Markets for Ecosystem Services

1. Markets for Ecosystem Services Making the Priceless Valuable

2. Make mine a Market • Michael has provided an overview • I’d like to: • Talk in-depth about each market • Look at current status globally (and potential) • Talk a bit about the theory of markets • What they are, how they work, what they need, etc. • Allow for discussion

3. But first, Why Markets? • Essentially we are dealing with a system where the environment is an externality • How to internalize • Could ask a team of economists to tell us what it is worth… but I wouldn’t trust the findings • To me something is worth what people are willing to pay for it… means markets

4. What do we mean by market? • Markets are regular meetings of buyers and sellers for the purposes of exchanging goods and services • Emphasis on the word regular • One-off deals are important • may end up being most important way forward in some places (developing countries)

5. What markets exist? • Lots of ways of slicing this (see Matrix), but I will focus on three categories: • Carbon • Water • Biodiversity

6. Carbon • Is currently the most developed market as a result of Kyoto, European Emissions Trading • Estimated trading in 2005 for ETS alone was around 250 mt CO2 • Translates to around $4 billion • Is essentially a cap-and-trade market

7. Carbon

8. And the markets are large: • Carbon: • Deutsche Bank: CO2 emissions trading market could be worth as much as $60 B a year. • Others: worth anywhere from $150 B to $250 B from 2008 onward. • In short: CO2 could become the world’s largest commodity market.

9. EU Market 250 MT $US25/tCO2e NSW GGAS 10MT $US10/ tCO2e Retail 2-10 MT $US1-38/ tCO2e CCX 1 MT $US2/tCO2e Local Regulation 5 MT $US3-7/ tCO2e Pre-Compliance/CDM (eg World Bank, Japan, Canada, USA) 50 MT $US5-7/tCO2e Source: New Forests Pty Ltd.

10. Carbon: Who’s playing • Major European corporations forced to comply with EU-ETS • Major corporations on a voluntary basis: • HSBC, Swiss Re, Alcoa, BP, Cinergy, Entergy, Interface carpet, and more recently, GE, WalMart • Individuals on a voluntary basis • Coldplay, Leo di Caprio

11. Carbon: The US • The US may be behind, but there is movement: • CCX • RGGI • California, Oregon, Washington • Lots on voluntary market • TerraPass, etc. • Once the US comes in, could see explosive growth • One day there will be a national market

12. Carbon Market: It’s here • Can already buy credits on E-bay • Need I say more? • Seriously though: • There are already carbon investment funds, carbon brokers, even carbon hedge funds • Credits are being bought and sold globally • People in Uganda, Chile, India, China, etc. are getting paid to sequester/reduce emissions • World Cup, SuperBowl going carbon neutral

13. Water markets • Much less developed • Two possible kinds: • Quality • Quantity • Quality likely to come in first • i.e. Nutrient trading

14. Nutrient (pollution) trading • Is essentially cap-and-trade applied to watersheds • Those who pollute more than allocation have to buy, those who pollute less can sell • Dozens of examples in the US • Connecticut, Colorado, others

15. Nutrient trading: challenges • Unlike carbon, not easily commoditized • Happens on watershed scale so limited possibility to trade outside watershed • i.e. will be lots of little markets, not global market like carbon • Serious issues related to point vs. non-point sources of pollution

16. Nutrient trading: potential • Issues of water pollution are so important • To health, to productivity • That this could become a series of very large markets: • Think Chesapeake, Gulf of Mexico, SF Bay • Also will see experiments outside the US: • New Zealand

17. Other water-related markets • Flood control? • Paying for upstream watershed protection • Seen this in many places (Mexico, Costa Rica, Ecuador) • But in Mexico, Costa Rica is essentially a way to channel gov’t money • Or one-off deals like Ecuador • Problem is science is still tricky • Salinity, etc.

18. Biodiversity • As Michael mentioned, toughest nut to crack • By its very nature not easily commoditized • Is an “anti-commodity” • Besides, what do we mean by Biodiversity? • Ecosystems? • Species? • Genetic diversity? • All of the above?

