Market mechanisms for adaptation to climate change

Market mechanisms for adaptation to climate change – lessons from mitigation and a pathway to implementation / Sonja Butzengeiger-Geyer, Axel Michaelowa, Michel Köhler and Martin Stadelmann. Center for Comparative and International Studies (CIS) at University of Zurich and ETH Zurich, November 2011, 34 p. (Working Paper # 71)

Adaptation can have the character of a private good, a club good or a public good depending on the nature of the action. Thus underprovision of adaptation is likely if left to private initiative, and public policy instruments are required that incentivize adaptation. Such instruments should be as efficient as possible, and in other policy fields market-based mechanisms have been used to maximize efficiency. So far however, there is almost no experience with adaptation taxes, tradable project-based offsets or tradable allowances, whereas climate change mitigation has been a field where such instruments have been widely applied during the last two decades. While generally, market-based instruments for mitigation can be seen as successful, several key lessons have been learned. (1) Pilot phases are important to test an instrument and to correct design flaws.(2) Distortions by lobbies can lead to adverse distributional effects. Regulatory uncertainty reduces the efficiency gains. (3) Transaction costs can form a significant barrier. (4) Monitoring and independent verification are key to prevent fraud. These lessons should be taken into account in the design of market mechanisms for adaptation, and we derive requirements for that. Finally, we discuss a concrete pathway to establishing market mechanisms for adaptation and define priorities for further research and possible pilot implementation, differentiating by types of adaptation. (© the authors)

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