Making the Priceless Valuable:

Ecosystem Service Payments Markets

TranslinksTanzania - September 2008

Michael Jenkins, Forest Trends

Carbon

Watershed Conservation &

Restoration

Biodiversity

Conservation

Revenue

Carbon Credits –Reforestation/AfforestationBiofuelsConservation Carbon

Pharmaceuticals/Natural Medicine Personal Care/ Cosmetics

Eco-tourism Protection Biodiversity Credits & Offsets

User FeesMitigationSalinity Credits

TreesCertified Timber BotanicalsWastewood Utilization

Markets in Transition - Ecosystems Services

Services

New Finance: Payments for Ecosystem Services

Types of PES: Self-organized private deals

Private entities pay for private services

Public payments to private land and forest ownersPublic agency pays for service

‘Cap and Trade’ - trading of environmental credits under a cap or floorLandowners either comply directly with regulations, or buy compliance credits

Eco-labelling of agricultural and tree productsConsumers prefer certified sustainable supplies

Charting Payments for Ecosystem Services: The Matrix

55

EU ETSVol: 2,061 Mt

(CO2e)Value: $50 Billion

CCX23 Mt72 M

CDM791 Mt

$ 15 Billion

Voluntary OTC42 Mt

$258 M

NSW GGAS25 Mt

$224 M

5Source: New Forests/Ecosystem Marketplace, World Bank

JI41 Mt $495 M

CARBON: Carbon Markets

Carbon Market Transaction Volumes and Values, 2006 and 2007

Markets VOL. (MtCO2e) VALUE (US$mill)2006 2007 2006 2007

Voluntary OTC Market 14.3 42.1 58.5 258.4Chicago Climate Exchange (CCX) 10.3 22.9 38.3 72.4 Total Voluntary Markets 24.6 65.0 96.7 330.8

EU-ETS 1,1044 2,061 24,436 50,097Primary CDM 537 551 6,887 6,887Secondary CDM 25 240 8,384 8,384Joint Implementation 16 41 141 495 New South Wales 20 25 225 224 Total Regulated Markets 1,702 2,918 40,072 66,087

TOTAL GLOBAL MARKET 1,727 2,983 40,169 66,417

Sources: Ecosystems Marketplace, New Carbon Finance, World BankOTC = Over the Counter

CARBON: Growth of Carbon Markets

Forest carbon is < 1% of total market since effectively excluded from regulatory markets (high transaction costs in CDM)

Forest carbon composed ~20% volume of Voluntary Market

Voluntary carbon prices are increasing – for OTC trades from $1.80/tCO2e in 2006 to $3 in 2007. Forest carbon prices are above average: $7-8 for afforestation and $4.8 for AD projects

Voluntary market allows innovation, e.g., development of methodologies and standards for REDD; ‘gourmet carbon’ combines carbon and equity objectives

Key role of standards to ensure quality and reassure buyers, e.g., combination of CCB and VCS standards

CARBON: Forest Carbon in the Voluntary Market

Potential of Avoided Deforestation or REDD

Stern Review (2006): deforestation contributes about a fifth of CO2 emissions – he said avoided deforestation (AD) should be one of four key elements of global climate change mitigation strategy.

Stern also said AD is a “highly cost-effective way of reducing greenhouse gas emissions” due to (often) low land-use opportunity costs

REDD will have major co-benefits: biodiversity, water and (perhaps) equity

Bali CoP 2007 committed to “urgent and meaningful action on REDD” – need to define REDD mechanism for post-Kyoto regime (2013-2017) at Copenhagen

Source: Stern, 2006

Baselines are difficult due to future uncertainty

Ex-post payments but up-front costs: how to fund ‘Readiness’, e.g., baselines, REDD planning, national carbon infrastructure, etc.

National strategy is vital due to leakage, but so is a project approach involving private sector investment – ‘nested approach’

Equity concerns, e.g., compensating the ‘bad guys’; community conservation has potential, but ‘additionality’ and transaction costs (role for ODA/philanphropy finance?)

Deforestation is highest where governance is worst

But REDD is Complex - Challenges

WATER: Payments for Watershed Services

Demand for clean water is increasing rapidly: water use has increased at twice the population rate. 40% of cities depend on forest areas for water.

Investment in watershed management is cheaper than treatment or obtaining new water supplies. In the US, each $1 in watershed protection saved $7-200 in filtration/water treatment.

Payments of upstream watershed protection is already taking place in New York City as well as several countries (e.g., Mexico, Costa Rica, Ecuador)

WATER: The “Dead Zone” Problem

Source: New Scientist

WATER: Payments for Watershed Services - Types

Nutrient Trading:

Is essentially cap-and-trade applied to watersheds - Those who pollute more buy from those who pollute less.

