Tacklinginternational
spillovers:
an overview ofpolicy options
A discussion paper
December 2023

1

Contents
Foreword

3

Acknowledgments

4

Summary

5

1.

Introduction

62.

Four national policy levers to curb international spillovers

12

2.1

3.

Target setting and monitoring

2.2 Public administration		

19

2.3 Regulation

27

2.4 Fiscal policy and investment

31

Behavior change and recommendations

35

Bibliography

2

14

38

Foreword
Today’s economies and markets fail to

The framework considers both demand andadequately price the full societal costs ofsupply-side policy instruments and theirbusiness models on our natural world. This

impacts on the global commons, offering aundermines our global commons—theholistic approach to designing better national

stable and resilient Earth systems on which

policies to tackle environmental spillovers.

human prosperity and security depend. In
particular, national policies tend to focus on

We hope this practical and actionable

domestic priorities, ignoring the significant

framework and the many examples throughout

negative environmental impacts on otherthis paper will highlight how governments

countries that contribute to the degradation

can reduce international environmentalof the global commons. These international

spillovers. Success will require collaboration

environmental spillovers are a pressing global

between trading partners, business sectors

challenge that requires urgent attention.

and nongovernmental organizations, as wellas through international fora.

To tackle these challenges, we need tosystematically value natural capital. Such

At a time of extremely fraught geopolitics

a fundamental shift in economic incentives

and rising mistrust globally, every country

would discourage destructive extractive

needs to redouble its efforts to lead bypractices and safeguard the global commons.

example in safeguarding the global commons

The systematic valuation of natural capitalon which all human life depends. This applies

would constitute a profound change to ourparticularly to high-income and upper-

economic systems. This is urgently needed;

middle-income countries, which tend to

but it will take time, and it must be accompanied

generate the largest international spillovers.

by other policy and business measures that

A concerted cooperative effort to tackle

curb international spillovers and drive theinternational spillovers can strengthentransformation of key economic systems

the bilateral and multilateral collaboration

toward global commons stewardship.

needed for global commons stewardship.

This discussion paper outlines a four-

The Center for Global Commons at Tokyo

point framework for national policies andUniversity would be delighted to work withregulation to reduce international spillovers

international partners to advance this urgent

and strengthen the stewardship of thecommon agenda in support of meeting the

global commons. We focus on target setting

objectives of the Paris Agreement and theand monitoring, public management,

Sustainable Development Goals.

regulation, and fiscal policy and financing.
Naoko Ishii
Center for Global Commons3

Acknowledgments
Lead authors:

4

We would like to thank the following
contributors who have shared their•

Naoko Ishii•

Guido Schmidt-Traub•

Guillaume Lafortune•

Maximilian Bucher-Melcer•

Jakob Franke•

Salma Dahir•

Felix Cornehl•

Eamon Drumm•

Astrid von Preussen•

Dan Esty•

Deeptanshu Kotru•

Carl Kühl•

Guillaume Lafortune•

Eliza Macmillan-Scott•

Reed Miller•

Rebecca Nohl•

Julia Okatz•

Milan Petit•

Elizabeth Petykowski•

Marco Daldoss Pirri•

Janez Potočnik•

Zach Wendlingexpertise and insights:

Summary
Today’s economies seek to generate

spillovers, with the ultimate aim ofenhanced prosperity, but the linear production

systematically valuing natural capital andand consumption patterns that underpin

integrating it into economic decision making.

them promote unsustainable resource use
and the destruction of nature. The scientificThis discussion paper introduces a framework

evidence is clear: humanity is disrupting thefor understanding how four types of national

global commons—the stable and resilient

policy levers can tackle international spillovers:

Earth systems that are vital for our wellbeing(1) target setting and monitoring; (2) public

and survival. Major course corrections aremanagement; (3) regulation; and (4) fiscal

needed to shift toward an economic system

policy and financing. We consider boththat achieves prosperity and wellbeing for all

demand and supply-side policy instruments

without breaching the planetary boundaries,

and their impacts on the global commons. We

the nine processes that regulate the stability

provide examples and highlight the lessons

and resilience of the Earth system.

learned from countries which have advanced
this agenda. Much work remains to be done,

One distinctive feature of environmental

and we need faster problem solving. The goodpressure is that it transcends national borders.

news is that practical models are emerging for

The Global Commons Stewardship Index

how countries can tackle international spillovers.

highlights that 47% of deforestation, 33%
of greenhouse gas (GHG) emissions

Making trade flows more environmentallyand 24% of water stress are driven bysustainable is crucial in addressing spillovers;

international spillovers—mostly throughbut curbing spillovers must not become a

trade. International spillovers are driven

smokescreen for protectionism. Instead,fundamentally by inadequate pricing ofcountries should build partnerships to incentivize

environmental externalities and natural

the conservation and restoration of natural

capital as well as by national policy

capital while promoting human development,

frameworks that are designed to meetparticularly in lower-income countries.

domestic objectives without paying due
attention to spillover impacts.

This paper highlights practical lessons
on how national policymakers can tackle

Deep reforms of economic systems areinternational spillovers. It complements theneeded to “internalize” such environmental

paper International Governance for Global

externalities. Meanwhile, countries can takeCommons Stewardship, which reports onpractical steps toward curbing internationalcross-country efforts to protect the global
commons.

5

1

Introduction

Human activity is at risk of exceeding the safe

renewable and non-renewable resources,

operating space for people and the planet.

and emitting unsustainable volumes of waste

1,2

While the last 12,000 years constituted a uniqueand pollutants. This makes resource use ageological period of stability that enabled thecritical driver of environmental degradation.

rise of human civilization, the recent explosion

The Global Resources Outlook published byin human activity has pushed us into a new

the UN International Resource Panel (IRP)

geological epoch characterized by humanrevealed that: “90 per cent of biodiversity

degradation of critical Earth systems: theloss and water stress are caused by resource

Anthropocene. We are undermining theextraction and processing. These samestability and resilience of the global commons—

activities contribute to about half of global

the interdependent Earth systems that are the

GHG emissions.”5

3

foundation for humanity prosperity and future
wellbeing (see Box 1).

In this paper, we adopt the IRP definition of“resources,” which includes land, water, air

Since 1900, the world’s population has

and materials. The latter comprise biomass

increased fivefold, while global gross produc-(e.g., crops or wood), fossil fuels, metals andtion has increased eightyfold. Humanity is

non-metallic minerals.

4

consuming ever-larger shares of the world’s
As described in the Global Commons Stew1
2
3
4

6

Rockström et al., 2009.
Wang-Erlandson et al., 2022.
Steffen et al., 2011.
DeLong, 1998.

ardship Framework, published by the Center
5

Oberle et al., 2018.

for Global Commons in 2022, countries mustand economic activities that recasts resource

transform four economic and social systems

use, institutions, technologies and social

to safeguard the global commons (Figure 1).

relations. Together, these transformations will

Each transformation describes a major

help decouple socioeconomic progress fromchange in the organization of societal, politicalnatural resource use.

Box 1 | Defining the global commons
The global commons refers to the stable and resilient Earth system, which provides the foundation forhumanity’s prosperity and future wellbeing.
The global commons consists of interdependent and interconnected sub-systems (e.g., the land
biosphere sub-system is made up of forests, freshwater, biodiversity and other ecosystems) andfunctions, and their interlinked processes (e.g., carbon, water, and nutrient cycles).
Safeguarding the ‘global commons’ is essential to ensuring the planet functions within ‘safe and just’earth system boundaries – a necessary condition for justice, people and planet – and requires integrated,
often location-specific, strategies at the local, national, and global level.

