Available online at www.sciencedirect.com Biodiversity conservation and climate mitigation: what role can economic instruments play? Irene Ring 1 , Martin Drechsler 2 , Astrid JA van Teeffelen 3 , Silvia Irawan 4 and Oscar Venter 5 Tradable permits and intergovernmental fiscal transfers play an increasing role in both biodiversity conservation and climate mitigation. In comparison to regulatory and planning approaches these economic instruments offer a more flexible and cost-effective approach to biodiversity conservation. Economic instruments should act as complements to rather than substitutes for conventional land-use planning, given that their applicability is limited by the heterogeneity of biodiversity. Linking biodiversity policies with carbon mitigation policies may provide synergies and alleviate the chronic inadequacy of conservation budgets. Since the scope and scale of the two policy fields differ in some respects, it must be ensured that market-based climate mitigation policies will be implemented with the restrictions necessary for safeguarding Earth’s biological diversity. Addresses 1 UFZ — Helmholtz Centre for Environmental Research, Department of Economics, Leipzig, Germany 2 UFZ — Helmholtz Centre for Environmental Research, Department of Ecological Modelling, Leipzig, Germany 3 Wageningen University and Research Centre, Department of Environmental Sciences, Wageningen, The Netherlands 4 Crawford School of Economics and Government, The Australian National University, Australia 5 The Ecology Centre, University of Queensland, Brisbane, Queensland 4072, Australia Corresponding author: Ring, Irene (irene.ring@ufz.de) Current Opinion in Environmental Sustainability 2010, 2:50–58 This review comes from a themed issue on Terrestrial systems Edited by Anne Larigauderie and Harold A. Mooney Received 13 December 2009, accepted 22 February 2010 Available online 17th March 2010 1877-3435/$ – see front matter # 2010 Elsevier B.V. All rights reserved. DOI 10.1016/j.cosust.2010.02.004 Introduction Economic instruments play an increasing role in both biodiversity conservation and climate mitigation [1–3]. Already possessing a long tradition in the context of policies related to air and water pollution (e.g., [4,5]), economic instruments are being recommended more and more as a cost-effective means of implementing biodi- versity policies [6,7]. Most notably, The Economics of Ecosystems and Biodiversity (TEEB) initiative recently called for better use of economics and related instruments in according value to biodiversity and ecosystem services and their contribution to human well-being. In response, there have been a number of global studies on the benefits of biodiversity and the growing costs associated with bio- diversity loss and ecosystem degradation [8,9,10  ]. Here we review recent developments with regard to two economic instruments that hold promise for biodiversity policies, addressing both private actors (tradable permits) and public actors (intergovernmental fiscal transfers). Tradable permits and intergovernmental fiscal transfers are innovative policy instruments that are attracting attention from both researchers and decision makers as a means of protecting biodiversity. In a tradable permit scheme, a regulator places a limit on a certain activity (e.g., habitat development or carbon emis- sions), and distributes permits allowing the activity to occur. These permits may be traded among private actors, and any actor engaging in this activity must have a permit to cover the amount of the activity being undertaken [11,12]. Such schemes have been implemented in, for example, the United States [13,14] and Australia [15]. Compared to landscape planning, tradable permit schemes are expected to deliver benefits in terms of cost-effectiveness and private actor engagement (e.g., [16]). However, the conditions in which such benefits can be realised are not well understood. Fiscal transfer schemes redistribute public revenues, mostly from taxes, through transfers from national and regional governments to local governments. An important objective of such schemes is to reduce fiscal imbalances across decentralised governments [17]. Another purpose is to compensate local governments for expenditure incurred in providing benefits to areas beyond their boundaries, such as that spent on schools and hospitals. Some countries have started to introduce ecological indicators, such as protected areas, for the redistribution of intergovernmental fiscal transfers to the local level [18,19,20  ]. Ecological fiscal transfers compensate local governments for the expenditure incurred in providing ecological public goods and services [21,22]. They may also compensate for the opportunity costs of such goods that entail spillover benefits to areas beyond municipal boundaries, thereby reconciling the local costs with the global benefits of conservation [22,23]. Although less prominent in the literature, ecological fiscal transfers have Current Opinion in Environmental Sustainability 2010, 2:50–58 www.sciencedirect.com