Incentive measures: further refinement and consideration of the proposals for the application of ways and means to remove or mitigate perverse incentives
The Subsidiary Body on Scientific, Technical and Technological Advice,
Recalling decision VII/18 of the Conference of the Parties and, in particular, the request expressed therein to further refine and consider, with a view to recommending adoption by the Conference of the Parties, the proposals for the application of ways and means to remove or mitigate perverse incentives, giving adequate time for a substantive and conclusive review of the proposals,
Aware that, at its eleventh meeting, the Subsidiary Body on Scientific, Technical and Technological Advice will consider positive incentives and that incentive measures are on the agenda of the eighth meeting of the Conference of the Parties,
Having further considered the draft proposals for the application of ways and means to remove or mitigate perverse incentives,
Noting that this document (in the annex to the present recommendation) is of a voluntary nature and contains a number of unresolved issues,
Recommends that the Conference of the Parties to the Convention on Biological Diversity at its eighth meeting:
(a) Considers the draft proposals included in the annex to the present recommendation with a view to finalizing them, in conjunction with the outcomes of the consideration of positive incentives by the Subsidiary Body on Scientific, Technical and Technological Advice at its eleventh meeting;
(b) Considers the development of definitions on the basis of suggestions put forward by Parties and relevant organizations before the eighth meeting of the Conference of the Parties.
Annex
PROPOSALS FOR THE APPLICATION OF WAYS AND MEANS TO REMOVE OR MITIGATE
PERVERSE INCENTIVES
A. General considerations
1. For the purpose of these indicative guidelines, the term policy shall refer to a system of strategies, plans and programmes that spell out, inter alia, operational targets, and a related set of legal, administrative and/or economic tools that are implemented by national, sub-national and local governments to attain a set of underlying objectives. The term practice shall refer to any activity undertaken by individuals, communities, companies and organizations [that is based on customary law, social norms or cultural traditions].
2. A perverse incentive emanates from policies or practices that encourage, either directly or indirectly, resource uses leading to the degradation and loss of biological diversity bearing in mind that perverse incentives include those that negatively affect biodiversity in other countries. The removal of such policies or practices or the mitigation of their perverse effects is therefore an important element or may even be crucial in promoting the conservation and sustainable use of biological diversity.
3. Three phases are suggested in the process of removing such policies or practices or in mitigating their perverse effects on biological diversity, all of which should be implemented with stakeholder participation:
(a) The identification of policies or practices that generate perverse incentives and their impacts;
(b) The design and implementation of appropriate reforms;
(c) The monitoring, enforcement and evaluation of these reforms.
4. The following sections provide indicative guidance, corresponding to these three phases, on the application of ways and means to remove policies or practices generating perverse incentives.
B. Identification of policies or practices that generate perverse incentives
5. Review of policies and practices. A thorough study, critical review and evaluation of policies and practices potentially contributing to biodiversity loss, including the assessment of their impact on biodiversity as well as their effectiveness and efficiency, is essential to identify properly and comprehensively any specific policies or practices and their interaction that are responsible for such decline bearing in mind that not every single policy measure and, in particular, not every incentive measure, leads to adverse effects for biodiversity. The study should also consider that the removal or mitigation of such policies and practices, although necessary, may not be sufficient to halt the loss of biodiversity if other root factors, such as institutional, macro-economic, sectoral policies and their implementation and key socio-economic reasons and governance systems, remain unchanged.
6. Identification of perverse practices. Special analytical care is needed if practices are to be held accountable for any adverse impacts on biological diversity. Such practices are difficult to change as they may be rooted in [cultural traditions or customary law], which may have wider social values. Furthermore, perverse incentives may be often be explained by an economically rational response to ill-adapted policies. The analysis should determine whether the promotion of cultural adaptation is appropriate or whether the reform of policies, or a combination of both, provides better opportunities for an effective policy intervention.
