Economic instruments (EI), such as subsidies, taxes and insurance-related options are at the heart of discussions regarding novel approaches for managing risk and adapting to climate change, including in the context of multi-stakeholder partnerships (MSP) between the private and public sectors.
Although the attractiveness of reducing and managing disasters has long been demonstrated, there is underinvestment into disaster risk management (DRM). A number of factors, such as lack of comprehensive information and cognitive biases are important. In particular, financial constraints and moral hazard, i.e. adverse incentives provided by current arrangements for dealing with disasters rule high. In this line of thinking, instruments that provide a price signal for risk management and incentivize behavioural change hold high appeal to policymakers including the EU. Yet, little is known about such economic instruments, their mechanics, links to risk management and concrete application in the field of disaster risk management (and climate adaptation). Knowledge gaps exist particularly for conditions that create enabling environments for innovative market based EI. Among these are, e.g., the attractiveness for stakeholders in the context of MSP or institutional settings that are required to successfully and efficiently apply the EI.
This report reviews key EI according to their potential for managing and incentivising risk management in the context of the ENHANCE project. The guiding questions for this review are: What economic instruments exist for managing disaster risk? How do they contribute to risk management? What innovative options re being discussed? How do case studies plan to discuss and assess economic instruments? The overall aim of this report is to develop an inventory of EI as they support risk management generally and their anticipated uptake in the ENHANCE cases studies.
This report first discusses the methodology and the mechanics of EI. Next it presents the market-based and risk financing instruments; finally it concludes with a synthesis of our findings and next steps for the case studies, which are being carried out as part of the ENHANCE project