FIGURE 1
The Global Commons Stewardship Framework

GLOBAL COMMONSSUB-SYSTEMS INCLUDEACTION LEVERS
Set targets; aligngovernance andinstitutions

Reset economics,
finance andincentives

Ensure inclusionand fairness tobuild consensus
for change

Harness
innovation,technologies
and data

SYSTEM TRANSFORMATIONS

Decarbonization of energy, industry and transport
Power generation, transmission, long-distance transport, industry and industrial
heating and cooling

Sustainable cities and communities

Climate system
Aerosols, atmospheric composition &circulation, carbon cycle, monsoons

Ozone layer
Stratospheric ozone layer

Land biosphere

Compact and resilient design and transit-oriented development, sustainable waste
management and buildings including heating and coolingAmazon & boreal forests, freshwater,
grassland/ tundra, permafrost, soil
carbon sink

Sustainable production and consumption

OceansCircular product design, business models, production systems and supply chains,sustainable material flows and consumption patterns

Acidification, anoxia, biodiversity, coral
reefs, El Niño, methane hydrates,
ocean currents

Sustainable food, land, water and oceans

Ice sheets & glaciersProtection, sustainable management, restoration, sustainable diets, halting
overexploitation of species, reduced food loss and waste

Arctic sea ice, East & West Antarctic
Ice Sheets, Greenland Ice Sheet,inland glaciers

7The degradation of the global commons isInternational spillovers are driven fundamen-

driven by domestic action, which extends

tally by inadequate pricing of environmental

beyond national borders through trade andexternalities and natural capital as well as byother cross-border activities. The resulting

national policy frameworks that are designed

international spillovers are documented by theto meet domestic objectives without paying

Global Commons Stewardship Index (GCSI),

due attention to spillover impacts.

compiled by the Sustainable Development
Solutions Network (SDSN), the Yale Center for

The GCSI reveals that high-income countries

Environmental Law & Policy and the Center for

generate the largest environmental spillovers.

Global Commons. The index ranks countries

These countries therefore have a special

on their international spillovers.

responsibility to curb spillovers in collaboration

6

with their trading partners They are not just
In addition to environmental spillovers, driven

importers of environmental spillovers throughby international trade and domestic policies,

the footprint embedded in goods they import,

countries also generate economic, social andbut can also be the origin of significant

security spillovers. These non-environmental

environmental degradation. For example, thespillovers can have a significant impact; but our

European Union, Canada and United States

focus in this paper is on environmental spillovers

are the source of 54% of spillovers fromand how they affect the global commons.

deforestation through forestry and logging(see Figure 2).

6

8

SDSN, 2021.

FIGURE 2
Spillovers from deforestation due to forestry and logging

TOTAL GLOBAL
DEFORESTATIONDUE TO FORESTRY& LOGGINGNONSPILLOVERSIMPACT ORIGIN

Deforestation embodied in Spillover Flows

FINAL DEMAND

EU27, 22%

China, 26%

Canada, 18%

EU27, 21%

42%
Russia, 18%

USA, 17%EXPORTEDSPILLOVERS

58%

USA, 14%

Japan, 7%

Rest of G20, 8%

UK, 3%

Brazil, 6%

ASEAN, 5%Rest of World, 26%
Rest of World, 9%Source: SDSN, Yale Center for Environmental Law & Policy, and Center for Global Commons at the
University of Tokyo. 2023. Global Commons Stewardship Index 2022. Paris; New Haven, CT; and Tokyo.

We focus on the European Union as a sourceand basic organic chemicals. Forof major spillovers to illustrate some of thedeforestation, the main causes are forestry,

practical policy solutions and challenges.

cattle husbandry and beverage crop farming.

Table 1 illustrates three indicators of the Euro-

For water stress, leguminous crops and oilpean Union’s spillovers and the main sectors

seeds, wheat, fruit and nuts have the greatestthat generate spillovers. For GHG emissions,

impact. Other high-income countries exhibit

the key drivers are electric power generation,

similar patterns of environmental spillovers.

transmission and distribution, gas extraction

9

TABLE 1:
Spillover impacts from the EU's final demand by top source (Top 10) industries in foreign countries for GHG
Emissions, Deforestation and Water Stress.
GHG Emissions

in Tg CO2eq

Deforestation

in Ha

Water Stressin km3 H2Oeq

Electric power generation,transmission and distribution

410

Forestry and logging

395,318Growing leguminous
crops and oil seeds

159

Gas extraction

348

Raising of cattle

158,230Growing wheat

99

Basic organic chemicals

110

Growing beveragecrops (coffee, tea etc)

151,048Growing fruits and nuts

97

Road transport

107

Growing fruits and nuts

82,507Growing crops n.e.c.

56

Hard coal95

65,870Growing rice40

Textiles and clothing85

Growing leguminous
crops and oil seeds
Raising of animals n.e.c.;services to agriculture

52,756

Basic iron and steel

29

Basic inorganic chemicals

63

Raising of sheep

38,274Growing spices, aromatic, drug
and phamaceutical crops

29

Raising of animals n.e.c.; services
to agriculture
Waste collection, treatment,
and disposal
Computers; electronic products;
optical and precision instruments

56

Growing maize

23,226Growing sugar beet and cane26

55

Growing rice

11,496Growing grapes

26

51

Vegetable products

6,976

Basic organic chemicals

24

SOURCE: SDSN, Yale Center for Environmental Law & Policy, and Center for Global Commons at the University of Tokyo. 2023. Global Commons
Stewardship Index 2022. Paris; New Haven, CT; and Tokyo.

The GCSI reveals that the largest spillovers

more, even effective efforts to price and value

are caused by land use, food, oceans andnature will need to be complemented by ad-water. The food system is the biggest driverditional policies, such as policies that reduceof spillovers, so we place particular focus oninequalities.

agriculture and the international food system
more broadly.

The experience of carbon pricing offers
important lessons for wider efforts to realize

10

Tackling the environmental destruction inher-

natural capital accounting at scale. Despite aent in today’s extractive and linear economy,

widespread consensus on the importance ofof which spillovers are one aspect, requires acarbon pricing, a harmonized global carbon

fundamental reform of the global economic

price remains a distant prospect. While ansystem. Most important is the recognition ofincreasing number of national and regional

the true value of natural capital and the intro-

schemes have emerged (see Section 2.2.3),

duction of effective mechanisms to ensure

their effective prices vary widely. This illus-

this is incorporated into market prices (seetrates the fact that their design is inherently

Section 2.2.3). In other words, internalizing

shaped by political and social concerns. Sim-

externalities requires accounting for nature.

ilarly, although there is a clear common unit ofSuch deep reform is a necessary ambition;measurement—tons of carbon dioxide (CO2)but on its own it is unlikely to deliver the paceequivalent—the “market prices” in voluntaryand scale of change required to avert the risk

carbon markets vary widely according toof reaching dangerous tipping points. Further-

credit type, year and demand sector. Overall,standards are improving; more countries are

Many promising initiatives are emerging to

introducing and tightening carbon pricing

address these challenges and lay themechanisms and, over time, convergence may

foundations for a system that effectively values

be possible.

nature. In practice, attempts at reform will be
gradual, regional and imperfect in nature,

The challenges to valuing other aspects ofas their implementation is technically, politicallynatural capital (e.g., biodiversity, water) areand socially difficult. In the meantime, countries

even more fundamental. There is not yet a

can and should use the policy toolkit at theirscientific consensus on a common unit ofdisposal to take meaningful action.

measurement or accompanying standards.