7. Differential effects of policies. In some instances, policies and practices may generate perverse incentives only under specific local conditions and socio-economic circumstances, while they may prove to be neutral or even favourable for biological diversity under other conditions and circumstances. Whenever feasible and appropriate, the scope and extent to which such policies and practices adversely affect biodiversity should be identified or quantified, as this information is important for prioritization and for choosing the appropriate policy response, bearing in mind that polices of one country may negatively affect biodiversity in another country.
8. Differentiation of policy objectives, operational targets, and tools. [Policies that induce unsustainable use, [production and consumption] may result in unintended decline in biodiversity, despite the original objective.] Once a specific policy is identified as generating perverse incentives, further analytical work should differentiate the underlying objectives, operational targets and the specific tools used in attempting to deliver the outcomes of the policy, in order to identify the appropriate entry point for policy reform. [An evaluation of the economic social and environmental costs and benefits of the perverse incentive should be undertaken to assess the combination of policies and markets actions that would achieve a better outcome for biodiversity, and achieve the original policy objectives at lower cost. The choice of policies or market actions should ultimately depend on their combined contribution to the environmental, social and economic dimensions of sustainable development, as well as their consistency with international obligations.]
9. Identification of all relevant costs and benefits and their distribution. The identification of all relevant costs and benefits from removing or mitigating policies or practices that generate perverse incentive as well as their distribution within society and the economy is key for a well-informed policy choice. Hence, the assessment should, where feasible, include not only the direct, tangible costs and benefits, but also the intangible costs and benefits of all those affected by the policy. The use of appropriate valuation tools should be considered if feasible. Furthermore, when assessing the merits of mitigation policies, the following cost components should also be taken into consideration: compliance costs, monitoring and enforcement costs, administrative costs and costs of change management.
10. Identification of obstacles for policy reform. The following elements should also be identified, as they are crucial for the design of effective policy responses:
(a) Relevant obstacles for the removal of policies and practices generating perverse incentives, such as distributional issues, property rights, entrenched interests, cultural traditions and relevant international [law and policy][considerations] [obligations];
(b) Relevant obstacles for the implementation of policies that mitigate such perverse incentives, such as international obligations, lack of funds or lack of administrative and/or institutional capacity.
11. Periodic policy evaluations. The lack of evaluation of policy efficacy and efficiency contributes to the persistence of policies that create perverse incentives and do not assist in achieving what may still be legitimate policy objectives. Periodic quantitative policy evaluation, which includes biodiversity impacts, is desirable for various reasons: it provides criteria for the selection of the most desirable policy reform interventions, it assists in the identification of relevant stakeholders (winners and losers), creates political and evidentiary support for change of ineffective and perverse incentives, gives an indication of policy alternatives and provides an indication of the cost of removal of the perverse incentives. The establishment of periodic quantitative evaluation of the effectiveness of policy instruments and an assessment of any perverse incentives created by them would enable the development of win-win policy reforms. International organizations are requested to cooperate in this effort.
12. Prioritization The analysis should facilitate prioritization of subsequent reforms to remove or mitigate perverse incentives, that is, it should enable to spell out which reforms to take up first, and which ones to take up later. The prioritization should be based on a set of criteria, the primary of which should be the extent to which the reform will [promote conservation and/or sustainable use of biodiversity components] [address biodiversity degradation] [promote the three objectives of the Convention].
13. Strategic environmental assessment. Elements of strategic environmental assessment (SEA) procedures could be used, if appropriate, as a means to identify policies and practices that generate perverse incentives. In this regard, the Guidelines for Incorporating Biodiversity-related Issues into Environmental Impact Assessment Legislation and/or Processes and in Strategic Environmental Assessment (decision VI/7, annex) could be taken into consideration. While mainly used for proposed policies, SEA procedures provide useful guidance on how to design and conduct research to identify perverse incentives for biodiversity conservation and sustainable use that emanate from existing policies. In particular, the following steps emerge as possible means of assessing policies and practices with regard to potential perverse incentives:
(a) Screening to determine which policies or practices require full or partial study with regard to possible perverse incentives;
(b) Scoping to identify which potential impacts on biological diversity are relevant to address, and to derive terms of reference for the actual study;
(c) The actual study to identify the perverse incentives for biodiversity conservation and sustainable use emanating from policies and practices, taking into account those impacts that result from the interaction of different policies and practices;
(d) The identification of possible action to remove or mitigate perverse incentives;
(e) The identification of possible reform obstacles;
(f) Pursuant to the design and implementation of reform policies, monitoring and evaluating the implementation of such reform policies, to ensure that unpredicted outcomes and failed mitigation measures are identified and addressed in a timely fashion.
