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Market governance mechanisms

A market governance mechanism (MGM) is a set of formal or informal rules that have been consciously designed to change behaviour -- of individuals, businesses, organisations or governments -- to influence how markets work and their sustainable development impacts.

Well known examples include Fairtrade certification, and carbon trading, for example the European Union Emissions Trading System. Other examples include payments for ecosystem services, certification schemes, subsidies, and taxes. There are a large number of market governance mechanisms currently in operation.

Market based instruments fall under the umbrella of market governance mechanisms. But MGMs are broader than market based instruments in that they also include regulatory, or command and control, approaches.

Categorising market governance mechanisms: a typology

There are many different MGMs – some well established, and some that have yet to be fully implemented.

The landscape of market governance mechanisms is very broad. The sheer variety of mechanisms means that their characteristics, functionality and impact differ significantly. A typology of market governance mechanisms can help to organise, simplify and make sense of this landscape. Shaping Sustainable Markets, a research initiative from the Sustainable Markets Group at the International Institute of Environment and Development, has created a typology to frame its work on the sustainable development impact and effectiveness of MGMs.

The typology shown below has been created through the adaptation of existing sources, for example GTZ et al's paper on Policy Instruments for Resource Efficiency. Though some mechanisms could arguably fit in more than one category, they should be categorised according to their central aim and functionality -- i.e. how they bring about behaviour change.

Numerous subcategories are also relevant and could be used to organise market governance mechanisms, including, for example, sector of operation, geographical coverage, who leads the mechanism, whether it is voluntary or mandatory.

MGMs can be categorised in the following ways:

A typology of market governance mechanisms

1. Economic – Economic MGMs are typically market-based instruments that seek to change behaviour through economic incentives such as altering supply and demand, or through financial (i.e. cost) incentives. Financial incentives are usually positive (e.g. payments for environmental services and subsidies) but they can also be negative (e.g. taxes). These MGMs alter the balance of costs and benefits in a way that should promote positive social or environmental outcomes. Examples include: taxation, subsidies, carbon trading and payments for environmental services.
2. Regulatory – Regulatory MGMs are legally binding and set by governments, and include enforceable international agreements. They are known as ‘hard’ MGMs, in contrast to the ‘soft’ cooperative or voluntary mechanisms. Regulation promotes behaviour change through the sanction of legal consequences in the event of non-compliance.
3. Cooperation – Cooperative MGMs are defined by their voluntary nature, and therefore regarded as ‘soft’ in comparison to regulation. Changes to behaviour are often made through partnerships. Examples include: voluntary agreements and partnerships, such as the Alliance for Responsible Mining, WWF's Global Forest and Trade Network, and principles, such as the International Council on Mining and Metals sustainable development principles.
4. Information – Informational MGMs provide information in the public sphere with the aim of changing behaviour – of consumers, suppliers, investors or producers. These mechanisms aim to persuade, rather than compel, by altering understanding and priorities, and the significance attached to particular environmental and social issues. All other instruments depend partly on information, but 'information' can also be considered as an independent instrument. Examples include: certification and private voluntary standards, such as Fairtrade and organic certification, and sustainability metrics and reporting (such as the Global Reporting Initiative)

In each case, an MGM applies to a defined market, or subset of a market, rather than to any one single institution, individual, organisation or government.

External links

• Shaping Sustainable Markets
• Sustainable Markets Group at IIED

round 2

A market governance mechanism (MGM) is a set of formal or informal rules that have been consciously designed to change behaviour -- of individuals, businesses, organisations or governments -- to influence how markets work and their sustainable development impacts.

Well known examples include Fairtrade certification, and carbon trading, for example the European Union Emissions Trading System. Other examples include payments for ecosystem services, certification schemes, subsidies, and taxes.

Market based instruments fall under the umbrella of market governance mechanisms. But MGMs are broader than market based instruments in that they also include regulatory, or command and control, approaches.

History

The term market governance mechanisms was used by Baysinger and Butler in 1985 in their paper on the role of corporate law in the theory of the firm. More recently Amashi et al., have used the term to discuss the role of corporate social responsibility in correcting market failures. Shaping Sustainable Markets, a research initiative from the Sustainable Markets Group at the International Institute of Environment and Development, uses the term widely and has created a typologyto frame its work on the sustainable development impact and effectiveness of MGMs.