Making Markets for Ecosystem Services

Geneva, 25 March 2008 - Ecosystems thinking is slowly changing from concern about losing species to concern about losing the services that keep our own species — and its civilization — thriving.

The 2005 Millennium Ecosystem Assessment (MA), the largest and most comprehensive multi-stakeholder review of ecosystems and their services, concluded that some two-thirds of the ecosystems assessed and their services were being degraded or used unsustainably. The rate of ecosystem degradation has been swifter in the last 50 years than in the 150 years previously.

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The report introduced new ways of looking at ecosystems and of quantifying the services they provide. In a departure from previous thinking on ecosystems, it added human beings into the equation. It offered new incentives and impetus for sustainable use and mooted the idea of ecosystems and their services as fungible assets. This survey has encouraged all sectors of society, and particularly business, to view ecosystems with a greater sense of urgency and to seek out new mechanisms for their sustainable use.

The MA divided ecosystem services into four categories: supporting (nutrient cycling, soil formation), provisioning (food, freshwater, wood, fiber), regulating (climate regulation, flood control, water purification), and cultural (aesthetic, spiritual, educational).

Efforts to protect ecosystems have been hampered by the fact that in most cases no one owns them. Thus the focus has been on setting ecosystems aside, through the creation of national parks and the like, or passing anti-pollution laws that are hard to enforce, or through other voluntary measures — all good, but insufficient.

Recently another mechanism has been gaining currency: the creation of markets for ecosystem services. Underlying this is the belief that people will be more inclined to conserve something that has an economic value. Creating markets for ecosystems services offers a chance to capitalize on the strengths of business and the power of markets; to address existing weaknesses in markets that have led to degradation and loss of ecosystems resources; and to provide an opportunity to improve livelihoods in impoverished rural landscapes.

In fact, such markets have existed for a long time. Ecotourism is probably the most obvious example of the monetarization of ecosystem services. Now other market mechanisms are being considered as complementary tools that could be used to deliver environmental benefits; and business models are being developed that reflect this.

Roughly three types of market approaches exist. All can be voluntary or mandatory. Direct payments can be made for the delivery of specific ecosystem services or for adopting land uses that are thought to provide such services. Paying for watershed protection can result in reducing pollutant loads in run-off from upland areas and providing clean water for irrigation, for example. Governments in a number of countries provide subsidies and tax incentives to encourage resource conservation.

Another market-based mechanism rests in creating new rights and liabilities for the use of natural resources and then opening them up to trade. Examples include the growing market for wetland banking in the United States and the increasing trade in biodiversity offsets. The burgeoning trade in carbon credits based on government - allocated emissions allowances is another illustration. Global carbon trade was worth more than US$ 30 billion in 2006 alone.

The use of certification and ecolabeling offers another business opportunity. The certification of wood and non-timber forest products, fisheries and agricultural produce are already well-established, and signs indicate that they too are set to grow.

Using market mechanisms offers new business opportunities and the chance to use ecosystems and their services to tap into previously unrealized assets. However, these mechanisms are not without their limitations. Weak institutions and poor governance in some — often biodiversity-rich — areas can make it difficult to exploit market mechanisms equitably and sustainably. A lack of experience with market-based approaches to ecosystem management may result in further harm to ecosystems and their services. Finally, some of the most vital ecosystem services, such as regulating and supporting services, are actually the most difficult to “bring to market”.

Market mechanisms clearly offer opportunities to use ecosystems sustainably and deliver environmental dividends, provided they are carefully and equitably implemented. Ensuring this will require partnerships between governments (to provide the regulatory frameworks) civil society (for the knowledge surrounding ecosystems and their services) and business (for their capital and technology). Partnerships for sustainable use will enable all stakeholders to better understand ecosystems and their services, assess their dependence and impacts, reduce their negative impacts and scale-up solutions, and to explore and pursue new business opportunities.

5 steps to becoming a good trader

1. Know that you are selling ecosystem services at full cost

2. Know that you are buying ecosystem services at full cost

3. Ensure clear ownership of the ecosystems services that are to be traded

4. Ensure clear and transparent accountability of the ecological value accruing to the owner as a result of the sale

5. Create competition among buyers and sellers

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