Market-Based Conservation

1. Market-Based Conservation NRCS Market-Based Incentives Washington, DC January 10, 2006 Douglas Lawrence Director Resource Economics and Social Sciences Division

2. Market-Based Conservation What are Market-Based Solutions? • Market-oriented approaches rely on the use of economic and marketplace principles to achieve beneficial environmental outcomes. • The premise is that markets are more efficient at allocating resources than mechanisms such as government regulations. Markets and their prices reveal collective preferences. • The concept is evolving • Not a replacement for current approaches

3. Market-Based Conservation What is a Market? • A market allows people to trade, under the protection of law, and thereby allocates resources through prices that reflect collective preferences. • In practical terms it is a set of rules for exchanging goods and services. (Bazaars, e-bay Safeway, used car dealers, CarMax, conservation easements, employment, TSPs ...)

4. Market-Based Conservation Three Approaches to Market-Based Incentives • Creation of ecological markets(Chicago Board of Trade Carbon Market, Wetland Mitigation banking, Comet VR) 2. Use of economic principles to influence existing non-ecological markets (Cost sharing, information, education, research…) 3. Use of marketplace business practices to enhance conservation adoption (market segmentation, marketing, competition, partnerships)

5. Market-Based Conservation What are the Benefits of Market-Based Allocations of Resources? • Under perfect competition, a system of free markets will lead to an optimal allocation of resources. • Reduction of government costs and private compliance costs • Incentives for technological innovation.

6. Market-Based Conservation Market-Oriented Approaches Include: • Using Economic approaches (auctions, cap-trade, improving information (KBC)) • Applying business practices (precision marketing, fostering customer loyalty) • Encouraging competition (RFPs, bid-downs with multiple pools) • Informing the conservation investment decisions of others (Landcare) • Leveraging Resources (Wall Mart, PRS) • Providing information and tools to allow environmental markets to evolve or develop (Comet VR CCX)

7. Market-Based Conservation Market-Oriented Approaches • Focus on incentives (monetary and non-monetary) • Implementation of performance-based conservation (CSP Enhancement Payments) • Fostering knowledge-based conservation • Negotiating (NRCS has many assests)

8. Market-Based Conservation Conventional Market-Based Tools • Environmental Credit Trading • Sale of Environmental Services • Auctions and Bidding • Mitigation Banking • Green Labeling C

9. Market-Based Conservation Cuationary Notes Related to Market-Oriented Solutions • Regulation often required (Dennis King Aritcle: Limits of Environmental Credit Trading) • New York City Watershed - Gretchen Daily Book (Caution, what is presented is really cost-sharing not credit trading)

10. Market-Based Conservation Economic Principles: Perfect Competition • Atomicity – buyers and sellers are price takers. • Homogeneity -- goods and services in a given market are perfect substitutes. • Perfect and complete information -- information is available to all, transparency • Equal access -- to production technologies, and resources (including information). • Free entry -- any firm may enter or exit the market as it wishes.

11. Market-Based Conservation Economic Principles: Supply and Demand • Shifters: • Input prices • Technology Price Supply • Shifters: • Other prices (substitutes and complements) • Income • Tastes and Preferences Demand Quantity

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13. Market-Based Conservation Market for Conservation Tillage Equipment • Supply Shifters: • Input prices • Technology Price Supply Demand with Higher energy costs • Demand Shifters: • Other prices (substitutes and complements) • Income • Tastes and Preferences Demand The net result is that as diesel prices increase, the demand for No-till equipment increases, thereby enhancing conservation. Quantity

14. Market-Based Conservation Business Principles: Marketing • Advertising • Market research • Marketing strategy • New Product Development • Direct Marketing • Precision Marketing • Partnerships • Business to business

15. Market-Based Conservation Business Principles: Marketing

16. Market-Based Conservation Conservation Behavior Changing Policy Instruments Conservation Payments Education Cross Compliance Information Regulation Bad Actors Stewards

17. Market-Based Conservation Business Principles: • “Get, Keep, Grow” Focus on Customer Loyalty • Advisory Boards • A group of executives, professionals or customers appointed by a company to provide guidance and support on issues critical to the organization. A Board of Advisors is a working as opposed to an honorary body that offers guidance versus governance • Customer Focus, help them “Get the Job done” • Innovation and growth possibilities emerge from knowing what other supporting, ancillary or related jobs customers may want to get done in conjunction with the primary job. • Value is also created by helping customers get a specific job done more efficiently. Companies must be able to capture from customers the set of metrics — that define how they want to get the job done

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21. Market-Based Conservation USDA Policy Market-Based Environmental Stewardship • USDA is launching a market-based conservation initiative which supports the White House Cooperative Conservation Conference and the Under Secretary’s Legacy Goals.

