International Waters learning Exchange & Resource Network

6. Economic policy instruments

A range of different policy instruments have been developed and employed to manage the sustainable use of natural resources. Policy instruments are the mechanisms through which policy objectives are pursued. They include direct intervention and regulation by public bodies as well as the promotion of changes in the activities and behaviour of other relevant actors. This chapter provides an overview of economic policy instruments relevant to LME/MPA/ICM and discusses their design.

It is important to recognise that such economic policy instruments are developed and applied within existing policy and legal frameworks. The Governance toolkit, Section 3, provides detail on policy and legal frameworks in the LME context. Moreover, the development of policy instruments extensive engagement with stakeholders. The Stakeholder Engagement toolkit, Section 4, provides an overview of engagement processes and tools.

6.1 Taxes

Taxes are charges that are paid on inputs, outputs or emissions from production or on the consumption of products. Taxes can have two functions: (1) to raise revenue to fund public expenditure; and (2). to regulate economic activities by increasing their cost. Environmental taxes are levied on inputs or products that have negative environmental impacts, thereby providing incentives for producers or consumers to reduce the use, production or consumption of taxed items. In other words, environmental taxes work by internalising external costs so that the generator of that cost takes it into account in their decision making.

Environmental taxes can potentially deliver a “double dividend” in that they can produce two positive outcomes:

(1) internalise external costs to disincentivise environmentally harmful production and consumption; and (2) generate revenue that can be spent of environmental protection or potentially used to reduce other forms of tax that may distort positive economic behaviour (e.g. income tax).

In the LME context, there may be a case for advocating taxes on resource use and polluting activities within the LME to both partially restrict

6.2 Subsidies

A subsidy is a payment from the government to an economic agent to promote a particular activity. Environmental subsidies can be used to promote production or consumption that reduces negative impacts to the environment. Environmental subsidies can take a number of different forms: direct subsidies for environmental improvements; production subsidies with environmental pre-conditions; tax breaks such as capital allowances for environmental investments; tax rebates, grants or loans for environmental investments; financial support for advice services or voluntary initiatives; tax credits that reduce a person’s liability to pay an environmental tax if they have funded an approved environmental project.

Subsidies are widely used to promote economic development and support specific sectors. This includes many industries operating in or impacting on the marine environment (e.g. fisheries, energy, agriculture). In the case of fisheries, subsidies can take the form of reduced prices for fuel and equipment, or the provision of infrastructure (e.g. ports) and processing facilities. While this may be benefit the operators within the targeted sector, it is widely recognised that subsidized activities can have unintended environmental consequences through negative externalities. The design of subsidies therefore needs to include an assessment of their wider impacts and measures to mitigate negative external costs. It is also advisable that subsidies are time limited to avoid permanent dependence on government support, for example to cover periods of transition to new technologies or regulations.

6.3 Tradable permits and quotas

Tradable permits or quotas are used to control the overall level of a particular activity, type of pollution or the use of a resource but allow individual agents to buy or sell permits in order to ensure that they are allocated to the highest valued use. This form of policy instrument is also referred to as “cap-and-trade”. In the context of fisheries, the term “individual transferable quota” is used. The steps in designing a tradable permit system are:

1Set limit for total emissions or use of resource equal to an optimal/ sustainable level (for each sector, region, period),

2Make initial allocation of permits to polluters/resource users,

3Allow permits to be traded between polluters/resource users,

4Monitor actual emissions/resource use by each polluter/resource user, and

5Impose penalties if emissions/resource use exceed the amount of permits held.

The advantages of using tradable permits to manage the use of environmental resources are: (1) setting a total limit ensures that use does not exceed safe or sustainable levels (this is not guaranteed when using environmental taxes); and (2) allowing permits to be traded ensures that they are allocated to the users that gain the highest value from their use (i.e. ensures efficiency).

Challenges in designing a tradable permit system are: (1) the initial allocation of permits can determine the distribution of returns across participants within the sector; an auction of permits may be seen as a fair or neutral initial allocation but does not reflect historical use of the resource; (2) permits may affect competition within the sector by enabling a small number of firms to gain market (monopoly) power or to behave strategically (e.g. prevent the entry of new firms), and (3) in the case that the specific location and timing of emissions/resource use is relevant to its impact or sustainability, it may be necessary to introduce restrictions on where and when permits can be redeemed.