11

National policy levers to curb
international spillovers

2

Our analysis of national policy instruments

standards and regulation; and fiscal policy andfor curbing international spillovers focuses on

financing. These are summarized in Table 2four types of policy levers: target setting andand are discussed in detail below.

monitoring; public management; business

TABLE 2:
Policy instruments for tackling environmental spillovers

Target setting
and monitoring•

12

National targets for all
major environmental
dimensions•

Consumption-basedtargets to tackle
spillovers•

Official spillover data andmonitoring•

Availability and access tonature data

Publicmanagement

Business standards
and regulation

Fiscal policy
and financing•

Policy coherence

•

•

•

Policy spillover
assessments

National certification andstandards

Development andclimate finance•Supply chain legislation••

Support for international
business standards

Financing just energy
transition programs andother nationaltransformation programs•

International carbon andnature markets•

Carbon and other natural
capital pricing•

International trade andvoluntary partnershipagreements•

Border adjustment
mechanisms•

Public procurement

These policy instruments are part of theFirst, market prices often do not reflect theregular toolkit that policymakers are alreadyfull social cost of natural resource use; or, put

deploying widely. However, most countries

differently, these market prices are subject

are not yet using them to tackle the drivers of

to externalities. This incomplete pricing ofnegative environmental spillovers. As reviewed

natural capital incentivizes excess use of natu-

in Section 1, two principal reasons explain

ral resources and degradation of natural envi-

why national policies tend not to adequatelyronments. Second, national policies and otheraddress international environmental spillovers.

instruments are designed to address domestic

priorities and therefore systematically

Table 3 summarizes key elements of how policy

fail to take into account the detrimental

levers relate and contribute to each driver ofimpacts of environmental spillovers.

environmental spillovers. All levers must be
adjusted to address the lack of natural capitalpricing and to better align national policy
instruments with environmental spillovers.

TABLE 3:
How policy instruments currently relate to drivers of environmental spillovers

POLICY
LEVER

Target setting
and monitoring

Publicmanagement

LACK OF NATURAL
CAPITAL PRICINGNATIONAL INSTRUMENTS NOT ALIGNEDWITH SPILLOVERS

Targets and monitoring systems miss dimensionsof natural capital and resource use that are criticalfor global commons stewardship. Available nature
data remains inadequate to operationalize natural
capital accounting.

Targets and monitoring focus on
production-based metrics that ignore tradeand other environmental spillovers.

National policies and public management
systems do not use their influence to promotenatural capital accounting for public andprivate entities, including through trade policy
and public procurement.

Countries do not align policies acrossgovernment with achieving environmental
priorities and do not assess policy proposals
against this objective. In particular, trade
policies and public procurement pay too little
regard to their international spillover impacts.

Business standards have started to incorporate
natural capital pricing, but these principles focus
on carbon and must now be rolled out more
broadly to “natural capital.”

Emerging business standards on GHG emissions
apply to the entire supply chain, including scope
3 impacts. They must now be broadened andwidely applied in full.

Development and climate finance does not yet
promote systematic natural capital accounting.
One promising tool may be international carbon
and broader nature markets, which must reform
further to meet the highest standards ofenvironmental integrity and benefit sharing.

International finance, both official and private, isinsufficient. Interesting models are emerging for
scaling up such finance.

Business standards
and regulation

Fiscal policy
and financing

13

Policy levers must tackle both demand andWhile innovation can play a critical role insupply-side factors. Supply-side measures

reducing environmental harms, including

aim to increase or decrease the supply ofinternational spillovers, a discussion of policy

certain goods and services that have associatedlevers to promote innovation is beyond thespillovers. Demand-side measures aim to

scope of this paper.

increase or decrease demand for certain
goods and services that have associated

Below we outline each policy instrument andspillovers. While supply-side measures often

its link to environmental spillovers, as well as

receive a lot of attention, demand-side measures

examples and key challenges around theirare also critical for the transition to an economy

implementation. We close with recommen-that meets human needs within the planetary

dations on how countries can align the policy

boundaries.

levers to reduce spillovers in support of safeguarding the global commons.

2.1

Target setting and monitoring

What does not get measured does not get

enable effective monitoring and support the

managed. Therefore, as an initial step, countries

development of strategies to curb international

should incorporate spillovers into theirenvironmental spillovers.

national targets and data systems. This will

14

Consumption-based targets

2.1.1

There are two types of targets with regard toadjust for trade by adding the environmental

environmental impacts. Production-based

impact embodied in net imports of goods andtargets account for the total environmental

services. National climate and nature targets

impact (e.g., GHG emissions) of the production

tend to focus primarily on production-basedand consumption of goods and services

metrics, which ignore international spillover

within a country. Consumption-based targets

effects.

FIGURE 3:
Production vs. consumption-based CO2 emissions in the EU (27)Consumption-based emissions1 are national emissions that have been adjusted for trade. This measures fossil fuel and industry emissions.2
Land use change is not included.

4 billion t

Consumption-based
3 billion t
Production-based

2 billion t

1 billion t

0t
1990

1995

2000

2005

2010

2015

2021

1. Consumption-based emissions: Consumption-based emissions
are national or regional emissions that have been adjusted for trade.
They are calculated as domestic (or 'production-based' emissions)emissions minus the emissions generated in the production of goods
and services that are exported to other countries or regions, plus
emissions from the production of goods and services that areimported. Consumption-based emissions = Production-based Exported + Imported emissions

2. Fossil emissions: Fossil emissions measure the quantity ofcarbon dioxide (CO2) emitted from the burning of fossil fuels, anddirectly from industrial processes such as cement and steel
production. Fossil CO2, includes emissions from coal, oil, gas, flaring,cement, steel, and other industrial processes. Fossil emissions do notinclude land use change, deforestation, soils, or vegetation.

SOURCE: Our World in Data based on the Global Carbon Project, 2022.

https://ourworldindata.org/co2-and-greenhouse-gas-emissions

15

Figure 3 illustrates the significant gap be-

sumption (Finland8, Netherlands9, Austria10),tween production and consumption-basedor have committed to doing so (Germany11).

CO2 emissions in the European Union. In April

Setting overall targets on natural resource

2022, Sweden became the first country in

use is an important lever to tackle spillovers

the world to set consumption-based targets

that are associated with resource extraction

for achieving net-zero carbon emissions.

and production.

7

Building on this example, high-income
countries should take the lead in adopting

It will be important to reference consumption-

consumption-based targets and monitoring

based targets in international commitments,

systems to track environmental impacts beyond

such as Nationally Determined Contributions

national borders. Consumption-based(NDCs) and National Biodiversity Strategies andtargets should be set not just for GHG

Action Plans (NBSAPs).

emissions, but also for natural capital and resource use. Some European countries havealready set targets for reducing material con7

2.1.2

16

Lafortune & Drumm, 2022.

