A focus on market imperfections can help governments to mobilize private investments in adaptation

W.P. Pauw; L. Kempa; U. Moslener; C. Grüning; C. Çevik

doi:10.1080/17565529.2021.1885337

A focus on market imperfections can help governments to mobilize private investments in adaptation

W.P. Pauw
, L. Kempa
, U. Moslener
, C. Grüning
, C. Çevik

Research output: Contribution to journal › Comment/Letter to the editor › Academic › peer-review

10 Citations (Scopus)

Abstract

Climate change requires significant adaptation of economies, and the largest part of most economies is composed of private sector actors. In this Viewpoint, we argue that it should not be the role of the public sector to cover the full costs of adaptation - which would also typically exceed government's fiscal space. Rather, we suggest that the public sector should set the right conditions to catalyse private investments in adaptation. While the suggestion is not new, we argue that the current focus on generic ‘barriers’ hindering more private investments in adaptation is not expedient. These barriers are descriptive rather than explanatory, sometimes mix cause and effect, and tend to focus on eliminating obstacles, rather than adapting efficiently. Alternatively, we suggest to focus on addressing three market imperfections that give rise to those barriers. In doing so, the overall welfare of society, including the vulnerability of the most marginalized, should be centre-stage. The development of markets should aim to contribute to such welfare - it is not an end in itself. In that sense, our call for a focus on market imperfections is a call for a larger role of public actors, both in developed and developing countries.

Original language	English
Pages (from-to)	91-97
Number of pages	7
Journal	Climate and Development
Volume	14
Issue number	1
DOIs	https://doi.org/10.1080/17565529.2021.1885337
Publication status	Published - 2022
Externally published	Yes

Funding

Recognizing the externalities of different adaptation strategies and measures helps to identify opportunities for policy and financing mechanisms in order to remove or decrease market imperfections (see Bisaro & Hinkel, ; Woodruff et al., ). For example, a project or company could charge fees for the positive externality in order to improve the return on investment. In 2001, the Government of Malaysia developed the concept of a mixed-use tunnel that allows for traffic flow under normal circumstances, and that provides for storm water diversion during heavy rains. Private investments were secured by allowing a portion of the tunnel to be tolled for traffic, as these covered the operation costs and repaid the companies’ investments (Gardiner et al., ). An alternative way to compensate for positive externalities is to use public finance instruments such as grants or subsidized loans to bring down the cost of capital and increase the expected return on investment. For example, the Kayonza Growers Tea Factory in Uganda implemented wetland protection measures to prevent soil erosion, floods and increase water storage that also benefits the wider community. The factory might not have made this investment itself as there was no return on investment. Instead, the project received public grant finance through the Gesellschaft für Technische Zusammenarbeit (GTZ) and the charity Comic Relief. The size of the investment subsidy should reflect the value of the public good (or positive externality) provided by the project. This work was supported by Bundesministerium f?r wirtschaftliche Zusammenarbeit und Entwicklung: [Grant Number GZ: 414 K8187-0372/001]. We thank two anonymous reviewers for their constructive and detailed comments and suggestions to an earlier version of this Viewpoint. We thank the German Federal Ministry of Economic Cooperation and Development (BMZ) for their generous support.

UN SDGs

This output contributes to the following UN Sustainable Development Goals (SDGs)

SDG 13 Climate Action

Keywords

adaptation barriers
Adaptation finance
market imperfections
private sector
public interventions

Access to Document

10.1080/17565529.2021.1885337

Cite this

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title = "A focus on market imperfections can help governments to mobilize private investments in adaptation",

abstract = "Climate change requires significant adaptation of economies, and the largest part of most economies is composed of private sector actors. In this Viewpoint, we argue that it should not be the role of the public sector to cover the full costs of adaptation - which would also typically exceed government's fiscal space. Rather, we suggest that the public sector should set the right conditions to catalyse private investments in adaptation. While the suggestion is not new, we argue that the current focus on generic {\textquoteleft}barriers{\textquoteright} hindering more private investments in adaptation is not expedient. These barriers are descriptive rather than explanatory, sometimes mix cause and effect, and tend to focus on eliminating obstacles, rather than adapting efficiently. Alternatively, we suggest to focus on addressing three market imperfections that give rise to those barriers. In doing so, the overall welfare of society, including the vulnerability of the most marginalized, should be centre-stage. The development of markets should aim to contribute to such welfare - it is not an end in itself. In that sense, our call for a focus on market imperfections is a call for a larger role of public actors, both in developed and developing countries.",

keywords = "adaptation barriers, Adaptation finance, market imperfections, private sector, public interventions",

author = "W.P. Pauw and L. Kempa and U. Moslener and C. Gr{\"u}ning and C. {\c C}evik",