Ex. Chesapeake, Gulf of Mexico,Yellow River (China)

Upstream Watershed Protection:Ex. Mexico, Costa Rica, Ecuador

Other: Flood Control Salinity Control

Provide food, habitat, and temperature control for stream communities

Stabilize streambanks and control sediment flux by holding the soil in place

Filter pollutants by removing suspended solids from surface runoff

Function as a sink by taking up and sequestering nutrients in plant tissue

WATER: The Benefit of Forested Watersheds on Quality

WATER: The Chesapeake Fund

Goal: attract new capital and maximize return of restoration investments

Collaborative project: Forest Trends, Chesapeake Bay Foundation, and World Resources Institute

Regional pilot with the potential to scale and model in other watersheds

Focus on “offsetting” nitrogen emissions by investing in water quality protection and restoration projects

Forest restoration and protection: potential for high-value return

BIODIVERSITY: Biodiversity Markets

Not easily commoditized Is an “anti-commodity”

Wetland Banking

Conservation Banking

Voluntary Biod. offsets

Gov’t payments for biodiversity

– Such as Bush Tender, Eco-Tender in

Australia

– Program in Mexico

BIODIVERSITY: Biodiversity Markets

Largest Biodiversity Offset Market in the U.S.

$3.3 billion a year spent on mitigation in the U.S. $2 billion in mitigation parcel purchases

$1.3 billion sold from the roughly 120 species banks and 600 wetland banks in the US

Credits sell from $4,000 to $450,000 an acre

Banks are usually 30 to 400 acres (some as big as 1500)

Can be profitable, a known bank started selling credits for $1,500 and 10 years later they were selling for $125,000 - due to demand and ambient land value

The industry is ~20 years old and is growing steadily

Environmental Mitigation:

Forest landowners have the advantage of already owning the land. This is the big expense in selling mitigation credits.

Forestry Opportunity: generate income from existing conservation parcels generate mitigation for internal permitting

Sectors involved: Forestry (International Paper,

Weyerhaeuser) Mining & Minerals (Rio Tinto, Vulcan) Oil & Gas (Chevron, Shell) Electric Utilities (Southern California

Edison, EPRI) Finance (Bank of America)

BIODIVERSITY: Biodiversity Markets – Forest Landholders

Non Timber ActivitiesWatershed CreditsCarbon CreditsConservation CreditsRecreation ExtractiveOther

Timber Activities

ROI, Shareholder Value, Ratings, Capital

Sales, Profit, Pricing, Margins

Tangible Value Drivers

Intangible Value Drivers

New Revenue StreamsCost EfficiencyRisk ManagementAsset Value – Land AppreciationDiversity of Income Streams(minimized cyclicality)

Reputation (PR, Brand)Stakeholder Licence to Operate• protection of asset• stakeholder & local community

relationsInnovationTalent Attraction & RetentionBiodiversity/Natural Capital

Financing: Driving Sustainability into Natural Resource Management - A New Business Model for Forest Land Owners

More Finance from PES … But Big Challenges Remain

Need to tackle policy, market and governance failures, e.g., illegal logging, weak property rights, weak compliance, etc. These cause high opportunity costs so SFM can’t compete with alternative land uses – so the challenge is forest finance AND incentives

Challenges of REDD, e.g., start-up costs, government capacity, equity, nested approach, etc. – needs multiple financing and partnerships

The adaptation challenge – can we combine mitigation with adaptation?

How to combine equity and environmental objectives (trade-offs between these objectives have been more common in the past)

Global food and energy needs versus environment

A New Challenge: Creating Ecosystem Markets

Roles for ODA and/or philanthropy finance

1. Promoting an enabling regulatory and governance environment, including monitoring FLEG and secure property rights

2. Capacity building for PES: new institutions dedicated to PES (e.g. FONAFIFO), national certifiers/verifiers, carbon registries, business development services for PES, etc.

3. Ensuring equity: subsidising transaction costs, promoting secure tenure, SMFE finance, collective institutions for PES, etc.

4. Venture capital role - up-front investment for innovative PES mechanisms to leverage other private sector investors

Roles for ODA and/or philanthropy finance

5. Tackling risk constraints to new instruments, e.g., innovative approaches to insurance and re-insurance

6. ‘Product development’ role: pilot projects to develop new approaches, method-ologies, metrics, standards, etc. with communities/low income forest people

7. Facilitating information flows on new markets – PES, forest investors, technical assistance, etc.

8. Catalysing collaboration between donors, i.e. CPF members, UNFF-UNFCC, Millennium Development Goal programs

Some Other Resources