8

Government Resolution on the Strategic Programme
for Circular Economy, 2021
9 Circular Dutch Economy by 2050, 2023
10 Dao, 2023
11 Nationale Kreislaufwirtschaftsstrategie (NKWS), 2023

Official spillover data
and monitoring
Collecting official data on natural capital androle in driving the development and uptake ofspillovers is a fundamental prerequisite tobetter metrics through their adoption in public

effective policy making to address spillovers.

administration (statistics, policymaking) and

There are various potential indicators.

regulation. In many cases, this will require

Many—including the valuation of nature andadditional investments in national statisticalecosystem services—are still under develop-

offices, which can mainstream and systematize

ment. It is important that these not only quan-

spillover data throughout governments, as

tify risks, but also recognize the real value of

illustrated by the example of the European

natural capital. Governments can play a vital

Union (see Box 2).

Box 2 | Spillover monitoring in the European Union
The European Commission has established an evaluation framework called the Consumption Footprint,
which is a set of indicators based on lifecycle assessment for measuring the environmental impact of EU
consumption. 12 This framework serves as a crucial collection of indicators to support the goals of the European Green Deal, such as the circular economy, zero pollution, sustainable food production and biodiversity
preservation. Eurostat has contributed to the advancement of multi-regional input-output tables, which is
the most accurate technique to measure spillovers. Eurostat, in collaboration with the SDSN, has integrated a section on estimating spillover effects caused by EU consumption in the annual Eurostat Sustainable
Development Goals (SDG) monitoring publication. 13 However, compiling input-output tables is complex, andnational statistical offices around the world lack the capacity to ensure regular updates.14
12
13
14

Sala & Sanye, 2022.
Woelm, 2021.
Dietzenbacher et al., 2013.

To assess spillovers, accurate data on natural

cost of land—the carbon storage or ongoing

capital and resource use is important; but

sequestration foregone due to the use of landthese are currently patchy and out of date,for other purposes—could be considered

and can be difficult to access. Better data isin relation to international spillovers (seeneeded to operationalize public and private

Section 2.2.3). 15 Policymakers should also

commitments to nature-positive initiatives.

support an effective track-and-trace system

As a first step, we recommend better datathat enables suppliers to collect and provide

standards to ensure the quality, comparability

data on their products.

and interoperability of data on nature. Since a
lot of the data will be collected by nongovern­

One particular challenge is that low-income

mental organizations (NGOs) and businesses,

countries often lack the resources to collectcountries should consider creating incentives

data on environmental degradation; and infor data collection and disclosure throughconsequence, high-income countries lack arobust data-sharing architecture.

complete understanding of their spillovers.
In 2019, the share of official development as-

Policymakers should drive these changes tosistance (ODA) dedicated to data was 0.3%,

nature data architecture and should develop

which is far too little. 16 Advancing monitoring,harmonized accounting standards for natural

evaluation and progress in addressing spill-

capital, as supported by the Internationalovers worldwide must become a strategic

Sustainability Standards Board (ISSB). Proxylever for development partners.

measures such as the carbon opportunity
15
16

Searchinger et al., 2022.
Misra & Tian, n.d.

17

2.1.3

Improved availability of, andaccess to, nature data
There is no shortage of data to start acting on

In response, the Taskforce on Nature-related

the major failures to preserve natural capital

Financial Disclosures (TNFD)—working withand to enhance the stewardship of global

the Science-based Targets Network (SBTN),

commons. All governments and all businesses

the Capitals Coalition and other partners—

know some of the gravest challenges that

has initiated the development of a global data

must be addressed.

utility for nature data. The aim of this initiative
is to identify use cases for new data (e.g., forHowever, the availability and accessibility of

the financial sector); to develop standards fornature data are insufficient to manage progresscollecting and sharing high-quality in-situ data;

toward nature-positive transformations in line

and to propose IT architecture for making suchwith the Global Biodiversity Framework.

data widely available. Such a public data utility

One critical gap is the lack of high-resolution,

might comprise national data portals andin-situ biodiversity and other nature data, which

specialist data portals developed for specific

can now be collected at low cost using new

applications. Together, these could make atechnologies such as environmental DNA;major contribution toward strengthening the

low-flying drones combined with artificial

pricing of natural capital as well as measuring

intelligence algorithms for video analysis; andand tackling environmental spillovers. Govern-a multitude of low-cost sensors, such as

ments should consider how they can contributecamera traps and acoustic sensors.

to and advance efforts to improve nature data
availability and access internationally, as wellas through leading by example domestically.

18

2.2

Public management

A broad range of public management policies

and management tools that are most directly

can affect environmental spillovers. Manytargeted toward addressing environmental

more can help decouple socioeconomic

spillovers. Business standards and regulation

progress from natural resource use. To focus

are discussed in the next section.

our discussion, we consider only the policies

2.2.1

Policy coherence
Countless government institutions and policies

of policy coherence for sustainable develop-

may have a direct or indirect impact onment efforts at the national level.

generating international spillovers. Tacklingspillovers therefore requires a government-

Different institutions need to align on thewide commitment; and governments shouldshared principle of reducing spillovers andensure policy coherence toward this broadconsider impacts across different policy areas.

objective by aligning a broad number of policy

Policymakers should introduce mechanisms

instruments, as required under SDG 17.14.1,

that encourage stronger cooperation and“Number of countries with mechanisms in placecoherence—for example, through coordinatedto enhance policy coherence of sustainablestrategies, inter-ministerial working groups

development.”

and evidence-based policymaking, including
robust ex-ante and ex-post policy impact

Few countries have so far developed aassessments (see 2.2.2 Policy spillover

coherent policy package to systematicallyassessments). For example, climate policy

address environmental spillovers (see Box 3).

needs to be holistic and consider policy

Despite international efforts since 2015, there

impacts and tradeoffs across adaptation,

are still no robust international comparisonsmitigation, biodiversity and other relevant

19objectives. This will allow a greater focus onwater stress. Working with trading partners

strategies that deliver positive outcomesto adopt novel but proven methods of riceacross various dimensions, while managing

cultivation, such as the System of Ricedrawbacks. For example, rice cultivation is

Intensification, can reduce emissions, reducea major driver of (spillover) emissions andwater use and boost resilience and yields.

Box 3 | The policy coherence challenge of the EU Green Deal
The European Green Deal has an ambitious cross-cutting mission: a new growth strategy to transform theEuropean Union into a fair and prosperous society, with a modern, resource-efficient and competitive economy that reduces net emissions of GHGs to zero by 2050 and decouples economic growth from resourceuse. Translating this comprehensive vision into concrete and coherent action across a diverse range of policy
areas is challenging. The international impacts of the Green Deal raise further policy coherence issues. For
example, the EU regulation on bioenergy mandates must be coherent with the European Union’s supply chain
regulation on deforestation. The European Union’s encouragement of bioenergy production conflicts with thestated objective to reduce deforestation internationally. The International System Change Compass examines how EU external relations and trade flows with other states will be impacted by the European Green Deal
agenda and outlines a framework to tackle key international issues, tensions and tradeoffs that arise.17
17

20

Grabbe et al., 2022.

2.2.2

Policy spillover assessments
Countries routinely conduct policy impact

costs, which measure the land-use efficiency

assessments to evaluate the potential environ-in terms of carbon retention and capture.18 Thismental, socio-political and economic impacts

measure can be used to assess the impact ofof new policy proposals. But policy impact

outsourcing food production, pursuing different

assessments rarely address the spillovers

nutrition standards (e.g., plant-based versus

that domestic policies may generate. Intro-

animal-derived proteins), as well as the impact

ducing systematic assessment of spilloverof domestic land use changes on global GHG

impacts can help policymakers identify tensions

emissions. For example, when a country

between domestic policy objectives andconverts agricultural land into forest without

international spillovers so that these can bechanging the demand for food, this might

better managed by governments.

displace agricultural production abroad witha potentially high carbon opportunity cost.

