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Economic incentives for behavioural change (2015)

Economic Policy Instruments (EPIs) are incentives designed and implemented with the purpose of adapting individual decisions to collectively agreed goals. EPIs are traditionally classified in pricing (water tariffs), environmental taxes and charges, subsidies (on products and practices); trading (e.g tradable permit for pollution or water abstraction, compensation mechanisms, payments for environmental services); and voluntary agreements and risk management schemes such as insurances or liabilities.  EPIs can significantly improve an existing policy framework by incentivising, rather than commanding, behavioural changes that may lead to adaptation.

Economic policy instruments can spur behavioural change through incentives or disincentives; change conditions to enable economic transactions; or reduce risk. Rather than specifying a particular type of behaviour that the regulatee has to comply with, economic instruments create the economic incentives (e.g. price signals) to encourage or discourage certain behaviour, but leave it to the regulatee to devise his / her own way of dealing with this incentive.

The main advantage of these instruments is economic efficiency, i.e. the ability to distribute the burden of the distortion reduction where it is cheaper to do so. The drawbacks are on the equity side, as they affect differently different agents or social groups not necessarily in a progressive way, and strictly linked to this, on the political feasibility side.

EPIs have received widespread attention over the last three decades in climate, energy, and air policy-making, but less so in water policy. Increasing economic pressures on water resources are causing countries to (re)consider various mechanisms to improve water use efficiency. So, in recent years an increasing number of local, national and international EPI experiences in water management have appeared, and key legislative and policy documents, including the EU Water Framework Directive 2000 (WFD) and the Blueprint to Safeguard Europe’s Waters (2012) now support their wider use. A good overview of economic instruments applied to the water sector and references to case studies can be found at the website of the European Project EPI-Water (see Website section).

Finally, the WEATHER “Weather extremes: impacts on transport systems and hazards for European regions” FP7-funded research project provides an overview of possible incentives to transport adaptation and their potential impact.

Additional Details
Reference information

Adaptation Details



IPCC categories

Institutional: Economic options, Social: Behavioural

Stakeholder participation

Not surprisingly, public participation is a crucial element in increasing the general acceptance of an EPI and in motivating stakeholders to participate in the EPI. This is not to say that public participation is always required to make the EPI acceptable. For example, the importance of public participation may be reduced in cases where the EPI as such, or the water management solution at hand, has already gained public (social) acceptance.

Success and Limiting Factors

One size does not fit all. There is substantial variation in the needs, opportunities, and constraints facing each country. Even within countries, there is a substantial variation in the capacity to implement economic instruments across different regions or sectors. Some desired changes are easier to implement through economic instruments while others are easier to implement through command and control regulations. EPIs are by no means substitutes for other modes of governmental action, but instruments that can complement and strengthen governance as part of a broad mix of policy instruments. Broadly, one can discern between: (i) combinations of EPIs, as part of a strategy for “packaging incentives”, and (ii) mixing with other types of policy instruments, including regulatory, awareness raising, information, etc. When screening potential EPIs, one should be aware of the existing policy mix, but the selection should not be dictated by it.

Costs and Benefits

The costs and benefits of EPIs are hardly investigated and little information can be found on how they compare to classical command and control approaches. The costs of an EPI can be distinguished between the direct costs (e.g. cost of paying the tax) and transaction costs (TC) (e.g. the time and money cost of getting to the market, finding a buyer or seller, negotiating a purchase, consummating the trade, and returning from the market). The also might relate to additional monitoring required. For example the TC from monitoring groundwater may impede the adoption of such a tax, but it may also be worth paying to make sure the tax is effective. Likewise, a new water allocation mechanism may increase economic efficiency but impose high negotiation and enforcement costs, making simpler allocation mechanisms potentially preferable. The benefits of an EPI can be improved environmental quality, economic efficiency and a better social distribution of the burden to achieve the desired objective.

EPIs are recognised at political level in several major pieces of European legislation and policy documents.

The EU Water Framework Directive (2000) introduces a set of principles and measures that rationalize water use across member states. Its Article 9 calls for the full cost recovery of water services through pricing. The more recent EU Blueprint to Safeguard Europe’s Waters (2012)    emphasises the importance of incentive water pricing and other EPIs such as water trading and Payments for Ecosystem Services in the policy mix to improve Europe’s water. The EU Action on Water Scarcity and Droughts (from 2007) highlights the role of incentive pricing for adapting water demands and ensuring sustainable water management, while the EU Floods Directive (2007) encourages the uptake of green infrastructures and natural flood management by financially rewarding land managers and water users. The Common Agriculture Policy (CAP) includes financial reward (in the form of subsidies) for the protection of the water environment. Measures such as flood risk and drought insurance may be included in the future. The Nitrate Directive (1991) promotes the adoption of cooperative agreements through codes of Good Agricultural Practices.

The Climate Change Adaptation Strategy (2013) encourages the greater use of insurance to build resilience against climate change impacts in particular water scarcity, droughts and flood risk.

European Cohesion and Structural policies includes new ex-ante conditions on water pricing in order to be eligible for funding. EU biodiversity policy (including the Habitat and Birds Directives and the LIFE financing mechanism) encourages the use of financial and non-financial rewards for the protection of aquatic ecosystems.

Implementation Time

1-5 years.

Life Time

Long lasting measures. Lifetime is often determined by social acceptance.

Reference information

DG ENV project ClimWatAdapt, FP6 project ADAM Mitigation and Adaptation strategies and FP7 project EPI water

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