14. Stakeholder involvement. The involvement of all relevant stakeholders is an important element in identifying policies or practices that generate perverse incentives. The direct benefits of policies often go to well organized societal actors, while the costs of these policies, e.g., the loss of ecosystem services due to biodiversity decline, are borne by the wider public or by diffuse and/or powerless groups. Such groups, whether local, national or international, however, may be able to forward additional important information and to point to possible shortcomings in the conclusions of the assessment. It should therefore be ensured, through appropriate mechanisms of levelling the playing field for all stakeholders, that all relevant groups are involved throughout the process. A balanced representation of stakeholders in the consultation will contribute to identifying properly and comprehensively both the benefits of individual policies and their possible shortcomings.
15. Transparency. Perverse incentives could be difficult to detect. It is therefore important to ensure that the process of assessing policies and practices is conducted in a transparent manner and will contribute to ensure that all relevant stakeholders are well-informed about the process and its outcomes as well as the causes of perverse effects and their mechanisms. This is an important precondition for effective stakeholder involvement.
16. Capacity-building. In developing countries and countries with economies in transition, lack of institutional and administrative capacity to design and conduct appropriate assessment studies is often a serious impediment to identifying policies and practices that generate perverse incentives. In those cases, the resourcing and building of capacity, supported by relevant national, regional and international organizations, is therefore an important prerequisite in successfully removing or mitigating policies and practices that generate perverse incentives.
C. Design and implementation of appropriate reforms
17. Possible political action. The following is an indicative list of possible political action once specific policies and practices are identified as generating perverse incentives for the conservation and sustainable use of biological diversity, bearing in mind that, in some instances, several such activities need to be undertaken simultaneously, and also recalling that reforms of other macro-economic and sectoral policies may often be necessary to capture the full benefits of removing or mitigating perverse incentives and to halt the loss of biodiversity:
(a) Removal of the policy or practice;
(b) Removal of the policy and its replacement with another policy that attains the same objectives, but without or with fewer perverse impacts on biological diversity (re-instrumentation);
(c) In those cases where a policy or practice has overall negative impacts but some positive impacts, removal of that policy or practice and introduction of an additional policy that seeks to maintain the positive impacts;
(d) Removal or the policy or practice, combined with measures to overcome obstacles for policy reform;
(e) Introduction of policies that mitigate the perverse impacts on biodiversity of policies or practices, possibly including policies that address relevant obstacles.
18. The following paragraphs provide an indicative list of conditions for the selection of action further to the identification of policies or practices that generate perverse incentives. Some conditions make reference to costs and/or benefits. It is important to note that the policy choice should be based not only on the direct, tangible costs and benefits, but also on an assessment of the intangible costs and benefits, including, for instance, benefits emanating from ecosystems services. Furthermore, the assessment should also include components such as compliance costs, monitoring and enforcement costs, administrative costs and the costs of change management, if appropriate. The choice of reform policies should be based on the extent to which the new policy will contribute to achieving the three objectives of the Convention and take into account distributional objectives and effects at national and global levels.
19. Removal of policies that generate perverse incentives. The removal of policies that generate perverse incentives should be a priority, when the analysis reveals that a policy-generating perverse incentive was introduced under circumstances that no longer prevail and, as a consequence, the policy objectives are no longer valid. In other cases, the policy objective may still be valid. In such cases, complementary/alternative policy mechanisms or implementation strategies should be explored and the removal of the corresponding element of the existing policy should be considered.