One practical example for such spillover assessments is to apply global carbon opportunity

2.2.3

18

Searchinger et al., 2022.

Carbon and other natural
capital pricing
As reviewed in section 1, a principal driver ofChina—in introducing explicit carbon pricing,21

the degradation of the global commons is thecovering some 23% of total GHG emissions inlack of a coherent pricing system on natural

2022.22 In the European Union and some othercapital, including GHG emissions and broader

markets, carbon prices are now approaching

nature-related services. There has been alevels that will initiate major shifts away fromlongstanding debate on whether countries

fossil fuel use. It is critical that all major economies

should pursue market-based mechanisms,

in the G20 and beyond adopt ambitious carbon

such as emissions trading schemes, environ-pricing mechanisms to lower GHG emissions,mental taxation and regulation. An emerging

as this will reduce the need for technically andconsensus view is that all these tools canpolitically complex carbon border adjustment

play a role.

mechanisms (see Section 2.2.5).

19,20

What matters is how natural

capital in its broader coverage is priced at
acceptable levels.

Such pricing mechanisms must be broadened beyond carbon to cover nature andAs for carbon pricing on GHG emissions,other resource use. Of perhaps greatest

there has been substantial progress in many

importance is the need to put monetary value

G20 countries—such as the European Union,

on nature and related forms of natural capital

the United Kingdom, Canada, California andusing market-based mechanisms (e.g., nature

19
20

21
22

World Bank, 2022.
Petykowski et al., 2019., European Commission, 2021b.

World Bank, 2022.
Ibid.

21

credits), targeted tax instruments (e.g., tax

Another example could be the taxation of

credits for regenerative farming) and govern-

raw material use. As noted above, the IRP has

ment regulation, as well as voluntary businessshown that the extraction, processing andstandards. A critical focus of national regula-use of raw materials cause 90% of biodiversi-

tions should be to encourage natural capitalty loss and water stress, as well as about half

accounting as part of national accounts, suchof global GHG emissions.23 Material taxation

as the System of Environmental and Economic

could be an effective incentive to move from a

Accounts and similar approaches.

linear economy toward more circular approaches that eliminate waste and pollution,

Business standards that can promote naturalkeep products and materials in use at theircapital accounting are discussed in Section

highest value for the longest time possible

2.3. A major gap, though, is that such busi-

and regenerate natural systems.

ness frameworks focus on target setting and(risk) disclosure, so they do not necessarily
promote natural capital pricing.

2.2.4

23

Oberle et al., 2018.

International trade and voluntary
partnership agreements
Bilateral and multilateral trade agreements

agreements to ensure a level playing field,

govern international trade, which makes

but also to reduce environmental spillovers.25

them a critical policy instrument for managing

However, such standards may increase bar-environmental spillovers. These include

riers to trade. Exporting countries may see

preferential agreements between two or morethem as protectionist measures by importing

countries for a subset of goods and services.

countries;26 and the track record of environ-24

mental standards in reducing spillovers is
It is increasingly common to include environ-uncertain (see Box 4).

mental commitments and standards in trade24

22

Yamaguchi, 2020.

25
26

Elliott & Esty, 2021.
Esty, 2022.

Box 4 | The EU-Mercosur Trade Deal
The proposed trade deal between the European Union and the South American Mercosur trade bloc
includes sustainability principles for the trade in natural resources, such as forestry products, fisheries andother wildlife. For example, the deal prohibits trade in illegally harvested timber, with the aim of combatingillegal logging and promoting the sourcing of timber from sustainably managed forests.27 It also includes
a precautionary principle, ensuring that the European Union and the Mercosur countries can continue toprotect health and the environment even if trade is negatively affected, including in situations where scientificinformation is not conclusive.28
The trade agreement also aims to strengthen the implementation of several multilateral environmental
agreements signed by the European Union and the Mercosur countries, such as the Paris Agreement and theConvention on International Trade in Endangered Species of Wild Flora and Fauna.29
Negotiations on the agreement were concluded in 2019, but its ratification has been delayed by disagreements over environmental standards. While the European Union is seeking stronger measures to avoid
deforestation, Mercosur countries are understandably concerned about the imposition of additional technical barriers to trade as protectionism in the guise of environmental provisions. If environmental standards
are required only by some trading partners, trade flows may simply be diverted to other regions which do nothave high environmental standards.30
One solution is to broaden international cooperation between trading partners to support the transition
toward more sustainable practices.
27
28
29
30

EU-Mercosur Trade Agreement: Trade and Sustainable Development, 2022.
Petykowski et al., 2019.
EU-Mercosur Trade Agreement: Trade and Sustainable Development, 2022.
Fritz, 2020.

To allay understandable criticism from exporters

systematically and sustainably reward theof natural resources that deforestation regulation

preservation and restoration of natural capital.

and other environmental standards in trade

Technical and financial assistance can play aagreements are protectionist and discriminatory,role—for example, to help smallholder farmers,

importing countries need to work with their

who are unable to comply with complex trade

trading partners to make better environmental

requirements.31 Particularly for lower-income

practices attractive. This will involve the provisioncountries, collaboration should be gearedof strong economic incentives accompanied

toward driving their socioeconomic develop-

by support to meet higher environmental

ment in ways that are consistent with safe-

standards. Most critical is working with trading

guarding the global commons.

partners to build deep partnerships that31

Ruehl et al., 2023.

23

Voluntary partnership agreements (VPAs)

They can offer financial and technicalare an important complementary tool for

support, as well as favorable market accesscurbing environmental spillovers. These arefor countries to meet sustainability targets,government-to-government partnerships

which in turn reduce environmental spillovers

that can accompany trade agreements.

(Box 5).33

32

32

Petykowski et al., 2019.

33

Petykowski et al., 2019.

Box 5 | Example—VPAs agreements on forest law enforcement, governance and trade
The European Union has implemented various VPAs to incentivize sustainable timber production. Under theVPAs, Forest Law Enforcement, Governance and Trade (FLEGT) issues licenses that attest to the legalityof timber to export to the European Union. Importers of FLEGT-licensed timber products can place theirimports on the EU market without the need to conduct additional due diligence.

The multilateral global trading system iscan be used in a way that is compatible withfacing significant challenges and calls forthe principle of free trade. In particular, thereform. These include calls for making full

WTO’s principle of non-discrimination may

use of trade policy to address problems ofconflict with the objectives of environmental

the global commons—a sentiment shared

policy that seek to penalize economic

by the president of the World Trade Organ-

activities that cause spillovers of harm. The

ization (WTO), Ngozi Okonjo-Iweala.34 To

ultimate objective should be to internalize

strengthen and better govern the use of trade

externalities in internationally traded goods,

agreements to curb environmental spillovers,

but a grand bargain on reforms of the multi-

it is important to set international rules andlateral trading system might help reconcile

standards for how sustainability standards

these tensions.

34

2.2.5

24

Okonjo-Iweala, 2021.

