Ecosystem Markets Take Off

wetland

Correction appended

While global financial markets crumble, a new form of markets is on the rise.

Ecosystem markets, exchanges of nature's various services, are adding new dimensions to conservation. In addition to using regulation to restrict development, more countries are turning to the invisible hand of the market to protect biodiversity, clean waterways, and fight climate change.

In a nutshell, market-based approaches assign an economic value to ecosystem services such as erosion control, flood buffers, and clean air. In some circumstances, developers are allowed to pollute or transform a valuable habitat as long as the affected ecological services are offset through separate habitat preservation, water conservation, or greenhouse gas reductions.

Supporters praise the approach for its promotion of conservation funding at a time when financial resources are scarce. But critics suggest the market is a last resort that indicates governments may be neglecting their duty to protect ecosystems as habitats come under increasing levels of stress.

The most widely known ecosystem commodity is carbon. The global carbon market - exchanges of mandatory or voluntary greenhouse gas reductions - rose 84 percent in value last year, according to the research group New Carbon Finance, which released a report on the topic last week.

The net worth of the carbon market was estimated at $118 billion in 2008, and the report predicted its value could grow to $150 billion this year as carbon prices rise on the European carbon exchange, known as the EU Emission Trading Scheme.

Due in part to the success of carbon markets, more countries are experimenting with market exchanges that seek to protect biodiversity and clean water as well.

With biodiversity banks, for example, landowners who cannot legally develop their property because of the presence of an endangered species or a wetland can collect payments or "credits" from the conservation of their land . Once the property is preserved, the landowner sells the credits to developers who need to offset development that occurs where similar habitats are found.

About $3.4 billion of regulated biodiversity offset transactions occur per year, the research group Ecosystem Marketplace estimated in a report released last year [PDF].

"We're finally looking at the opportunity to capture much more capital market investments to spend on conservation," said Michael Jenkins, president of Forest Trends, a sustainable forestry think tank that launched Ecosystem Marketplace in 2005. "There's never enough money through private foundations or agencies to address these issues."

The markets are most developed in the United States, where wetland offsets first appeared in the 1970s, but more countries are showing interest. Australia launched an active biodiversity offset program in 2006, and several countries require some form of environmental offset to allow any impact on a protected area.

Ecosystem Marketplace predicts the biodiversity markets will grow to $4.5 billion by 2010 due to continued interest in the United States and Australia.

Although the markets are growing, economic recessions worldwide may affect the offset markets. "Ultimately it'll be about the bottom line, so there is potential for some additional investments in offsets to slow down," said Joe Kiesecker, science director for The Nature Conservancy's Rocky Mountain region. "But once developments move forward, the process will continue."

With water markets, governments typically cap the level of degradation allowed in a given area and allocate pollution permits that can then be traded among the polluters. Similar programs are now found in North America, Europe, Africa, and Australia. The size of actively trading water markets is expected to reach $500 million by 2010, Ecosystem Marketplace estimates.

As a sign of the growing interest in ecosystem markets, the U.S. Department of Agriculture is creating the first office dedicated solely to these emerging conservation strategies. The new Office of Ecosystem Markets and Services is tasked with creating uniform guidelines for the numerous markets, with an initial focus on carbon sequestration standards for agriculture and forestry.

Sally Collins, the office's first appointed director, said she was originally skeptical of the use of markets to protect ecological services. She eventually embraced the approach and began to implement market-based conservation strategies in her former role as the associate chief of the U.S. Forest Service.

"The regulatory framework that is so critical was driving people to do just the bare minimum. It was not doing enough to protect the land," Collins said in an interview. "Something different was needed."

Supporters of emerging ecosystem markets still acknowledge that the programs are not without their flaws. The offsets at times do not replace the lost ecological services - for instance, wetland offsets do not always provide as much habitat or flood control as the original ecosystem. For the markets to work, and for conservation efforts to succeed, the programs rely heavily on proper oversight and enforcement.

If successful, the shift in conservation strategy toward ecosystem services not only redefines the rationale for protecting a habitat, but it could also reshape the traditional role of rural areas, said Sara Scherr, president of Ecoagriculture Partners, a conservation research group.

"Historically we considered rural America as a way we got our food, where we found our parks," said Scherr, a contributing author to the Worldwatch Institute publication State of the World 2009. "Now we realize it has a really powerful role in providing ecosystem services."

Ben Block is a staff writer with the Worldwatch Institute. He can be reached at bblock@worldwatch.org.

For permission to reprint this article, please contact Julia Tier at jtier@worldwatch.org.

Correction: The name of Ecoagriculture Partners President Sara Scherr was misspelled as "Sara Scheer." We regret the mistake.