Carrots and Sticks

Biodiversity loss is a critical global issue that threatens the function and resilience of ecosystems. Our society and economy are heavily dependent on functioning global ecosystems and the many, varied ecosystem services that they provide. Like many environmental issues, a lack of recognised market value for biodiversity and incentives for protecting ecosystem services has exacerbated their loss.

Without a robust and resilient nature there is no economy. Realising this, public and private institutions around the world are rapidly developing frameworks and tools to address biodiversity loss. This study is a collection of 17 examples where economic mechanisms have been applied with the goal of limiting biodiversity loss associated with land-use change and promoting nature-positive activities. The cases are diverse, including both mandatory and voluntary mechanisms and schemes led by those in the public and private sectors. The cases have been characterised into three main groups: the polluter pays principle; payments for ecosystem services; and voluntary solutions in the private sector.

The polluter pays principle (PPP) schemes are government-led initiatives that set a fee on causing environmental damage. When used to limit biodiversity loss, PPP schemes set a disincentive on economic activities that drive biodiversity loss and often use the fees to incentivise nature-positive activities. As those causing environmental harm internalise the costs of biodiversity loss, PPP schemes can be cost-efficient for regulators to implement and can help to stimulate new markets for nature-positive activities. Important elements of PPP schemes include developing robust methods to quantify, monitor and verify environmental impacts as well as maintaining additionality and permanence of compensatory actions.

Payments for ecosystem services (PES) are voluntary payments made to those enabling the provision of one or many ecosystem services. Within PES schemes, companies and landowners are incentivised to modify their existing activities or undertake new actions to satisfy set criteria and qualify for payments. PES schemes are flexible and have potential to be scaled to new areas, ecosystems and sectors. PES schemes can also help to promote positive attitudes of private landowners towards nature-positive activities. PES schemes are typically led and funded by governments but can also be led or funded by NGOs or the private sector. Important elements of PES schemes include establishing cost-efficient payments, trust between businesses, landowners and governments and the long-term security of public funding.

Voluntary solutions in the private sector represent cases that have been established without government leadership. These schemes can include certification systems that businesses can join, incentives set within a company’s supply chain to promote biodiversity-friendly activities or voluntary compensation for land-use change. Implementing a voluntary scheme can help businesses show leadership and target biodiversity impacts associated with their activities. For private-sector schemes, important elements include establishing robust third-party verification of outcomes and alignment with national biodiversity strategies and action plans.

This study also examined cases that fall into an “other” category. These included schemes initiated at the municipal level and mechanisms used within the insurance sector. These cases demonstrate that municipalities can adopt local measures to respond to local drivers of biodiversity and that Insurance is a sector that can be used to share the costs of maintaining ecosystems and restoring them.

Expanding the use of economic mechanisms is crucial to reversing biodiversity decline and there are good examples of these instruments to guide future design. Well-designed schemes establish the relevant financial incentives to enhance biodiversity and avoid its loss. The role of government is fundamental to establishing mandatory or publicly funded schemes, and can be faciliatory in many private sector-led initiatives. Publicly funded mechanisms will not be able to solely address the biodiversity crisis, therefore providing the appropriate environment for private-sector initiatives to help achieve local biodiversity targets is important. This can be supported by strong dialogue and co-operation between the scientific and business communities and regulators.

Developing successful economic mechanisms takes time and often requires a pilot phase to ensure that the set incentives are effective and appropriate. Assessing the effectiveness and appropriateness of a scheme calls for standardised third-party evaluations that include monitoring of ecological outcomes. Well-designed mechanisms can also stimulate new markets for expert service providers and green job creation.

The long-term success and acceptance of economic mechanisms hinges on how well stakeholders are trained, engaged and experience positive socio-economic benefits from the scheme. To achieve this, economic mechanisms addressing biodiversity loss should also seek to promote local economies and cultural values. When local communities share in the benefits created by economic mechanisms, their motivation to actively participate increases.

Biodiversity loss is a critical challenge that requires urgent action to be halted; however it is imperative to also recognise the close linkages between other environmental values such as climate, water and soil. Designing economic instruments that target multiple environmental issues is often the efficient and necessary choice. New initiatives targeting biodiversity should be developed with consideration for how they interact with existing environmental incentives and any potential synergies.

In Finland, several mechanisms (such as PES and voluntary compensation) are already in place. There is potential to increase the usage of economic mechanisms to help set the appropriate incentives for reaching national and local biodiversity-related targets. New economic mechanisms could be designed to address the most important local drivers of biodiversity loss. The development of new instruments should involve an evaluation of the implications and their feasibility before implementation.

This is a revised version of the publication originally published on 4 June 2024. The update concerns pages 63–64 where additional background info and minor updates have been introduced.