Border adjustment mechanisms
One of the most contentious policy challenges

the most environmental spillovers—need tois how to level the playing field for companies

take the lead in internalizing the full costs ofoperating in countries with higher environmental

natural capital depreciation, which in turn will

standards, which in turn impose higher costs

impose costs on their businesses. But without

on their own companies. It is clear that countries

any countervailing mechanisms, imposing—particularly the richest ones that generatehigher domestic costs of doing businessmay lead companies to shift production to

trade provisions (see Section 2.2.4). However,markets with lower environmental standards

it is unrealistic to expect all major economies

and costs; or companies may lose market

to agree to the same implicit pricing of naturalshare to competitors that are subject to lower

capital in parallel, so policymakers in Europe-

environmental standards and costs. Suchan Union have proposed the need for borderleakage would negate some of the environ-adjustment mechanisms—particularly formental benefits of these policies and makecarbon pricing in form of a carbon borderthem politically unacceptable to domestic

adjustment mechanism (CBAM). The mostaudiences.

significant CBAM proposal comes from theEuropean Union (Box 6). Canada and the

Aligned approaches to introduce natural

United Kingdom are considering options forcapital valuation and pricing would be thesimilar mechanisms.35,36 In 2021, the G20

optimal outcome. Voluntary cooperation

finance ministers agreed to coordinate moreamong countries can be a helpful building

closely on carbon pricing mechanisms.37

block in this pursuit, reducing the risk of leakage
through shared standards, disclosures and

35
36
37

European Commission, 2021a.
World Bank, 2022.
European Commission, 2021a.

Box 6 | The EU CBAMThe EU CBAM aims to prevent the risk of carbon leakage to markets where the cost of carbon emissions islower.38 To this end, the CBAM aims to level the effective carbon price of imports and EU products. Importers will need to buy carbon certificates that correspond to the carbon price that would have been incurred
had the products been produced in the European Union.39 According to the European Union, the CBAM iscompatible with WTO rules; but the WTO is expected to bring a legal challenge forward.40 In any case, theCBAM will take effect gradually, to ensure stability for business. It will first applies to the most carbon-intensive sectors: iron and steel, cement, fertilizers, aluminum and electricity generation. The current CBAM does
not cover food and other agricultural products, but they may be covered in future phases.
38
39
40

European Commission, 2021a.
European Commission, 2021a.
World Economic Forum, 2022.

CBAMs have been met with strong opposition,(e.g., through regulation).41 Other concerns

particularly from developing countries.

focus on fairness, including the treatment

Concerns center around technical details,of countries that do not have the capacity

such as how to compute and compare
explicit as well as implicit carbon pricing

41

Dominioni & D. Esty, 2023.

25

to introduce domestic carbon pricing

recognized the need for some kind of carbon

mechanisms. Another fairness point relates

pricing, CBAMs seem necessary; but they

to the fact that high-income countries, whereshould be implemented with the greatest

CBAMs originate, account for high current

possible extent of international consultationand historic GHG emissions. A further concern

and coordination. Ideally, CBAMs become

stems from the fact that some developingmoot if all major economies move toward

country markets—particularly in Latin

consistent carbon pricing mechanisms andAmerica—fear that their markets might beensure appropriate transparency. It would beoverwhelmed with exports from China andreasonable to exclude some of the poorest

India that may no longer make it onto the EU

countries from the administrative burden of

market following the adoption of CBAMs.

administering CBAMs through appropriate

42

exceptions.
Proponents and opponents of CBAMs eachhave strong arguments. In the end, there

Another challenge is to broaden CBAMs toseems to be no politically and economicallycover environmental spillovers that are notfeasible way for a country to take the lead onlinked to CO2 emissions from energy use. The

pricing carbon without measures to protect

EU CBAM might over time include emissions

domestic industry from differential carbon

from land use and food systems; but morepricing. Since all major economies haveclarity—for example, on robust methodologies—is needed to include all dimensions of

42

2.2.6

natural capital.

Ibid.

Public procurement
Across Organisation of Economic Co-operation

overs and encourage the emergence of new,and Development (OECD) countries, publicmore sustainable technologies (Box 7).

procurement accounted for 12.6% of gross

The OECD’s Methodology for Assessing

domestic product (GDP) in 2019. Government

Procurement Systems—originally developed

procurement practice and standards driveby the World Bank and the Development

substantial demand for products and services

Assistance Committee—now includes a

directly, and they also set an example for private

supplementary module which aims to provide

procurement. Policymakers can therefore

a “harmonized tool” to assess the integration

use public procurement to help shift awayof sustainable development considerations infrom products with high environmental spill-

public procurement systems.44

43

44

43

26

OECD, 2022.

OECD, 2021.

Box 7 | Procurement to drive lower-carbon diets
Meat consumption is a major driver of environmental spillovers,45 so an increasing number of countries—particularly in Europe—are encouraging shifts to more plant-based diets,46 including through procurement forstate facilities such as state schools and hospitals.47 The city of Turin, for example, has introduced vegetarian school meals, cutting school meal emissions by 32%, and thereby reducing demand for meat imports.
Procurement standards supporting alternative proteins could lower the costs and increase the effectivenessof key production technologies, such as extrusion and extrudable fat technologies.48 This could in turn bringforward the tipping points at which alternative proteins reach cost and performance parity—for example, formicroorganisms and animal-cell-based proteins. Together, these advances could help to raise alternative
proteins’ projected European market share in 2035 from ~10% to ~20%.
45
46
47
48

2.3

FOLU, 2019; Willett et al., 2019.
FAO, 2021.
FAO, 2021.
Systemiq et al., 2023.

Business standards and regulation

Beyond public policies and management,

business standards will need to complement

regulation and business standards can inter-voluntary approaches over time.49 A rapidly

nalize the full value of changes to natural capitalgrowing number of international businessto shift business behaviors and ensure a levelstandards are providing countries withplaying field. For many commodities, interna-

alternatives to national regulation. Levelingtional demand significantly exceeds potential

the playing field is critical so that domestic

sustainable supply—for example, for palm
oil fruits—so regulations and compulsory

49

SDSN, 2019.

27

2.3.1companies are not disadvantaged interna-

below between three standards and regula-tionally by higher environmental standards;

tory instruments: national certification andbut efforts like border tax adjustments forstandards; direct supply chain legislation; andcarbon pricing (section 2.2.4) are technicallynational support for international standards

and politically highly complex. We distinguishfor business standards and disclosure.

National certification and standards
Countries are increasingly setting business

National standards are undeniably needed

standards for goods and services to enterto curb negative environmental spillovers, but

their markets—for example, in relation to bio-countries should aim for maximum harmoni-

fuels (see Box 8). Such standards can reduce

zation under WTO rules (see Section 2.2.3)

negative spillovers by raising the production

and by pursuing principles-based approaches.

standards in a country of origin. But they can

A critical principle is to internalize the full value

also be costly to implement, particularly ifof changes to natural capital into the market

different countries pursue different standards

prices for commodities. Such natural capitalacross a broad range of commodities. More-accounting, as recommended by the Capitals

over, they can impose significant costs on

Coalition and others, is particularly critical forexporting countries that must be partiallythe agricultural and forest commodities that

offset through financing levers (see Section 2.4).

drive the bulk of international spillovers.