note = "Funding Information: Recognizing the externalities of different adaptation strategies and measures helps to identify opportunities for policy and financing mechanisms in order to remove or decrease market imperfections (see Bisaro \& Hinkel, ; Woodruff et al., ). For example, a project or company could charge fees for the positive externality in order to improve the return on investment. In 2001, the Government of Malaysia developed the concept of a mixed-use tunnel that allows for traffic flow under normal circumstances, and that provides for storm water diversion during heavy rains. Private investments were secured by allowing a portion of the tunnel to be tolled for traffic, as these covered the operation costs and repaid the companies{\textquoteright} investments (Gardiner et al., ). An alternative way to compensate for positive externalities is to use public finance instruments such as grants or subsidized loans to bring down the cost of capital and increase the expected return on investment. For example, the Kayonza Growers Tea Factory in Uganda implemented wetland protection measures to prevent soil erosion, floods and increase water storage that also benefits the wider community. The factory might not have made this investment itself as there was no return on investment. Instead, the project received public grant finance through the Gesellschaft f{\"u}r Technische Zusammenarbeit (GTZ) and the charity Comic Relief. The size of the investment subsidy should reflect the value of the public good (or positive externality) provided by the project. Funding Information: This work was supported by Bundesministerium f?r wirtschaftliche Zusammenarbeit und Entwicklung: [Grant Number GZ: 414 K8187-0372/001]. We thank two anonymous reviewers for their constructive and detailed comments and suggestions to an earlier version of this Viewpoint. We thank the German Federal Ministry of Economic Cooperation and Development (BMZ) for their generous support. Publisher Copyright: {\textcopyright} 2021 The Author(s). Published by Informa UK Limited, trading as Taylor \& Francis Group.",

year = "2022",

doi = "10.1080/17565529.2021.1885337",

language = "English",

volume = "14",

pages = "91--97",

journal = "Climate and Development",

issn = "1756-5529",

publisher = "Taylor and Francis Ltd.",

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AU - Pauw, W.P.

AU - Kempa, L.

AU - Moslener, U.

AU - Grüning, C.

AU - Çevik, C.

N1 - Funding Information: Recognizing the externalities of different adaptation strategies and measures helps to identify opportunities for policy and financing mechanisms in order to remove or decrease market imperfections (see Bisaro & Hinkel, ; Woodruff et al., ). For example, a project or company could charge fees for the positive externality in order to improve the return on investment. In 2001, the Government of Malaysia developed the concept of a mixed-use tunnel that allows for traffic flow under normal circumstances, and that provides for storm water diversion during heavy rains. Private investments were secured by allowing a portion of the tunnel to be tolled for traffic, as these covered the operation costs and repaid the companies’ investments (Gardiner et al., ). An alternative way to compensate for positive externalities is to use public finance instruments such as grants or subsidized loans to bring down the cost of capital and increase the expected return on investment. For example, the Kayonza Growers Tea Factory in Uganda implemented wetland protection measures to prevent soil erosion, floods and increase water storage that also benefits the wider community. The factory might not have made this investment itself as there was no return on investment. Instead, the project received public grant finance through the Gesellschaft für Technische Zusammenarbeit (GTZ) and the charity Comic Relief. The size of the investment subsidy should reflect the value of the public good (or positive externality) provided by the project. Funding Information: This work was supported by Bundesministerium f?r wirtschaftliche Zusammenarbeit und Entwicklung: [Grant Number GZ: 414 K8187-0372/001]. We thank two anonymous reviewers for their constructive and detailed comments and suggestions to an earlier version of this Viewpoint. We thank the German Federal Ministry of Economic Cooperation and Development (BMZ) for their generous support. Publisher Copyright: © 2021 The Author(s). Published by Informa UK Limited, trading as Taylor & Francis Group.

PY - 2022

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N2 - Climate change requires significant adaptation of economies, and the largest part of most economies is composed of private sector actors. In this Viewpoint, we argue that it should not be the role of the public sector to cover the full costs of adaptation - which would also typically exceed government's fiscal space. Rather, we suggest that the public sector should set the right conditions to catalyse private investments in adaptation. While the suggestion is not new, we argue that the current focus on generic ‘barriers’ hindering more private investments in adaptation is not expedient. These barriers are descriptive rather than explanatory, sometimes mix cause and effect, and tend to focus on eliminating obstacles, rather than adapting efficiently. Alternatively, we suggest to focus on addressing three market imperfections that give rise to those barriers. In doing so, the overall welfare of society, including the vulnerability of the most marginalized, should be centre-stage. The development of markets should aim to contribute to such welfare - it is not an end in itself. In that sense, our call for a focus on market imperfections is a call for a larger role of public actors, both in developed and developing countries.

AB - Climate change requires significant adaptation of economies, and the largest part of most economies is composed of private sector actors. In this Viewpoint, we argue that it should not be the role of the public sector to cover the full costs of adaptation - which would also typically exceed government's fiscal space. Rather, we suggest that the public sector should set the right conditions to catalyse private investments in adaptation. While the suggestion is not new, we argue that the current focus on generic ‘barriers’ hindering more private investments in adaptation is not expedient. These barriers are descriptive rather than explanatory, sometimes mix cause and effect, and tend to focus on eliminating obstacles, rather than adapting efficiently. Alternatively, we suggest to focus on addressing three market imperfections that give rise to those barriers. In doing so, the overall welfare of society, including the vulnerability of the most marginalized, should be centre-stage. The development of markets should aim to contribute to such welfare - it is not an end in itself. In that sense, our call for a focus on market imperfections is a call for a larger role of public actors, both in developed and developing countries.

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KW - Adaptation finance

KW - market imperfections

KW - private sector

KW - public interventions

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DO - 10.1080/17565529.2021.1885337

M3 - Comment/Letter to the editor

AN - SCOPUS:85101262375

SN - 1756-5529

VL - 14

SP - 91

EP - 97

JO - Climate and Development

JF - Climate and Development

IS - 1

ER -

A focus on market imperfections can help governments to mobilize private investments in adaptation

Abstract

Funding

UN SDGs

Keywords

Access to Document

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