A focus on market imperfections can help governments to mobilize private investments in adaptation

Abstract

Climate change requires significant adaptation of economies, and the largest part of most economies is composed of private sector actors. In this Viewpoint, we argue that it should not be the role of the public sector to cover the full costs of adaptation - which would also typically exceed government's fiscal space. Rather, we suggest that the public sector should set the right conditions to catalyse private investments in adaptation. While the suggestion is not new, we argue that the current focus on generic ‘barriers’ hindering more private investments in adaptation is not expedient. These barriers are descriptive rather than explanatory, sometimes mix cause and effect, and tend to focus on eliminating obstacles, rather than adapting efficiently. Alternatively, we suggest to focus on addressing three market imperfections that give rise to those barriers. In doing so, the overall welfare of society, including the vulnerability of the most marginalized, should be centre-stage. The development of markets should aim to contribute to such welfare - it is not an end in itself. In that sense, our call for a focus on market imperfections is a call for a larger role of public actors, both in developed and developing countries.