20. Removal of perverse practices. The removal of practices that generate perverse incentives should be considered if a careful analysis of their interplay with formal policies reveals that such practices are indeed the appropriate target for reform. Such practices are often difficult and costly to remove, because of the fact that they may be rooted in cultural traditions or customary law. Their removal should be considered if the cost of promoting cultural adaptation, through for instance appropriate awareness-raising and education programmes, is lower than the cost of effective mitigation policies. Furthermore, it has to be recalled that perverse incentives, apparently caused by specific practices, may often be explained by an economically rational response to ill-adapted policies. In those cases, the reform of these policies may often provide better opportunities for an effective policy intervention.
21. Re-instrumentation. In many cases, the underlying policy objective may still be valid and legitimate, and the perverse incentives emanating from the policy could be substantially lowered or avoided if other operational targets and tools would be used. In such instances, the removal of the policy and its replacement by a policy with fewer or no perverse impacts should be considered. Special care should be paid to identifying and implementing those operational targets and related tools that generate the least or no adverse impact on biological diversity.
22. Removal and introduction of policies that maintain any positive impacts. In some cases, policies and practices may generate perverse incentives under specific local conditions and socio-economic circumstances, while they may even be favourable for biological diversity under other conditions and circumstances. In these cases, the removal of these policies and practices should still be envisaged if the overall effect on biological diversity is mainly negative. Additional, well-targeted policies could be introduced to maintain the positive impacts.]
23. Removal and overcoming of obstacles. Substantial obstacles may sometimes hinder the removal of policies and practices. Additional policies to overcome such obstacles could be introduced if the associated costs are lower than the costs of effective mitigation. The choice of the appropriate policy would clearly depend on the relevant obstacle identified. A step-by-step approach to the reforms could be considered and, as part of that approach, attention should also be given to the costs and benefits for all relevant stakeholders:
(a) Distributional concerns. In some cases, the removal of policies or practices may have adverse distributional consequences. The impact of reforms on food security and poverty should be of particular concern. [A step-by-step approach to the reforms could be considered. Additional well-targeted income policies could also be implemented to compensate for these adverse effects;][Additional well-targeted non-trade-distorting direct income support could also be implemented to compensate for these adverse effects;]
(b) [Legal issues. In some cases, the removal of policies may impinge on the property rights of some stakeholders. Compensation of associated losses might be required, in accordance with [international law] [and the legal framework of the country concerned;]]
(c) Entrenched interests. In most cases, some groups or individuals will lose as a result of the removal of policies or practices. Such groups or individuals will resist such reform. Participation in the decision making process, access to information, education and awareness-raising can be a measure to overcome such obstacles as well as to increase transparency. [Compensatory policies for such stakeholders should only be considered as a last resort;]
(d) Lack of capacity. In developing countries and countries with economies in transition, lack of resources, institutional and administrative capacity is often a serious impediment to removing or mitigating perverse incentives. The resourcing and building of capacity will be needed in these cases;
(e) Cultural traditions. The removal of practices generating perverse incentives is particularly difficult if they are deeply rooted in cultural beliefs, customs and traditions. Participation in the decision-making process, access to information, education and awareness-raising can be appropriate means to overcome such obstacles;
(f) [International competitiveness. Unilateral removal of policies that generate perverse incentives may create a risk that domestic industries lose competitiveness. Such risks become more important in a globalized world of increased international trade and capital flows. When evidence for such cases is compelling, international cooperation to remove such policies in a coordinated, synchronized way may be warranted;]
(g) Global benefits of removing perverse incentives. In many cases, the benefits arising from a removal of policies that generate perverse incentives for the conservation and sustainable use of biodiversity are of a global nature, while the costs of removing such policies accrue at the national level. In such cases, international cooperation, including the extension of the activities of international funding mechanisms such as the Global Environment Facility, is warranted to cover developing countries with the possible incremental national costs of generating global benefits.
24. Mitigation. If the removal of policies or practices that generate perverse incentives is not feasible or too costly, the effective mitigation of their perverse effects on biodiversity, through appropriate means should be implemented. The following scenarios could be considered:
(a) The cost for society of removing policies and practices, including forgone benefits, would be higher than the cost of effective mitigation policies;
(b) The cost for society of replacing the policy by a policy serving the same objective with less or no perverse impacts would be higher than the cost of effective mitigation policies;
(c) The cost for society of overcoming obstacles to the removal of policies and practices is higher than the cost of effective mitigation policies.
