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Economic and financial instruments


Economic and financial instruments can be used to change people’s behavior towards desired policy objectives. Instruments typically encompass a wide range of designs and implementation approaches. They include traditional fiscal instruments, including for example subsidies, taxes, charges and fiscal transfers. Additionally, instruments such as tradable pollution permits or tradable land development rights rely on the creation of new markets. Further instruments represent conditional and voluntary incentive schemes such as payments for ecosystem services. All these can in principle be used to correct for policy or/and market failures and reinstate full-cost pricing. They aim at reflecting social costs or benefits of the conservation and use of biodiversity and ecosystem services of a public good nature (“getting the price right”). Financial instruments, in contrast, are often extra-budgetary and can be financed from domestic sources or foreign aid, external borrowing, debt for nature swaps, etc. Economic instruments do not necessarily imply that commodification of environmental functions is promoted. Generally, they are meant to change behavior of individuals (e.g., consumers and producers) and public actors (e.g., local and regional governments).