Box 8 | EU policies on indirect land use change
Bioenergy production has a high opportunity cost of land, causing environmental spillovers through the“outsourcing of land.” Under the Fit for 55 Plan, the European Union will import more wood and devote 22
million hectares to energy crops by 2050 due to land use change—roughly equal to one-fifth of Europe’s
cropland.50 Historically, bioenergy has been considered to be “carbon neutral” and has received significant
public subsidies, but this ignores its high carbon opportunity cost. Only 35% of the land providing non-foodproducts to the European Union is cultivated domestically, which causes net land imports of up to 180 million
hectares per year (more than three times the area of France).51 In addition to its high carbon opportunity cost,such land use change is also by far the biggest driver of biodiversity loss.52 Overall, better information on theenvironmental and socio-economic costs and benefits that are associated with the global biomass tradeis important.53 The European Union is the biggest consuming region (measured in cropland area) and a net
50 Searchinger et al., 2022.
51 Bruckner et al., 2019.
52 WWF, 2022.
53 Bruckner et al., 2019.

28

importer of non-food land use, and thus plays a central role in determining global pathways for non-food land
use.54 In response, the European Union has implemented a delegated regulation on indirect land use change(ILUC) in 2022, which sets standards and criteria for bioenergy imports with high carbon opportunity costs
due to ILUC. 55 The European Commission also aims to create a trajectory for the gradual phaseout of biofuels by 2030. 56
54
55
56

2.3.2

IPBES, 2019.
European Commission, 2019.
European Commission, 2022c.

Supply chain legislation
Supply chain legislation and other obligations

requirements for companies importing into

go beyond national certification and standards,

their markets in line with OECD due diligenceby requiring companies to disclose andstandards for multinational corporations. To

address specific challenges in their international

reduce the economic burden, particularly on

supply chains. Historically, such supply chain

small and medium-sized enterprises, alignment

legislation has focused on labor conditionsof national legislation with international

and the respect for human rights, but countries

standards will be key. Moreover, standards—particularly in Europe (see Box 9) —areshould be tightened over time by using a risk-

now expanding such legislation to coverbased approach—which requires companies

environmental challenges in supply chains.

to identify and address the most significant risks

Canada and other countries are also taking

first—or similar strategies to ensure effective-

steps toward legislating due diligenceness without overwhelming companies.

Box 9 | The EU supply chain legislation
The European Commission has adopted a directive on corporate sustainability due diligence, which will impose
significant transparency and disclosure requirements on large EU firms.57 As the legislation comes into force
over the coming years, companies operating in the European Union will need to conduct human rights andenvironmental due diligence on their entire supply chains, and will be held accountable and responsible forany harm. The law will be actively monitored and breaches sanctioned.
57

European Commission 2022b.

29

Business groups have been advocating for a reduction of the directive’s scope or a delay in its implementation
because they fear a decline in the competitiveness of EU firms. Estimated compliance costs considering thenumber of companies affected amount to one-off costs of €500 million to €680 million, and recurrent (annual)
costs of EUR 1.72 to 2.37 billion recurrent (annual) costs (or 0.01 to 0.02% of EU GDP in 2021).58,59 However,firms may also realize economic benefits, based on factors such as better risk management.60
58
59
60

2.3.3

Ibid.
Statista, 2021.
European Commission, 2022a.

Support for international businessstandards
In recent years, international NGOs havetargets for nature with an initial focus on land-

worked successfully with business and in

use and water.

some cases national governments to advanceinternational standards for disclosure, science-

The ISSB was initiated inter alia by thebased targets and natural capital accounting.

International Financial Reporting Standards

On the disclosure side, the TCFD has set

Foundation, which sets accounting stand-climate disclosure standards that are applied

ards that apply in about 140 countries, toon a voluntary basis by many major corporations.

develop and drive the adoption of accounting

The United Kingdom and other countries

standards that incorporate natural capital.

have integrated these standards into national

The aim is to align these international stand-legislation and listing rules for stock markets.

ards with the science of 1.5°C. The standards

Building on this model, the TNFD is developing

are increasingly being adopted by companies

a disclosure framework for nature-related risks

from across the globe; in particular, finan-and opportunities in order to incentivize financial

cial services companies are beginning toinvestments in nature-positive outcomes.

incorporate them into investment decisions.
Such “soft standards” offer an important andScience-based climate targets have beennovel mechanism for countries to work withpioneered by the Science-based Targets

and—where possible—to endorse in order

Initiative (SBTi), a global consortium of

to raise business standards that can curb

non-government organizations. It has set

environmental spillovers. Critically, however,science-based targets for most economic

they must be adequately resourced: we aresectors, which have now been adopted byalready seeing signs that the SBTi might

thousands of companies. The SBTN is pre-be overwhelmed by the demand for setting

paring standards for setting science-based

science-based targets.

61

61

30

SBTI, 2023.

2.4

Fiscal policy and financing

So far, we have focused largely on actions

trading partners in transitioning their econ-that importing countries can take domesti-

omies toward sustainable development thatcally to curb their environmental spillovers.

combines socioeconomic progress with

But without countervailing measures, such

lower environmental damage. While deep

actions may impose socioeconomic costs

reforms are needed to strengthen naturalon exporting countries. These costs risk

capital pricing, countries can already be stra-

undermining the economic, political andtegic in how they deploy their funds and use

social case for global commons stewardship.

their clout to mobilize financing to effectively

Shifting capital to support the transitions

tackle spillovers.

toward sustainable development is critical toprovide real incentives and fair rewards for

Crucially, supporting natural resource ex-

the preservation and restoration of the global

porting economies toward a sustainable tran-commons. This is also critical to reward ansition is also an opportunity to reinforce andalternative economic model for economies thatsustain economic ties between countries. It

depend on natural resource exports, and thus

can safeguard the supply of critical goods

for a fair transition and human development.

and services (e.g., food security, commodity
supply) in the face of increasing instability

Therefore, high-income importing countries

due to, for example, overexploitation and/or

should promote international financing andlack of climate adaptation measures.

investment mechanisms to support their31

2.4.1Development and climate finance
Enabling developing countries to meet theirand other environmental action is to be main-

climate and related development goals istained. Fair development and climate financeexpected to require external financing of

sit at the center of any solution to the crisis of$1 trillion per year by 2030, according to

global commons.

Finance for Climate Action. In this landmark
62report, Vera Songwe, Nick Stern and Amar

Another critical element is to encourage the

Bhattacharya lay out a comprehensive agenda

trend of greening cross border flows (e.g.,

for climate finance that covers the reform

foreign direct investment) through an emphasisof multilateral development banks (MDBs),on environmental and social sustainability,

public finance and commercial finance. The

including through international standards

realization of the report’s recommendations

and other initiatives to increase supply chain

has the potential to have positive ripple effects

transparency (see also Section 2.3). Multi-

on reducing negative environmental spillovers.

national corporations’ growing demand fortraceability along their international supply

The report proposes a new way of coordinating

chains, increasingly enabled by digital environ-different sources of financing and capabilities,

mental and social management systems,with the aim of lowering the cost of capitalsheds light on and offers potential to trans-

and providing targeted finance for countries’

form the intertwined relationships between

transition strategies. One key part of this is

end consumers and producers.

reforming and scaling up MDBs and ODA.
While concessional climate finance accounts

Through accounting for modest financial flows,

for a small share of the overall financing needs,

technical assistance and capacity building

concessional finance is critical for mobilizing

can play crucial roles in supporting developing

larger volumes of private finance and forcountries to accelerate socioeconomic

enabling greater domestic resource mobilization

development with lower environmental costs.

by reducing, managing and sharing risk more

This will also require meaningful and mutuallyeffectively. Furthermore, developed countries

beneficial partnerships between developed

must honor their financing commitments if

and developing countries that rely on exports

the fragile international consensus on climateof raw/low processed commodities.

