Market-Based Instruments to Enhance Climate Resilience 21

activity being promoted does not align with community perceptions of how landshould be used, as has been reported in some instances around carbon farming inAustralia (Cowie et al. 2019).

Kerr et al. (2017) recommend careful consideration of existing social normsbefore implementing MBIs aimed at community-scale behavior change. If there isno existing social norm in favor of the desired action, then payment may be aneffective way to increase that behavior, but payments cannot in themselves beexpected to create a new social norm in favor of the behavior. Conversely, if thereis an existing social norm around the behavior, payment schemes need to bedesigned carefully so that they are seen to be recognizing and supporting thatnorm rather than replacing it. Important considerations include the inclusion oflocal people in the design of the scheme to ensure it is seen as fair and autonomyfor local people to operate the scheme.

Lessons can be learned from MBIs that have been specifically designed to buildsocial capital and enhance trust and collaboration between different participants in asupply chain. For example, Brazil’s biodiesel support program, which began in2004, was designed to encourage the participation of small family farmers bymaking them eligible for additional tax breaks. However, this economic incentiveproved insufficient, as small farmers growing castor beans struggled to compete withindustrial-scale soybean producers and relationships with biofuel producers wereunstable (Pousa et al. 2007). A turning point came with the involvement of Brazil’sstate-owned oil company, Petrobrás, which led to a quadrupling of participatingsmallholders and a rise in reported satisfaction levels (Lima 2012). Key measuresincluded the provision of free seed, crop diversification, technical support forsmallholder cooperatives, paying above-market prices for feedstocks, and oversightof supply contracts by a local NGO to ensure fairness.

While the specific arrangements required to build social capital for climateresilience may vary between MBIs, it is essential that this is a specific considerationin policy design rather than relying on financial self-interest and purely transactionalrelationships between participants.

7.6 Principle 6: Consider Feedbacks, Indirect Impacts,and Perverse Incentives

The introduction of MBIs into complex socio-ecological systems can often encoun-ter feedbacks that either enhance or inhibit their desired purpose. Balancing feed-backs may work against the incentives that MBIs create, such as small familyfarmers in Brazil being prevented from capitalizing on preferential biodiesel taxbreaks due to structural socio-economic disadvantages (Lima 2012). Conversely,reinforcing feedbacks may enhance adoption of desired practices under MBIs, suchas Australian farmers taking up carbon farming not only for the carbon payments onoffer but also due to co-benefits related to soil health, farm productivity, andaesthetics (Baumber et al. 2019b).

22 A. Baumber and G. Metternicht

In addition to feedbacks that directly impact on their effectiveness, MBIs can alsotrigger feedbacks that lead to indirect impacts, such as the role that EU biofuel targetshave played in promoting deforestation for palm oil in SE Asia (Gerasimchuk andKoh 2013). Perverse outcomes may also arise where MBIs act as balancing feed-backs to support system states that actually require transformation, with Walker(2019) arguing that the traditional approach to drought relief in Australia is anexample of this phenomenon. This highlights that enhancing resilience at all scalesshould not necessarily be the objective of policy-makers and sometimes it may benecessary to overcome the resilience of certain sub-systems (e.g., unsustainablelocal-scale farming practices) in order to enhance the resilience of the broadersystems in which these sub-systems are nested.

Understanding where feedbacks lie and designing MBIs to capitalize on them iscritical for effective enhancement of climate resilience. A modular approach toimplementing MBIs at appropriate scales, as previously discussed, may help toreduce the risk of feedback loops spilling over into neighboring systems. Consider-ation may also need to be given to the timing of payments under MBIs and theconditions that are linked to them. For example, Hughes et al. (2019) argue that inorder to enhance resilience to climate variability, drought support in Australia shouldbe provided at times when farmers are not in drought and should be linked toadjustment and change rather than being used to fill income gaps during droughtwith no change in practice.

8 Conclusion

While MBIs have been heavily utilized in efforts to mitigate climate change, theirapplications to climate change adaptation have been much more limited to date.Despite this, there are important precedents that have been set in the areas of carbontrading, biodiversity conservation, watershed protection, urban planning, and renew-able energy that can act as models for the design of MBIs that help to build climateresilience within affected communities. However, the bringing together of environ-mental economics and resilience theory requires careful evaluation of some of theassumptions that underpin market economics, such as the promotion of efficiency asa guiding light in decision-making and the goal of eliminating uncertainty to providemarket participants with perfect information.

The principles outlined in this chapter provide guidance on how MBIs may bedesigned to enhance climate resilience, but they do not provide detailed prescriptionsthat can be followed in all circumstances. Further policy experimentation is essential,both to understand what works in specific contexts and to refine the broader policyprinciples outlined in the chapter. Furthermore, MBIs must be complemented withother policy measures aimed at better understanding climatic disturbances, enhanc-ing the effectiveness of government planning, mobilizing community action, andpromoting resilience-building practices that are not driven by economic motivations.When viewed as part of this broader policy mix and designed with careful attentionto resilience-building principles, MBIs have the potential to play an important role in

Using Market-Based Instruments to Enhance Climate Resilience 23

building resilient communities that are able to cope with uncertain and unprece-dented climatic conditions in the future.

9 Cross-References

▶Adaptation Finance: A Review of Financial Instruments to Facilitate ClimateResilience

▶Building Social Capital in Low-Income Communities to Enhance Resilience▶Energy Transition in the Context of a Climate Resilient Society▶ Financing Resiliency in Cities▶Green Infrastructure and Climate Resilience▶Local Planning for Disaster Risk Reduction and Urban Resilience▶ Public-Private Sector Cooperation in Enhancing Resilience▶ Sustainable Land Use Planning for Climate Resilient Cities▶ Systems Thinking to Reveal Opportunities to Meet the Climate Challenge▶What Australian Cities Can Do Post the Bushfire Apocalypse

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