In the case of fisheries management, individual transferable quota (ITQ) programs allocate shares of a total allowable catch (TAC) to individual fishers, entities or vessels. Such systems allow more individual flexibility in decisions regarding when to fish and what technology to use (in comparison to fishing effort restrictions).

A useful resource for designing ITQ programs is the Environmental Defence Fund (EDF) catch share design manual.

6.4 Area based user rights

An alternative approach to quota based user rights such as individual transferable quotas (ITQs) is to allocate a share of the harvestable area for a resource to each user. In the case of fisheries management this is termed “territorial use rights for fishing” (TURF).

TURFs allocate exclusive rights to harvest one or more target species in a specified area to groups or individuals. They are usually managed by an organized cooperative of fishermen and set appropriate controls on fishing activities. The use of TURFs is most applicable for target species that are not highly mobile and remain within the specified areas.

Environmental Defence Fund (EDF) catch share design manual also provide guidance on designing TURFs and a number of example applications.

6.5 Protected areas

Protected area is defined by the International Union for the Conservation of Nature (IUCN) as “a clearly defined geographical space, recognised, dedicated and managed, through legal or other effective means, to achieve the long-term conservation of nature with associated ecosystem services and cultural values” and the Convention on Biological Diversity as “a geographically defined area which is designated or regulated and managed to achieve specific conservation objectives”.

Protected areas (PAs) include national parks, wilderness areas, community conserved areas, nature reserves and marine protected areas (MPAs). Designation of PAs has been one of the principal approaches for biodiversity conservation. The IUCN has developed a categorisation of protected areas based on their management objectives. Table 8 provides a summary of this classification. By managing activities and the exploitation of resources within areas of high biodiversity, PAs provide a means to protect biodiversity and enhance the provision of other ecosystem services. They also play a role in mitigation of and adaptation to climate change through the storage of carbon and regulation of micro-climates, water flows and storm damage. Effectively managed networks of protected areas have been recognised as important instruments in achieving the objectives of the Convention on Biological Diversity and the Sustainable Development Goals.

Challenges associated with the use of PAs as a biodiversity conservation tool include the extent to which planned protection is implemented and the potential conflicts between biodiversity conservation objectives and the use of resources by local communities.

The Governance toolkit, Section 5.5., provides further information on capacity needs and good practices for the implementation of MPAs.

The Strategic Approach toolkit Section 5 also provides information on best practices in MPA implementation.

Table 8. IUCN Protected Area Management Categories


Main objective


Strict Nature Reserve

Managed mainly for science


Wilderness Area

Managed mainly to protect wilderness qualities


National Park

Managed mainly for ecosystem protection and recreation


Natural Monument

Managed mainly for conservation of specific natural features


Habitat/Species Management Area

Managed mainly for conservation through management interventions


Protected Landscape/Seascape

Managed mainly for landscape/seascape conservation and recreation


Managed Resource Protected Area

Managed mainly for the sustainable use of natural ecosystems and resources

Example Box 7: Enhanced management of marine parks, Malaysia

This case study describes the “Conserving Marine Biodiversity through Enhanced Marine Park Management and Inclusive Sustainable Island Development” project, implemented by the Government of Malaysia (GoM) in partnership with the United Nations Development Programme (UNDP) Malaysia, and supported by the Global Environment Facility (GEF).

The project covered three demonstration marine parks in Malaysia: Pulau Redang, Pulau Sibu-Tinggi, and Pulau Tioman. The total project financing incurred was approximately. The project, which ran from 2007-2013 with a budget of US$ 4.13 million, was aimed at:

Widening the existing development planning process in order to support marine ecosystem management as well as sustainable tourism through stakeholder involvement;

Strengthening the capacity of the marine parks management system in Peninsular Malaysia and to ensure effective enforcement of marine park regulations at three project sites; an

Enabling an influential advocacy framework for the conservation of marine biodiversity supported by a raised level of awareness of the importance and benefits of marine biodiversity.

The project resulted in the following benefits particularly related to areas of awareness raising, pollution control, protected areas management and respect of traditional knowledge:

a)Awareness and livelihood impact: Through the project’s awareness programs such as snorkel guide training, advocacy group set up resulted in greater ownership and appreciation of the biodiversity values of the marine protected areas (MPAs) among the local communities. In addition, direct training and programs such as business courses, English language courses, lessons to fix and maintain boats, training certificates that enabled the communities to be legally recognized as boatmen elevated their livelihood options and opportunities.

b)Pollution control: Awareness raising programs by the project and exchange visits brought about the inspiration and push for the local community to clean up their house reef which was then transformed into a site that could support snorkeling activities.

c)Protected areas management: The project included the development of protected areas management plan to support better management of MPAs. At the same time, the project raised the enforcement capacity of the Department of Marine Park.

d)Respect of traditional knowledge and involvement of local communities: The project developed mechanisms that enabled stakeholder participation and engagement at the local, state and national level. It enabled community perspectives to be channelled to decision makers and planners.

