Economic and Policy Instruments to Promote Adaptation

Adaptation to climate change will comprise of thousands of actions by households, firms, governments, and civil society. This chapter provides some pointers as to how smart policy can turn private initiative into a force for adaptation. It focuses on three instruments: insurance, environmental markets and public private partnerships. Insurance has a long track record as a way to share weather risks. However, as climate damages grow insurance will become riskier. Public policy measures will be needed to overcome this problem, for example through publicly funded adaptation measures that bring down risks or by sharing the most extreme layer of risks with commercial insurers. Public policy should not, however, subsidise the systemic risks, as this may sustain activities that become progressively less viable under the changing climate. Environmental markets and pricing have a key role to play in the preservation of natural systems, even without climate change. They incentivise owners to preserve natural assets and consumers to use them carefully. From an adaptation point of view, environmental markets and pricing serve two main purposes. First, they reduce baseline stress, making systems more resilient. Second, they can help to monetise the adaptation services provided by ecosystems. Public Private Partnerships (PPPs), meanwhile, can help to overcome operational constraints and accelerate investment in infrastructure, which will likely be the most expensive part of adaptation and, therefore, put considerable strain on the administrative and financial capacity of governments. PPPs may also play a role in research and development and the search for better adaptation technologies.