22. Market-Based Conservation USDA Policy Market-Based Environmental Stewardship • The Policy • Defines USDA roles and responsibilities • Formalizes a Coordination Council and a mechanism to evaluate and resolve issues • Formalizes a work-group to support the Coordination Counsel

23. Market-Based Conservation USDA Policy Market-Based Environmental Stewardship • USDA will Cooperate with other Federal departments, Tribal, State, and Local governments, and NGOs to: • Establish a role for agriculture and forestry in providing environmental offsets and enhancements • Develop accounting procedures for quantifying environmental goods and services.

24. Market-Based Conservation USDA Policy Market-Based Environmental Stewardship • Enable USDA partners to take advantage of and promote the awareness of stewardship markets. • Promote the use of environmental credit trading and voluntary reporting registries, etc.

25. Market-Based Conservation USDA Policy Market-Based Environmental Stewardship • Develop innovative tools to quantify environmental impacts • Conduct outreach, education, technology transfer, and partnership building activities • Increase awareness of environmental stewardship markets within USDA

26. Market-Based Conservation USDA Policy Market-Based Environmental Stewardship • Status of the NRCS Market-based Incentives Strategy Team: • Core work-group meeting (NRCS, FSA, FS and OCE) • Partnership with DOD • Co-sponsor - National Water Quality Trading Conference • May 23-25, 2006, Pittsburgh, PA • Co-sponsor - Annual Conference on Mitigation and Conservation Banking • April 10-13, 2006, Portland, OR • Agency Strategic and Business Plans • Market-based Incentives Emphasis Area in B-Plan • Strategic Plan overarching approach • 2006 Ag Outlook Forum (February, 2006) • Concurrent session on Market-based Environmental Stewardship

27. Market-Based Conservation Current Market Oriented Solutions Used by NRCS • Easements (FRPP, WRP, GRP) • EQIP Buy-Down (pre 2002) • Environmental Credit Trading (CIG, Ohio ) • Implementation of Comet VR • Program performance awards • Transparency in program allocations • Advisory Boards • Development of Marketing Strategies

28. Market-Based Conservation Opportunities for Using Market-Based Solutions • Informing Investments of Others (Conservation Certification, measuring carbon credits) • Knowledge-Based Conservation • Performance Payments (Cherry grower, EQIP incentive payments for pest management used for weather stations.) • Stimulating Industry Innovation (precision farming) • Supporting Tradable Development Rights programs • Mitigation Banks (Wetlands, FPPA) • Auctions (85 percent reduction FA costs in AUS) • Reverse auctions for State allocations (TA bids for FA, FA cost share bids for FA and TA)

29. Market-Based Conservation Opportunities for Using Market-Based Solutions • Using Economic Principles (program auctions, cap-trade, improving information (KBC)) • Applying business practices (precision marketing, fostering customer loyalty) • Encouraging competition (RFPs, bid-downs with multiple pools) • Informing the conservation investment decisions of others (reducing their risk) • Focusing on incentives (monetary and non-monetary, health insurance, enterprise planning, ) • Implementing performance-based conservation (CSP Enhancement Payments) • Fostering knowledge-based conservation • Negotiating

30. Market-Based Conservation Opportunities for Using Market-Based Solutions • Yield indemnification • Expand the use of partial interest in land • “Think like a farmer” (Boot camp, “mile in my boots, Farm Management Training) • Leveraging regulations • Use PRS as a platform for the accomplishments of others, NGOs, agencies, industry, etc.

31. Market-Based Conservation • Summay • Use economic principles (incentives) • Apply sound marketplace or business practices • Encourage competition • Inform the conservation investment decisions of others • Leverage resources of others (partnerships) • Provide information and tools to allow environmental markets to evolve or develop (Comet VR)

32. Market-Based Conservation • Incentives • Incentives • Incentives

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