Sources: GoM, UNDP, GEF (2006)

6.6 Certification and labelling

Product labelling can be used to indicate the environmental and social characteristics of goods and services. Certification and labelling of goods and services with positive environmental characteristics enables markets to develop for such products, in which consumers can fulfil their preferences for environmental sustainability and producers can gain a price premium or market share. Certification and labelling addresses one of the difficulties in establishing markets for environmentally friendly products, namely that consumers are otherwise unaware of (or cannot trust claimed) differences between the production processes of products. In other words, it addresses a market failure due to imperfect and asymmetric information held by producers and consumers.

The main elements in a certification and labelling system are: (1) setting environmental and social criteria for the production process; (2) a system of third party verification of compliance with the criteria; (3) ensuring credibility and trust of the process and label; and (4) promoting consumer recognition of the label.

6.7 Links

Examples of certification and labelling systems that are relevant in the LME/MPA/CZM context are:

►Marine Stewardship Council (MSC)

►Aquaculture Stewardship Council (AFC)

6.8 Trade restrictions

Legal restriction on the use or trade of wildlife products is one of the main policy instruments for protecting biodiversity. Demand for wildlife products is diverse and encompasses food, medicine, skins, ornaments, timber and live specimens. The demand for such products is generally observed to increase with population, income and tourism and drives the likelihood that species become endangered or even extinct. Controlling the use of endangered species through legal bans is a direct measure for protection and requires strong institutional capacity for monitoring and enforcement. Illegal trade in endangered species is observed to continue in cases where enforcement is weak and/or demand and prices for wildlife products remain high. Poaching is arguably the most serious direct threat to many of the most endangered species.

Regarding international trade in endangered species, the Convention on International Trade in Endangered Species of Wild Fauna and Flora (CITES) is an international agreement between governments established to ensure that international trade in specimens of wild animals and plants does not threaten their survival. There is a recognised need for international cooperation to safeguard wildlife that is traded internationally in order to coordinate regulations and monitoring. CITES accords varying degrees of protection to more than 35,000 species of animals and plants. CITES works by controlling international trade in selected species. All import, export, re-export and introduction from the sea of species covered by the Convention has to be authorized through a licensing system, which is administered by a designated Management Authority in each country that is a Party to the Convention. The species covered by CITES are listed in three Appendices: Appendix I includes species threatened with extinction for which trade is permitted only in exceptional circumstances; Appendix II includes species not necessarily threatened with extinction, but in which trade must be controlled in order to avoid over-use that would threaten their survival; Appendix III contains species that are protected in at least one country, which has asked other CITES Parties for assistance in controlling the trade.

►Convention on International Trade in Endangered Species of Wild Fauna and Flora

The World Trade Organisation (WTO) rules contain a number of provisions relating to Illegal, Unreported, and Unregulated (IUU) fishing, including on subsidies that may promote IUU.

6.9 Sustainable financing mechanisms

Sustainable financing mechanisms include a wide range of approaches for raising long term funding flows for environmental management, as opposed to conventional donor or project financing that is usually time limited. Sustainable financing mechanisms include conservation trust funds (CTF), debt for nature swaps (DNS), green bonds, payments for ecosystem services (see section 8.9), and biodiversity offsets (see section 8.10). Here we briefly introduce CTFs and DNS. The UNDP provides an extensive list of options for financing sustainable development:

►Financing Solutions for Sustainable Development

The importance of sustainable financing to LME governance is specifically addressed in Section 2.4 of the Governance toolkit.

Conservation Trust Funds (CTF)

Conservation Trust Funds (CTF) or Environmental Trust Funds are generally designed as independent grant-making institutions that mobilize and manage financial resources for environmental purposes, such as biodiversity conservation, climate adaptation and mitigation.

CTFs can be structured as endowment funds (allocating a share of the income generated by the “endowment”, which is usually composed of stocks or other revenue generating assets), sinking funds (disburses a share of its capital each year over a defined period of time, until it sinks to zero) or revolving funds (replenished or augmented on a regular basis, usually through government contributions).

