This post originally appeared on Weathervane, RFF’s climate policy blog.
Future commodity traders may look back on June 26, 2009 as the day that the Congress officially backed ecosystem service markets as the prominent vehicle of environmental conservation in the 21st Century. It was then that the sweeping American Clean Energy and Security Act of 2009 (H.R. 2454)—legislation in which carbon offset markets play a huge role—passed the House 219-212. Estimates from the EPA suggest by 2030, the U.S. offset market could be worth $4 billion. Forest offsets will likely constitute a large portion of the total market but agricultural lands will also have some significance.
While the ultimate fate of the bill remains uncertain, H.R. 2454 indicates that ecosystem service markets have a critical role in both the fight to slow climate change and the future of ecosystem conservation. In fact, reduced emissions from deforestation and degradation (REDD) and other forestry issues will likely be integral to an eventual agreement at the COP negotiations in Copenhagen this December.
Ecosystem Service Markets
While carbon markets are currently dominating discussions, they are certainly not the only type of ecosystem service market being utilized for environmental benefits. Other examples include water quality or nutrient trading, conservation easements, and habitat banking for endangered species. Section 404 of the Clean Water Act led to the establishment of wetland mitigation banks, which proved to be a successful conservation device. By 2005, 450 wetland banks had been established, with 59 selling out of credits completely.
Current ecosystem service markets have just scratched the surface. Robert Costanza and others estimated the global annual value of ecosystem services was $33 trillion. The voluntary carbon market in 2008 was estimated to be worth about $705 million. The forest carbon offset markets in H.R. 2454 provide an opportunity to expand and refine ecosystem service markets aggressively and incorporate them into the larger economic system domestically and worldwide.
Widespread acceptance of carbon-related ecosystem services may present a vehicle for the expanded usage of other types of ecosystem services. Combining the value of these different services is called bundling or stacking, and it allows landowners and indigenous communities expanded opportunities to be compensated for maintaining and enhancing ecosystem functions. It is important to note that services will be stacked or bundled in a single ecosystem, but must be well-defined enough to separate into autonomous markets. The markets themselves will not necessarily be stacked.
One can imagine eventually linking carbon offsets with water quality credits or habitat credits. With a network of robust, functional ecosystem service markets a landowner could manage an entire portfolio on his/her land, balancing forest offsets with increased stream buffers that generate water quality market credits, understory clearing to generate endangered species habitat credits, and other types of natural capital. Such opportunities are a prospective avenue for alleviating poverty among rural or indigenous populations.
Stacked but separate ecosystem service markets could possibly create incentives (though not guarantees) for landowners to take a more holistic management approach, looking at the functionality of entire natural systems rather than one specific usage. A fully integrated and functional ecosystem marketplace is currently far from becoming a reality, however. There are a number of issues that must be addressed to ensure the markets are robust and effective. Major concerns include:
- Valuation: One advantage carbon has over other ecosystem services is that there are straightforward mechanisms for valuing tons of CO2. Determining accurate values for endangered species habitat credits or water filtration on a chunk of land will require better research and better valuation techniques than are currently available. Significant investments in scientific assessments and monitoring are needed before these markets can be established effectively.
- Additionality: One of the major questions carbon markets must answer is how they can establish additionality, or proof that sequestration activities would not have occurred in the absence of the offset project investment. If other ecosystem markets link up with the carbon market on a piece of land, the landowners will likely need to show that actions that can earn other types of credits would not have occurred without additional investment.
- Double-counting: If landowners hope to obtain multiple revenue streams, then they must manage for multiple ecosystem services. Selling water quality credits from land that is only being managed for carbon will not generate the correct incentives for landowners and will undercut the effectiveness of the water quality market. Added value of different services must be well-established enough to avoid multiple payments go to one specific type of action.
- Capacity-building: International forest carbon offsets will be a sizable chunk of the total offset market, the vast majority of which will come from developing countries that currently lack the capacity to effectively establish, monitor, and certify offset projects. To ensure the veracity and efficacy of the market, massive capacity-building efforts are needed in places like the Congo Basin, Indonesia, and Central America. Other ecosystem service markets will also need similar building efforts, though they may be able to piggyback on the efforts to establish carbon-related infrastructure.
- Permanence: What is the value of an ecosystem service credit if the ecosystem is damaged or destroyed soon after investment? This question will need a solid answer for markets to work properly. While permanence is currently a big concern in carbon markets, it will correspondingly affect other ecosystem markets. In order for these markets to grow and thrive, solid governance structures will be needed to establish appropriate risk premiums and other tools that can mitigate the problems related to permanence.
Stacked ecosystem services could prove to be a powerful conservation tool, but are not a silver bullet for protecting natural systems. They are designed to create incentives for people to manage land carefully. If carbon, water quality, endangered species, and other services simply morph into commodities to be traded back and forth without any robustness checks or on-the-ground coordination, then the transformative power of stacked ecosystem services will be lost. Moreover, regional issues will play a key role in determining which markets work and how. Carbon is a global good that can be traded across countries and continents; water quality and species habitat are very region-specific and will require smaller-scale markets that may or may not be trans-national.
Despite these challenges, ecosystem service markets are an innovative and potentially useful approach to conserving and restoring damaged and sensitive parts of the biosphere. The emphasis on forest carbon in H.R. 2454 may provide an opportunity to refine and expand these markets to the benefit of both ecosystems and the people who depend on them.