25. All the mitigation policies selected and applied under such conditions should introduce measures aimed at mitigating the impact of the policies with perverse incentives, taking into consideration the adverse effects on biodiversity and all relevant stakeholders.
2. Ways and means to remove or mitigate perverse incentives
(a) Important tools for removal and mitigation
26. National guidelines. Guidelines that are adopted by competent national authorities will be an important indirect means to effectively remove or mitigate perverse incentives. Guidelines that are well adapted to national needs and circumstances may serve to structure and inform the national process of identifying as well as removing or mitigating policies and practices that generate perverse incentives. If made publicly available, they may serve as a benchmark against which the general public can gauge the effectiveness of the reform process.
27. 0160; Stakeholder involvement. The removal of policies or practices that generate perverse incentives is often opposed by influential groups or individuals that profit from these policies or practices. Even when it is not the stated objective of a policy to support such groups or individuals, its removal may be at risk because of their influence. In contrast, the costs of these policies, e.g., the loss of ecosystem services due to biodiversity decline, are borne by the wider public or by diffuse and/or powerless groups. The empowerment and involvement of such groups during the design and implementation phase, through appropriate mechanisms of levelling the playing field for all stakeholders, is therefore another important means to ensure that appropriate policy responses are implemented.
28. Participation, awareness-raising and education. The very fact that practices that generate perverse incentives may be rooted in customary law, social norms or cultural traditions implies that considerable obstacles exist to their removal, obstacles that are beyond the immediate reach of formal policy-making. The more indirect approach of participation in the decision-making process, access to information, education and awareness-raising may therefore be a particularly important means in removing such practices. However, awareness-raising and education programmes will also be an important element in successfully removing policies or introducing mitigation policies, to overcome the resistance of powerful groups opposing their removal.
29. Transparency. Creating transparency with regard to the intermediate and final outcomes of the assessment study, that is, with regard the objectives, costs, and possible negative impacts of policies and practices will contribute to clarifying the implicit choices and priorities and will expose irresponsible policies and practices to the wider public. Transparency will therefore be an important element of a successful programme to raise awareness of these issues. As a consequence, it will also increase the political costs of irresponsible policies and generate political rewards for appropriate action.
30. Resourcing and building of capacity. In developing countries and countries with economies in transition, lack of resources, institutional and administrative capacity is often a serious impediment to removing or mitigating perverse incentives. While some policies that generate perverse incentives can, in principle, be easily removed, the removal of practices or the implementation of successful mitigation policies may require substantial resources, institutional and administrative capacity. The provision of resources and building of capacity, supported by relevant national, regional and international organizations, is therefore a key precondition in successfully removing or mitigating policies and practices that generate perverse incentives for the conservation and sustainable use of biological diversity.
31. International cooperation. International cooperation is a very important element in removing or mitigating perverse incentives as set out in paragraph 23 (f) and (g) above.
(b) Ways and means of removal
32. [Re-instrumentation. In the case of legitimate and valid policy objectives, re-instrumentation, that is, the application of operational targets and related tools that attain the same objective with less or no adverse impacts on biological diversity, may often be a particularly effective way of removing policies that generate perverse incentives for the conservation and sustainable use of biodiversity.]
33. [Compensatory policies. The introduction of additional measures could be considered to compensate stakeholders that are negatively affected by the removal of policies that generate perverse incentives. Provided that funding is ensured, the use of compensatory policies could be considered in the following cases:
(a) If the removal of policies will have an adverse effect on distributional objectives, a step-by-step approach to removing such policies could be taken, and additional, well-targeted income policies could be implemented;
(b) If the removal of policies negatively affects the property rights of some stakeholders, the compensation of associated losses could also be envisaged;
(c) If the conditions spelled out under (a) and (b) above do not prevail, compensatory policies should be used only as a last resort.]