Debt-for-nature swaps (DNS) involve debtor governments committing to invest in conservation and/or climate change adaptation or mitigation in return for a reduction or cancellation of debt on the part of creditors. Such arrangements have also been established in the form that creditors agree to sell the debt they hold to a third party (e.g. a conservation organisation) for a discounted price.

Debt for nature swaps (DNS)

Debt-for-nature swaps (DNS) involve debtor governments committing to invest in conservation and/or climate change adaptation or mitigation in return for a reduction or cancellation of debt on the part of creditors. Such arrangements have also been established in the form that creditors agree to sell the debt they hold to a third party (e.g. a conservation organisation) for a discounted price.

►Debt for Nature Swaps

Conservation Finance Alliance’s set of practice standards for CTFs

OECD report on scaling up finance mechanisms for biodiversity

6.10 Payments for Ecosystem Services

Payment for Ecosystem Services (PES) is a relatively new policy instrument in resource conservation that establishes a mechanism through which ecosystem service beneficiaries can compensate service providers (Kumar and Thiaw, 2013). PES schemes are based on the principle that people located in ecosystems that provide the services (providers) should be compensated for the continuous provision of such services, while the people who benefit (beneficiaries) from ecosystem services should pay for the protection of such ecosystems (Macandog, 2014).

The term “payments for ecosystem services” (PES) covers a broad set of mechanisms through which incentives for the provision of ecosystem services are established. In a PES scheme, providers of an ecosystem service (e.g. upstream farmers who conserve forests that control water flow) are incentivized to provide that service through some form of payment or compensation, which may be paid by the beneficiaries of the service (e.g. downstream farmers that benefit from lower exposure to flooding). PES schemes attempt to provide incentives for the continued or enhanced provision of services and address the commonly observed problem that markets do not exist for ecosystem services. It is the creation of incentives that is crucially important since the provider of an ecosystem service may otherwise be better off using the ecosystem resource in another way (e.g. an upstream farmer might convert forest area to agricultural land).

PES has been defined narrowly as voluntary transactions between service users and service providers that are conditional on agreed rules of natural resource management for generating offsite services.

Other definitions have been stated more broadly, for example as a simple transfer of resources between social actors, which aims to create incentives to align individual or collective land use decisions with social interest in the management of natural resources. This broad definition allows for the inclusion of compulsory transactions, payments in kind rather than money (e.g. infrastructure development, education, technical assistance, tenure security), and relaxes the technically challenging condition that the ES provider is shown to ensure the provision of the service.

One of the main attractions of PES as a policy instrument is that it can in principle be self-financing in the case that payments by beneficiaries cover all associated costs (transaction costs as well as opportunity costs of the provider of ecosystem services). A further attraction of this policy instrument is that it can in principle result in an efficient allocation of resources. In theory, payments for ecosystem services will continue up until the point at which the marginal costs of providing them (i.e. the value of the foregone use of those resources to the provider) equals the marginal benefit (i.e. to value of the ecosystem service to the beneficiary).

The observed disadvantages of this policy instrument are the high transaction costs involved in establishing and operating a PES scheme, the institutional requirements for setting, collecting and disbursing payments, and the information requirements to monitor the activities of participants. Few PES schemes have proven to be financially sustainable in the long term after initial funding, often from international donors, has ended.

6.11 Biodiversity offsets, banking and trading

Biodiversity offsets are conservation actions intended to compensate for the unavoidable harm to biodiversity caused by development projects, so as to ensure no net loss of biodiversity (ten Kate et al., 2004). Such conservation actions can be on-site or off-site, and include the restoration or creation of areas of similar habitat to that which is harmed or destroyed.

Biodiversity offsetting is predominantly used by planning authorities and developers to prevent biodiversity loss and, in some cases, produce gains in biodiversity. Biodiversity offsetting involves using qualitative and quantitative measures to determine the amount, type and quality of habitat that is likely to be affected by a proposed project. Biodiversity offsetting can also involve estimating the cost of replacing damaged biodiversity by calculating the cost of creating the same amount, type and quality of habitat at other locations.

