Key issues for the sustainable markets group

Environmental economics

Environmental economics has historically formed a large part of IIED's work. The need to tackle incentives facing market actors has been a consistent message from IIED research, and environmental economic tools have been important in driving the sustainable markets agenda.

Within the Shaping Sustainable Markets research group, the economics side of our work focuses on: 

How to recognise and address market failure

Better recognition and quantification of market failures that affect the environment, and incentive mechanisms that are designed to correct adverse social and environmental outcomes.

Background and context
Many environmental problems such as climate change, pollution, habitat destruction and biodiversity loss are in part the result of market failures. These market failures are present in most sectors of the economy, including agriculture, forestry, fisheries, extractive industries, manufacturing and tourism. 

Those towards the end of a lifecycle chain of a product or service are rarely negatively affected by the impacts their sector has on environment and society. They therefore have little incentive to take account of these impacts (environmental or social externalities) in their decision-making. As a result, the market rarely incorporates true costs of environmental or social externalities.

Incentives need realigning to ensure positive sustainable development outcomes. Through identification and measurement of these market failures, market-based solutions can be designed. The conventional way to address failures is through regulation to restrict certain types of economic activity and land use, prevent polluting emissions, and ban certain types of trade such as in wild species. Yet such regulation is too often a blunt instrument that requires reinforcement from complementary incentive-based policy instruments.

Incentive mechanisms are increasingly being tested in developing countries to address provision of ecosystem services, particularly payments for environmental services (PES) and land-based carbon projects. However, its application in coastal and marine environments — where resources (fish) are more mobile and harder to monitor, and where property rights are often ill-defined or insecure — remains embryonic.

Therefore, the environmental economics team is pioneering the use of economic incentives for sustainable management of marine and coastal ecosystems in general, and fisheries resources in particular. Our research illustrates that, if well designed, PES schemes could play a significant role in incentivising fisher or coastal communities to conserve, restore and sustainably manage their resources.

A growing number of examples from across the world point to ways in which adding PES to existing 'regulatory' schemes can make them more effective in protecting both environments and livelihoods

Current themes and projects 

Small-scale and informal enterprise

To improve the governance of markets and sectors with high levels of informality and small-scale enterprise, in pursuit of inclusive and green development. 

Background and context
The informal economy has not been superseded by modern markets and indeed is increasing in size. But its diversity – from clean, efficient and resilient to toxic, wasteful and vulnerable – is neither fully understood nor reflected in policy and business models.

In particular, there is a continuing poor fit between approaches to growth and the reality of informal enterprise. Even progressive approaches tend to be framed around formal enterprise. Tools of 'greening', including standards for sustainability and product safety, only work for formal businesses.

But there are many examples of informal business producing inclusive green outcomes: significant insights are waiting to be gathered through assessment across geographies and sectors with policymakers (eg at municipal level), associations and federations of informal actors, support organisations, that can lead to better and more inclusive outcomes.

Current projects

Energy and Extractive Industries

Improved policy, business and community capabilities for responsible, pro-poor energy access and extractive industry operations.  

Background and context
IIED's energy and extractives work spans access to energy and renewable energy in low-income communities, the governance of large-scale oil, gas and mining, and artisanal and small-scale mining. More information on our work towards inclusive and responsible mining is available here.  

By carrying out case studies, assessing policy and practice, supporting demonstration projects, and innovating with new approaches such as participatory energy service design, we aim to strengthen the knowledge base among key stakeholders, stimulate scale-up of successful approaches, and promote changes in policy, business practice and development support.

Access to sustainable modern energy services underpins health, education and livelihoods and increases resilience to climate change – yet millions of people have no access to electricity and use dangerous and unhealthy fuels for lighting and cooking. 

Policy to expand energy access needs to be more inclusive and responsive to poor people's needs and low-income energy markets. Yet compared to health or education, energy lacks strong citizens' movements to press for policy change. There is considerable innovation on the ground, often unrecorded as entrepreneurs lack time to reflect, write up, or lobby.

IIED has produced energy access case studies from Argentina, Kenya, Nepal, Peru, China; and tested delivery models in South Africa, Nigeria and Nicaragua. We have developed an energy delivery model framework and participatory design approach and are working to use it as a practical design tool, research and monitoring framework.  

We are currently conducting research on productive uses of energy and financing of energy access. We are also working closely with other civil society organisations to support evidence-based engagement with energy decision-makers, particularly toward Sustainable Energy for All and the Sustainable Development Goal discussions.

For large-scale energy and extractives projects, there is increased transparency in how natural resources and associated revenues are used in some sectors and countries, but this does not yet always serve local development objectives. The human rights agenda is gaining ground in progressive business. But there is a clear challenge in implementing tools such as FPIC and grievance mechanisms effectively at the local level.

A particular challenge is faced by national companies, juniors and mid-tier firms. With extraction in increasingly remote regions, there is a strong focus on indigenous rights. IIED's work on large-scale extractives focuses on company-community relations, localising revenue transparency, rights (Free Prior and Informed Consent), the Mining Minerals and Sustainable Development (MMSD) agenda, citizens' perceptions of mining, and other tools for company-community engagement. 

Current projects

Market governance

Improved access to information, exchange and debate on inclusive and green market governance mechanisms.

Background and context
Shaping sustainable markets that work for the many, rather than the few, requires an understanding of mechanisms: corrective policy measures and market governance mechanisms – their design and development, and their improvement and/or scaling up – to support sustainable development of poor countries, producers, communities and their markets, and to hold governments and business to account.

IIED is working to support that understanding through:

•    Researching effectiveness and equity of existing Market Governance Mechanisms (MGMs),
•    Exploring promising MGM innovations,
•    Publication and knowledge management that reaches poor countries and business,
•    Linking communities of practice on different MGMs, that have been narrowly focused on individual tools and mechanisms, and
•    Informing common ground between relevant international initiatives.

Current projects