Market-based instruments for flood risk management: A review of theory, practice and perspectives for climate adaptation policy

Climate change creates challenges for developments in coastal and delta areas. The risks are reduced more effectively if both planned and autonomous adaptations take place. Flood risk management is dominated by planned adaptation, which is primarily command-and-control in nature, e.g. spatial planning and engineered flood defenses. If autonomous adaptation is downplayed people are more likely to make land-use choices that collectively lead to increasing flood risks while leaving the costs of adaptation and land scarcity with governments. Unless governments provide stimuli, autonomous adaptation in flood-prone areas is unlikely to happen due to spatial externalities, path-dependency and time lag between private investment decisions and consequences. This paper reviews the theory and practice of using market-based instruments (MBIs) for flood-risk management as means for autonomous climate change adaptation. While the use of MBIs for climate change mitigation is widely discussed, systematized reviews of various MBIs for climate change adaptation are rare. Yet, international experience shows that such measures as preferential taxes, non-perverse subsidies, flood insurance, marketable permits and transferable development rights can engage local stakeholders and provide price signals that stimulate individual adaptation. MBIs combined with command-based instruments help policy-makers to guide developments in flood-prone zone by affecting individual behavior via market forces. As adverse consequences of climate change become more pronounced locally, quantity-based MBIs unfeasible at present should become more attractive. Price-based MBIs that are currently employed could be designed to strategically account for increasing climate-induced flood and erosion probabilities in coastal and delta areas.