Biodiversity banking, also known as biodiversity trading or conservation banking, is a process through which gains in habitat and biodiversity can be reliably measured and traded for the purpose of offsetting losses in biodiversity elsewhere. The term “banking” is used to refer to the way offsets are created and approved prior to development and biodiversity loss taking place. The resulting conservation benefits are “banked” with the regulator and later sold as offsets to future development projects. One of the aims of banking is to avoid any temporal loss of ecosystem benefits.

Biodiversity offsets are generally viewed as a secondary conservation measure to be used in cases where direct protection of biodiversity is not feasible. In other words, developers are expected to first seek to avoid and minimise harm to biodiversity before they contemplate the use of offsets. One of the challenges involved in using biodiversity offsets as an effective conservation policy instrument is ensuring that the habitat that is created or restored is genuinely equivalent in terms of biodiversity to that which is destroyed. Further challenges are associated with monitoring and the permanence of restored habitats.

It is advisable that biodiversity offsetting is only used after all other options in the mitigation hierarchy have been considered and no alternatives are available. Avoidance of biodiversity loss is the first and most important step in the mitigation hierarchy. Biodiversity offsets should not be used to circumvent responsibilities to avoid and minimise damage to biodiversity, or to justify projects that would otherwise not happen.

Example Box 9: Policies to secure food and livelihoods in the Coral Triangle

The Coral Triangle’s natural wealth directly sustains more than 130 million people living along the coasts of this 6 million square-kilometer ocean expanse in Asia-Pacific. The annual estimated retail value of the trade in live reef food fish, one of the most lucrative and distinctive of the region’s reef-based fisheries is USD 1 billion. Indonesia, the Philippines and Papua New Guinea are among the top 10 tuna producing countries in the world. The value of tuna exports from these three countries, plus Malaysia and Solomon Islands, is estimated to be close to USD 1 billion. The annual value of nature-based tourism in the Coral Triangle is estimated to be worth USD 12 billion. All these benefits rely on healthy coastal and marine habitats through the effective protection and management of key areas that are vital for people’s food security, livelihoods, and economic stability.

To ensure that this region’s natural capital is safeguarded, the governments of the six countries in the Coral Triangle – Indonesia, Malaysia, Papua New Guinea, Philippines, Solomon Islands and Timor-Leste – came together in 2007 to form a multilateral partnership now known as the Coral Triangle Initiative on Coral Reefs, Fisheries and Food Security (CTI-CFF). The CTI-CFF is an example of a regional framework under which governments, private sector, civil society, donors, and development partners collectively aim for the sustainable management of coastal and marine resources in the region. In 2012, the CTI-CFF endorsed a Coral Triangle Marine Protected Area System (CTMPAS) Framework and Action Plan, which contains criteria for the effective management of MPAs and guides the development of a system of MPAs that addresses multiple issues including biodiversity conservation, fisheries management, and climate change adaptation. The CTMPAS is a system of prioritized individual MPAs and networks of MPAs that are connected, resilient, and sustainably financed. These MPAS and networks are designed to be able to generate significant income, livelihoods, and food security benefits for coastal communities, as well as to conserve the region’s rich biological diversity.

In 2014, the Tubbataha Reefs Natural Park in the Sulu Sea, in the Philippines was identified as a flagship site for the CTMPAS. Established in 1988, this 970 square-kilometer area is a nationally designated no-take MPA – the largest in the Philippines. Governance incentives have made Tubbataha successful over the years which include:

Green marketing of products and services from the MPA through dive tourism - generating $80,000 to $110,000 a year from conservation fees which support park management, local community livelihoods, local infrastructure and the improvement of public facilities,

Economic compensation for foregone profits to restricted users (i.e., local fishers),

Public communication, education, and awareness raising activities,

Alignment with international, regional, national, and local regulatory obligations that require effective MPA conservation and an effective judicial system,

Participative governance structures and processes; transparent participation and decision-making processes, and

Equity and stewardship strategies that imply sharing of tourism revenues as a compensatory mechanism and co-ownership of the vision to conserve Tubbataha and take pride in it (Dygico et. al., 2013).

Monitoring for the last 15 years in Tubbataha has shown that the live coral cover has been stable at 45-50% after the bleaching of 1998, when coral cover declined by about 22%. Fish biomass, similarly, fluctuates on a yearly basis but has an increasing trend and for the last decade has remained stable at 200 Mt/sq km, which is four times the fish biomass of the average healthy reef in the country. Commercially important species are growing into maturity thus indicating that spawners are protected in the site. This seeds the fisheries in the greater Sulu Sea where the Park is located.