19. And yet there is movement… • Wetland Mitigation Banking • Conservation Banking • Voluntary Biodiversity offsets • Gov’t payments for biodiversity • Such as Bush Tender, Eco-Tender in Australia • Program in Mexico

20. Wetland/Stream Banking • Is sometimes classified as a water market, • but I believe it is a market for a type of ecosystem (ergo Biodiversity market) • Even if the driver is Clean Water act • Driver is “no net loss of wetlands” • If damage, must offset • About $1 billion market (not small)

21. Wetland/Stream Banking • Has created multi-million dollar businesses: • Wildlands in CA • EBX in Maryland • Essentially private wetland bankers • Poised for growth with regulations coming out any day now (DoD regs) • Is national, but takes place at watershed level (watershed codes)

22. Conservation Banking • Like wetlands, but at species level • Probably around 60 banks in the US • Most in California • But poised for growth in Texas, Florida, etc. • Species credits selling for hundreds of thousands of $ • Private bankers entering market • Market worth about $45 million • Being exported to Australia, elsewhere

23. Voluntary Biodiv. Offsets • Companies (e.g. mines) voluntarily offsetting damage to biodiversity by creating elsewhere • Still small, but could grow in places (e.g. Mexico) where regulatory system may not allow conservation banking-type mechanism • Forest Trends has pilot program • Working with mines, multinationals

24. Other existing/potential markets: • Watching many, still in infancy: • Pollination • Disaster prevention • Conservation Easements (and associated tax credits) • Refer to matrix

25. Many other deals (not markets) • Payment schemes that may not be markets in my definition, but still important: • Mexico, Costa Rica, China, PES in Africa, NY watershed, Napa, Danube, • Shouldn’t minimize the importance of one-off deals in all of these markets; may be way forward in some instances

26. Lessons: Key Factors • Property Rights • Can’t sell what you don’t own • Some level of Trust • Good flow of Information • On quality, prices, location of buyers/sellers • Competition • Concern over unintended consequences • Look at externalities

27. Lessons: Property Rights • “Property titles are only the visible tip of a growing formal property iceberg. The rest of the iceberg is now an enormous man-made facility for drawing out the economic potential of assets… without property, mankind cannot convert the fruits of its labor into fungible, liquid forms that can be differentiated, combined, divided, and invested to produce surplus value… [Property] is an instrument of thought, representing assets in such a way that people’s minds can work on them to generate surplus value.” • Hernando De Soto

28. Lessons: Role of Sovereignty • This can be done in two ways • Agreement among all current users • Through government • Requires strong sovereign government • Not only to allocate rights • But to protect them • May provide insights on Kyoto/CDM

29. A Brief Digression • A global carbon market can happen in one of two ways: • Starting global • Requires some level of global sovereignty • Starting at highest existing level of sovereignty • Regional / Global • And then the aggregation of these • We are seeing the latter

30. Lessons: Allocation of rights • One of the (if not THE) hardest things • Do you give rights away (grandfather)? • Is politically easier in the short run • Do you distribute equitably? • SkyTrust initiative • Is the ideal in long run • Helps mollify rising prices • After all, this was a “public good” • Addresses issues of power

31. Lessons: Trust and Info. • Trust • Origin of “credit” is Latin “credere” to believe • Won’t buy if don’t trust quality • Don’t believe contracts will be honored • May make markets more difficult in some countries, better to use one-off deals • Information • Important to get the systems right • registries, Internet, certification, verification, auctions, bringing together buyers and sellers

32. Lessons: Competition and Consequences • Competition • Make sure to have more than one seller (no monopolies) and more than one buyer (no monopsonies) • If only one owner of watershed, market will not work very efficiently if give all the rights upstream • Is issue of power in transactions • Unintended consequences (externalities) • Are a market of unintended consequences, designed to correct externalities, but have some of our own • Higher prices • Creating disparities in power relationships • Others consequences we can’t foresee?

33. And, we need the right Systems/Institutions

34. A Solution: Ecosystem Marketplace • A “Bloomberg” for Emerging Markets in Ecosystem Services: • Carbon Markets (related to ecosystems) • Water markets • Biodiversity Markets • Easements and Other Conservation Transactions • www.ecosystemmarketplace.com • News updated daily on the web, with features and a regular e-mail newsletter

36. Key Questions • How does a gov’t agency participate? • Can/should credits be stacked? • What are the consequences? • Higher prices? • Who wins, who loses? • Many others