Editing IPCC:AR6/SRCCL/Chapter-1 (section)

==== 1.4.3.2 Economic and financial instruments ====

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Economic (such as taxes, subsidies) and financial (weather-index insurance) instruments deal with the many ways in which public policy organisations can intervene in markets. A number of instruments are available to support climate mitigation actions including public provision, environmental regulations, creating property rights and markets (Sterner 2003 <sup>[[#fn:r896|896]]</sup> ). Market-based policies such as carbon taxes, fuel taxes, cap and trade systems or green payments have been promoted (mostly in industrial economies) to encourage markets and businesses to contribute to climate mitigation, but their effectiveness to date has not always matched expectations (Grolleau et al. 2016 <sup>[[#fn:r897|897]]</sup> ) (Section 7.4.4). Market-based instruments in ecosystem services generate both positive (incentives for conservation), but also negative environmental impacts, and also push food prices up or increase price instability (Gómez-Baggethun and Muradian 2015 <sup>[[#fn:r898|898]]</sup> ; Farley and Voinov 2016 <sup>[[#fn:r899|899]]</sup> ). Footprint labels can be an effective means of shifting consumer behaviour. However, private labels focusing on a single metric (e.g., carbon) may give misleading signals if they target a portion of the life cycle (e.g., transport) (Appleton 2009 <sup>[[#fn:r900|900]]</sup> ) or ignore other ecological indicators (water, nutrients, biodiversity) (van Noordwijk and Brussaard 2014 <sup>[[#fn:r901|901]]</sup> ).

Effective and durable, market-led responses for climate mitigation depend on business models that internalise the cost of emissions into economic calculations. Such ‘business transformation’ would itself require integrated policies and strategies that aim to account for emissions in economic activities (Biagini and Miller 2013 <sup>[[#fn:r902|902]]</sup> ; Weitzman 2014 <sup>[[#fn:r903|903]]</sup> ; Eidelwein et al. 2018 <sup>[[#fn:r904|904]]</sup> ). International initiatives such as REDD+ and agricultural commodity roundtables (beef, soybeans, palm oil, sugar) are expanding the scope of private sector participation in climate mitigation (Nepstad et al. 2013 <sup>[[#fn:r905|905]]</sup> ), but their impacts have not always been effective (Denis et al. 2014 <sup>[[#fn:r906|906]]</sup> ). Payments for environmental services (PES) defined as “voluntary transactions between service users and service providers that are conditional on agreed rules of natural resource management for generating offsite services” (Wunder 2015 <sup>[[#fn:r907|907]]</sup> ) have not been widely adopted and have not yet been demonstrated to deliver as effectively as originally hoped (Börner et al. 2017 <sup>[[#fn:r908|908]]</sup> ) (Sections 7.4 and 7.5). PES in forestry were shown to be effective only when coupled with appropriate regulatory measures (Alix-Garcia and Wolff 2014 <sup>[[#fn:r909|909]]</sup> ). Better designed and expanded PES schemes would encourage integrated soil–water–nutrient management packages (Stavi et al. 2016 <sup>[[#fn:r910|910]]</sup> ), services for pollinator protection (Nicole 2015 <sup>[[#fn:r911|911]]</sup> ), water use governance under scarcity, and engage both public and private actors (Loch et al. 2013 <sup>[[#fn:r912|912]]</sup> ). Effective PES also requires better economic metrics to account for human- directed losses in terrestrial ecosystems and to food potential, and to address market failures or externalities unaccounted for in market valuation of ecosystem services.

Resilient strategies for climate adaptation can rely on the construction of markets through social networks as in the case of livestock systems (Denis et al. 2014 <sup>[[#fn:r913|913]]</sup> ) or when market signals encourage adaptation through land markets or supply chain incentives for sustainable land management practices (Anderson et al. 2018 <sup>[[#fn:r914|914]]</sup> ). Adequate policy (through regulations, investments in research and development or support to social capabilities) can support private initiatives for effective solutions to restore degraded lands (Reed and Stringer 2015 <sup>[[#fn:r915|915]]</sup> ), or mitigate against risk and to avoid shifting risks to the public (Biagini and Miller 2013 <sup>[[#fn:r916|916]]</sup> ). Governments, private business, and community groups could also partner to develop sustainable production codes (Chartres and Noble 2015 <sup>[[#fn:r917|917]]</sup> ), and in co-managing land-based resources (Baker and Chapin 2018 <sup>[[#fn:r918|918]]</sup> ), while public-private partnerships can be effective mechanisms in deploying infrastructure to cope with climatic events (floods) and for climate-indexed insurance (Kunreuther 2015 <sup>[[#fn:r919|919]]</sup> ). Private initiatives that depend on trade for climate adaptation and mitigation require reliable trading systems that do not impede climate mitigation objectives (Elbehri et al. 2015 <sup>[[#fn:r920|920]]</sup> ; Mathews 2017 <sup>[[#fn:r921|921]]</sup> ).

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