Environmental Market Credits: who’s buying?

Interest is growing among federal agencies in using ecosystem markets to achieve environmental goals. The elevator speech: “Markets and payments for ecosystem services offer opportunities to leverage new private investment in conservation, diversify sources of revenue for landowners, lower costs of regulatory compliance and environmental restoration, and shift emphasis and accountability in conservation from participation rates to environmental outcomes.”  Some even say successful environmental markets will support job creation and rural prosperity, newsworthy topics today.

Much commendable work has been done to further these ideas-- metrics, online tools, guidance, protocols… all useful and necessary elements of building markets.  Most efforts focus on generating credit supply or establishing the infrastructure for defining, verifying, or tracking credits. 

However, demand remains universally anemic. Even where the infrastructure for voluntary or regulatory markets exists, there is no clear demand signal, suggesting a lack of confidence in the ability of markets to deliver environmental outcomes, and frustrating any testing or expansion of market ideas.  

Notably, most of the groundwork for these enterprises has been laid through federal grants and assistance. Now there is clamor for more federal investment on the demand side! For example: USDA should purchase credits from farm and forest landowners using the same market rules and infrastructure as others instead of using  traditional Farm Bill cost-share incentive approaches.  Or the federal government should provide loan guarantees or risk insurance.

Are these really effective strategies? Would this just create a false market that would complicate things?  Are there better ways to stimulate demand?  What’s wrong with just using the incentive approach?

Author bio: 
Al currently serves as the Chesapeake Bay Team Leader for the USDA Office of Environmental Markets. Prior to 2011, Al served for 2 ½ years as Assistant Director for Ecosystem Services and Markets for the Forest Service and 18 years as Northeastern Area Watershed Program Leader where he also managed forestry support to the Chesapeake Bay Program. Al received a BS from Penn State University in Environmental Resources and MS from the University of Arizona in Hydrology. Al has worked for local government, the private sector, and 32 years with USDA and the Forest Service.

Comments

Tim Gieseke

USDA Role is not to

USDA Role is not to Buy                                           

 

 I think that if the USDA started purchasing credits at this point in market develop, it would create a false market and complicate things -as you state.  With that said, I do think the governments (fed/state/local) should provide value to landowners that meet ecoservice production targets.  I just completed a 2-year project for the MnDeptAg that created a water quality "market signal" [SWETw=75].  The producer value was that they were able to provide "reasonable assurance" that they met TMDL goals.  A market signal based on producing something by how you manage the land is aligned with all other market signals farmers receive [Corn/bu=$6].  As farmers deliver on this market signal, food processors such as General Mills can leverage this to meet their sustainability goals.  I refer to the MDAg project as a "shared governance" approach, which quite effectively aligns with the "shared value" approach that food processors are building on.  The paradigm shift that will occur (aided by severe budget cuts and even bigger issues) will move the center of governance from a USDA-centric system toward the private and corporate sector.  It would seem that this will be a long and drawn out affair, but I thnk that part is nearly over.  It is not that the USDA has lost competency to deliver conservation, but that the realm of the ecoservice market is much larger than the USDA.

Al Todd

Good comments, Tim and thank

Good comments, Tim and thank you for adding to the discussion. 

I am particularly interested in your view of how ecosystem value is currently being built into sustainability goals such as those that food processors like General Mills are building on.  I am aware of intent and some supply chain standards but not clear "value" in dollars and cents.   In terms of USDA, even under potential budget reductions coming in the future, USDA incentives and commodity support will continue to be a major influence on food markets and on conservation investments in the near term.  I agree that in the long run the ecoservice market has the potential to be much larger than any incentive program for conservation in USDA, but it will be an gradual evolution.  It seems that a direct investment approach (perhaps for a defined time period) as a "jump-start" strategy could serve as a "signal" for performance-based markets in targeted areas where capacity exists and some maturity of credit-based system has developed.  . 

Can you tell me more about what "SWETw=75" means?

Adam Davis

Government Role in

Government Role in Stimulating Demand

While interim measures like loan guarantees to jump-start environmental market activity are important and laudable, the federal government has two opportunities to improve demand that are more direct and powerful.

The first is simply improving the predictability and effectiveness of credit buying as a means of compliance with environmental laws.  To the extent that developers, highway builders, energy project proponents and others can buy approved credits as a cost-effective and efficient means of meeting their compliance obligations, they are happy to do so.  We see this in the areas of the country where mitigation banking credits are available for compliance with Clean Water Act section 404 requirements.  Federal agencies could do much more to create the basic structure that supports use of credits - including clear standards, performance verification and monitoring, and approved registries for listing available credits - which would in turn make it easier for those with compliance needs to find what they need.  This would improve demand.

The second is to 'prime the pump' for various types of credits through direct purchase for a limited period of time.  While I'm sympathetic to concerns about 'false markets', the reality today is that these potentially powerful and important environmental market solutions are not being used to their full potential, and that they need strong signals of support and legitimacy from the government to do so.  Government already spends billions of dollars on programs that are intended to create environmental protection and restoration; the suggestion here is no more radical than using some of these funds to buy credits that represent measurable results on the ground directly.  Purchasing an initial traunch of credits - for nitrate reduction in a TMDL, for endangered species habitat, or for other types of desired public benefit - would provide encouragement for land owners and land managers to participate, and by demonstrating that 'credits' are not just a fad but instead a serious part of our national environmental policy, would stimulate demand.

Al Todd

This is clearly a new way of

This is clearly a new way of doing business, and as such it requires significant institutional change in approach.  Like all new strategies where there is limited experience, changing direction to use this approach will not be easy.   There is aversion to the possible risk of something new.  However,  I agree that there could be significant power in sending a signal.  As such, it does not need to represent a wholesale change in approach but rather taking steps to diversify the nature of federal investments.  This would be true as well whether we are talking about buying credits or simply using new performance-based metrics for funding benefits.  Either way "credit defining metrics" could be the basis for measuring outcomes.   Would be ideal if tradional avenues of delivery (such as working through states) could be utilized to provide added confidence in system.