Instrument Choice and Replication

Abstract

In climate law, we have witnessed the establishment of innovative market-based instruments, such as emissions trading, the Clean Development Mechanism, Joint Implementation and REDD+. The aim of these instruments is the increase in cost-effectiveness in climate mitigation. These innovative instruments, while having attracted significant interest from economic actors and stimulated concerted action, have shown some shortcomings in terms of certainty of result and potential for circumvention, misuse and negative side-effects. At the same time, there is ongoing discussion of replicating some of these instruments in the new international climate agreement currently negotiated under Durban Platform for Enhanced Action (ADP). Moreover, the replication of market-based instruments is also being considered to other environmental challenges, most prominent among them biodiversity and ecosystem conservation. This paper discusses both the possibilities and dangers of replicating market-based climate mitigation instruments in other areas of environmental law. In particular, it identifies lessons that can be learned from climate instruments and ways to avoid some mistakes from being made in other fields. Such lessons include the need for clear rules and the need for robust methodologies and data, the challenges to design market-based instruments in a way which secures that the largest part of available financial resources goes to the environmental project or good and is not captured during the process, and the need for strong legal rules that protect non-financial benefits. The market itself will not naturally deliver non-financial benefits or address non-economic interests. Rather, these interests and benefits have to be “regulated in” the mechanism. Finally, financial transfers should be based on monitored, reported and verified results (both on the primary, but also secondary/indirect market-impacts). Result-based ex-post payments not only reflect the true value of the environmental “good” which is being paid for, they can also keep corruption and fraud at bay. Still, markets are means – not ends. As means they are just one tool in the toolbox. While for some environmental policies, suitable market-solution can be designed, with care required. For other environmental ends, such as nature conservation and ecosystem protection, traditional command-and-control approaches might lead to more secure, predictable and effective results.