146. Fossil fuel prices almost always fail to include the negative externalities, such as climate change and air pollution, associated with the production and burning of such fuels. Full-cost pricing has the power to correct this. By capturing and making clear the real costs of goods and services to society and the environment, it can prompt companies and consumers to find ways of preventing problems in the first place, through sustainable practices such as pollution prevention, energy efficiency and renewable energy use.

147. A growing number of Governments are already starting to reform prices. In particular, some have started to price carbon, either through taxation or through emissions trading. Direct and indirect carbon pricing is a critical part of any climate change solution — leading to lower emissions not only by incentivizing conservation, efficiency and demand-side management, but also by helping to make alternative sources of energy more competitive with highly polluting sources. A tax on the most important energy-related greenhouse gas, carbon dioxide, would be another economically efficient means of addressing externalities. This should be done in a manner that does not penalize the poor.

148. Governments can also institute innovative market-based mechanisms to create incentives for companies to move towards more sustainable patterns of production and take a longer term view of profitability.

149. Public and private actors are also increasingly recognizing the value of ecosystem services such as soil fertility, water quality, waste decomposition and carbon sequestration. The 2005 Millennium Ecosystem Assessment and the 2009 Economics of Ecosystems and Biodiversity report project were instrumental in defining, valuing and raising awareness about the valuable services which natural systems deliver. This progress is likely to be crucial not only in slowing the destruction of the world’s forests, but also in making sure that vital increases in agricultural production do not come at the cost of ecosystem health.

150. Schemes to create payments for ecosystem services are already being implemented around the world as a way of providing incentives for conserving biodiversity, reducing deforestation, restoring forests, protecting water catchments or reducing soil erosion, while stimulating economic growth and reducing poverty. Examples include:

(a)    At the national level, the Conservation Reserve Programme of the United States, the Grain for Green programme of China, the Green Water Credits scheme of Kenya and the National Forest Commission scheme of Mexico;
(b)    At the regional level, the European Union agri-environmental and forest environmental schemes (worth €2 billion a year);
(c)    At the international level, the reducing emissions from deforestation and forest degradation (REDD-plus) programme.

Recommendation 27
161. Governments should establish price signals that value sustainability to guide the consumption and investment decisions of households, businesses and the public sector. In particular, Governments could:

(a) Establish natural resource and externality pricing instruments, including carbon pricing, through mechanisms such as taxation, regulation or emissions trading systems, by 2020;
(b)    Ensure that policy development reflects the positive benefits of the inclusion of women, youth and the poor through their full participation in and contribution to the economy, and also account for the economic, environmental and social costs;
(c) Reform national fiscal and credit systems to provide long-term incentives for sustainable practices, as well as disincentives for unsustainable behaviour;
(d) Develop and expand national and international schemes for payments for ecosystem services in such areas as water use, farming, fisheries and forestry systems;
(e)    Address price signals that distort the consumption and investment decisions of households, businesses and the public sector and undermine sustainability values. Governments should move towards the transparent disclosure of all subsidies, and should identify and remove those subsidies which cause the greatest detriment to natural, environmental and social resources;
(f)    Phase out fossil fuel subsidies and reduce other perverse or trade- distorting subsidies by 2020. The reduction of subsidies must be accomplished in a manner that protects the poor and eases the transition for affected groups when the products or services concerned are essential.