62

32

Independent High-Level & Expert Group on Climate
Finance, 2022.

2.4.2Financing Just Energy Transition
Program and other nationaltransformation programs
A major outcome of the Glasgow Climate

financing with help from the domestic and

COP26 was the announcement of the firstinternational financial sector.63 The JETP

Just Energy Transition Program (JETP) for

concept has established itself as a novel andthe coal transition in South Africa, with aneffective mechanism for financing large-scaleinitial funding package of $8.5 billion. The

decarbonization and could be replicated to

JETP is a financial restructuring deal provided

address large-scale spillovers.

by major creditors to sovereign and subsovereign entities in exchange of climate

Recently, discussions have turned to what

outcomes. This is particularly relevant today,

equivalent programs might look like for halt-

given that low growth and strong inflationing deforestation, meeting the objectives ofrate forecasts in developing countries are

the Global Biodiversity Framework at national

increasing financial and fiscal pressure onlevel and switching to sustainable agricul-

already debt-ridden countries. The JETP

ture. Under the Forest and Climate Leadersoffers financial headroom without increasing

Partnership that emerged from the Glasgow

the short-term debt repayment sustainability.

COP26, countries are exploring forest andland use investment packages; while theSince COP26, several other JETPs haveFrench government, in collaboration with

been launched. In spite of numerous difficulties,

Conservation International, has advanced thethese JETPs have generated real traction invery similar concept of priority conservation

the host countries by elevating the transition

partnerships. A shared approach to support-

issues to the top of the political agenda;

ing large-scale domestic and international

mobilizing domestic stakeholders to identify

investments in sustainable land use is clearly

and tackle just transition challenges; andand urgently needed, and a related initiative

generating additional and better coordinatedmay be launched at COP28 in the Unitedinternational support, including blended

Arab Emirates.
63

Blended Finance Taskforce, 2020.

33

2.4.3

International carbon andnature markets
Voluntary and regulated international carbon

There has been a recent surge in develop­

markets can be an important source ofments involving biodiversity credits. Examples

climate finance. In fact, with public budgets

include the Biodiversity Credit Alliance; theunder strain, there is no credible alternative toUnited Nations Environment Programme’s

mobilizing this volume of financing for forest

recent Stepping Up on Biodiversity report;

conservation and restoration through otherand the Biodiversity Credit Markets: The

sources.

Role of law, Regulation and Policy report of
the Taskforce on Nature Markets. These

Carbon markets have recently come underimportant initiatives are still at an early stage,

criticism for not upholding environmental

so it remains to be seen if nature credits will

integrity and for diverting too much funding toremain separate from carbon credits.

middlemen. Carbon markets must accelerate

The carbon market tools that already exist

their journey toward becoming the high-integrity

incorporate nature and social co-benefits

financing mechanisms the world needs.

into carbon credits, which tend to fetch

Recent efforts to promote the high-quality

higher market prices, so one option is tosupply of carbon credits—including the corestrengthen the accounting for “co-benefits”

carbon principles published by the Integrityin carbon markets. In some cases, it might beCouncil for the Voluntary Carbon Market

useful to establish distinct nature credits; butand emerging rating agencies for carbon

this would require clarity on where theprojects—all point in the right direction. On

additional demand for such credits might

the demand side, the Beyond Value Chain

come from, because such credits cannot be

Mitigation Standards developed by the SBTi,

used for offsetting. Separating nature andthe recommendations of the UN High-Level

carbon credits would also require parallel

Expert Group on the Net-Zero Emissions

registries and market infrastructure, so

Commitments of Non-State Entities andit remains to be seen if the benefits fromadvances in corporate accountability standards

separate nature credits warrant these extra

promise to establish transparent, high standards

investments.

for the use of carbon offsets.

34

3Conclusions andrecommendations

As the GCSI makes clear, many countries—that international environmental spillovers

particularly high-income ones—generate

can be curbed. But these reforms will likely

vast environmental spillovers. Such spillovers

take time to implement.

are at the core of the tragedy of our global
commons. They are driven by twin challenges:

Meanwhile, environmental spillovers can be

first, market prices do not reflect the full value

curbed through four practical policy leversof natural capital; and second, most nationaldescribed in this paper: target setting andpolicies do not factor in impacts beyond

monitoring; public policies and management;

national borders, such as imported GHG

business standards and regulation; and fiscal

emissions or deforestation caused throughpolicy and financing. We illustrate gaps asinternational supply chains or domestic bio-

well as the feasibility of rapid progress with

fuel mandates.

examples—particularly from the European
Union, which among the G20 has dedicatedDeep reforms of economic systems are

the most policy attention to curbing environ-

required to value and price natural capital, so

mental spillovers (Table 4).

35

TABLE 4:
Practical steps to curb the twin drivers of environmental spillovers

POLICYINSTRUMENTLACK OF NATURAL
CAPITAL PRICING••NATIONAL INSTRUMENTS NOT ALIGNEDWITH SPILLOVERS

Integrate principles of natural capital
accounting into official statistics.
Improve the quality and availability of data
for nature.

••

Introduce dedicated natural capital pricing
mechanisms and integrate them into trade
policy and public procurement.

••

Target setting
and monitoring••

Publicpolicies andmanagement

•

•

•

Business standards
and regulation••

International
financing andinvestment

36

Support business standards for disclosure,target-setting and accounting that are
science based and cover entire supply
chains.
Broaden the focus beyond GHG emissions
to include nature and other dimensions of
natural capital.

•

Strengthen carbon markets, and consider
the development of nature markets or
better inclusion of nature in carbon markets.

•

•

•

•

Adopt consumption-based targets.
Track environmental spillovers as part ofofficial statistics.
Provide technical support on spillover
monitoring/data for nature to trading
partners.

Assess environmental spillovers of all major
policy proposals and implement structures
to increase policy coherence.
Consider environmental spillovers in multiand bilateral trade agreements and design
partnership agreements to provide meaningful
incentives that value and reward thepreservation and restoration of natural capital.
Carefully design border adjustment
mechanisms to curb spillovers, and provide
a level playing field and incentives forharmonization of natural capital pricing andenvironmental policies.
Align public procurement withenvironmental spillovers.

Strengthen national supply chain legislation
to cover environmental spillovers throughcoverage of entire value chains.
Encourage the broad-based adoption ofinternational business standards fordisclosure, science-based target setting
and accounting.

Scale up MDBs and ODA funds to targetedsustainable development strategies in close
collaboration with private investors, in line
the with recommendations in Finance for
Climate Action.
Strengthen and build out JETPs fordeveloping countries facing the greatest
challenges in transitioning from fossil fuels
Consider the nature equivalents for JETPs.

While domestic policy levers can have a

stewardship. Instead, countries should consider

significant impact on global commons

how they can build deep partnerships withstewardship, they must be deployed carefully.

trading partners that systematically andTrade flows must change and becomesustainably reward the preservation andsustainable to address spillovers; but curbing

restoration of natural capital. Particularly forenvironmental spillovers must not become alower-income countries, collaboration shouldsmokescreen for protectionism. Unilaterally

be geared toward driving their socioeconomic

imposing barriers to trade risks hurting tradedevelopment in ways that are consistent withpartners, without providing incentives for

safeguarding the global commons.

countries to improve global commons37

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