(c) Ways and means of mitigation
34. Regulation. Where appropriate, the introduction of regulation may be an effective means to mitigate the perverse impacts on biodiversity, provided that a number of preconditions are met. Such preconditions include:
(a) The existence of well-defined, comprehensive and measurable performance indicators;
(b) The resources and capacity to effectively manage, monitore and enforce; and
(c) Regulation that can be designed in a comprehensive way so as to avoid adaptive behaviour of target groups, leading to secondary adverse effects on biological diversity.
35. Overcoming obstacles to mitigation through regulation. It should be borne in mind that the very obstacles preventing the removal of policies may also impede the effective mitigation of their perverse effects. For instance, the incentive of target groups not to comply with the regulation may be especially high if the policy generating the perverse incentive remains in place unchanged. Therefore, access to information, education, awareness-raising, transparency and stakeholder involvement are important elements of effective regulatory policies to mitigate perverse incentives.
36. Positive incentive measures. The introduction of additional positive incentive measures is another possible means to mitigate the perverse impacts of some policies and practices. In addition to the preconditions enumerated in paragraph 34 above, a number of other caveats should be taken into consideration when using positive incentive measures:
(a) If policies having perverse impacts on biodiversity remain unchanged, the cost of using positive incentives for mitigating these impacts will be especially high, which, in turn, will impair the efficiency of using this instrument. Prior to using positive incentives, such policies should therefore be removed to the extent possible, through the means enumerated above;
(b) As explained in paragraph 22 above, policies and practices that generate perverse incentives in most circumstances may have a favourable impact on biological diversity in others. In such cases, the use of positive incentive measures could be considered to mitigate the negative effect of removing these policies and practices;
(c) The careful design of the incentive measure, including the proper specification of eligibility conditions, is especially important in the case of positive incentive measures to avoid the generation of secondary adverse effects on biological diversity;
(d) In some cases, the strategic behaviour of rational recipients will impede the long-term effectiveness of positive incentive measures. In such cases, their use should be restricted to a transitional period of time through appropriate legal means such as sunset legislation;
(e) Lack of funds may limit the use of positive incentive measures;
(f) The use of positive incentive measures may have both negative and positive distributional consequences. These consequences need to be taken into consideration when using positive incentive measures.]
37. [Negative incentive measures. The use of negative incentive measures could also be considered to mitigate the perverse impacts of some policies and practices. In addition to the preconditions enumerated in paragraph 34 above, political resistance will often be especially severe if negative incentive measures are to be introduced. Therefore, awareness-raising, transparency and stakeholder involvement are key elements of a successful introduction of negative incentive measures to mitigate perverse incentives.]
38. Guidance on the use of incentive measures. Further guidance with regard to the design and implementation of incentive measures is given in the proposals for the design and implementation of incentive measures, endorsed by the Conference of the Parties to the Convention on Biological Diversity at its sixth meeting (decision VI/15, annex I).
D. Monitoring, enforcement and evaluation of reforms
39. Stakeholder involvement. Even after the design and implementation of reforms, all relevant stakeholders, as appropriate, should have the opportunity to be involved in evaluation to ensure their feedback on unanticipated side-effects, failed mitigation measures and other shortcomings, and to ensure that such shortcomings are addressed in a timely fashion.
40. Indicators and information systems. The introduction of appropriate information systems should be considered in order to facilitate the process of monitoring and enforcing reforms. Furthermore, the development and application of sound indicators is a crucial precondition to the useful evaluation of reform policies.
41. Criteria for evaluation. The evaluation of the effectiveness of the reforms should use sound criteria that incorporate the three objectives of the Convention on Biological Diversity.
42. Transparency. Further dissemination of information can play a key role in building and maintaining public support for the reforms, and can thereby contribute to lower monitoring and enforcement costs for public authorities. Again, transparency may be a crucial precondition to ensuring effective stakeholder involvement in evaluating reforms.
43. Resourcing and the building of capacity. The ultimate success of the chosen reform is contingent upon successful monitoring, enforcement and evaluation of its impact, including unanticipated side-effects, failed mitigation measures and other shortcomings. It therefore depends on sufficient resources, institutional and administrative capacity.
