Building Oregon's Ecosystem Marketplace
Landowners whose properties generate ecosystem services should be rewarded for preserving those services – but that requires agreement on what those services are and how they should be measured. The US State of Oregon has embarked on a two-year program designed to reach that agreement.
Second in the Series Building the Ecosystem Marketplace
. Adapted from a story that will appear in the August edition of the Oregon Insider
5 August 2009 |
Advocates of payments for ecosystem services
believe these schemes can help improve the environment while expediting development in designated areas. They can also provide revenue to struggling rural areas by paying cash-strapped landowners to act as guardians of the ecosystem.
To achieve their potential, however, these schemes must not only be properly structured and managed, but they must follow a clear set of rules that everyone agrees on.
About this Series
Ecosystem Marketplace believes that our planet's living ecosystems deliver services upon which our entire economy depends – such as the cleansing of our air and water and the regulation of our atmosphere. We also believe that our economy's failure to account for this value is the reason that our that forests, wetlands, and other ecosystems are worth more dead than alive – and that incorporating the cost of environmental degradation into the cost of producing goods and services will correct this failure.
Governments, NGOs, and private-sector entrepreneurs around the world agree, and many have devised payments for ecosystem service schemes to do just that, with varying degrees of success.
For these schemes to deliver environmental value on a meaningful scale, they must utilize financial mechanisms that bring buyers and sellers of ecosystem services together in a transparent market that is easily-accessible to all participants and generates clear price signals that can be used to develop business plans and manage risk. Only when these financial mechanisms are in place can the true value of nature's services be identified and incorporated into the global marketplace.
In this series, we will be identifying a handful of companies that are creating such mechanisms:
Part One: Building the Ecosystem Marketplace
Guest author Michael Van Patten provides an overview of the challenges facing the incorporation of nature's services into our current economic system.
Part Two: Building Oregon's Ecosystem Marketplace
Ecosystem markets are nothing without a solid regulatory framework, and guest author Sara Vickerman summarizes the US State of Oregon's two-year plan to establish just that.
Part Three: Markit and the Re-Making of the Registry Landscape
London-based Markit built itself into a derivatives powerhouse by identifying which numbers reflect underlying reality better than most of their competitors. On June 30, Markit finalized the purchase of environmental registry TZ1, which has now been re-christened the Markit Environmental Registry. We examine the impact of this development on existing registries and the overall ecosystem marketplace.
Part Four: Markets with a Mission
There's been no shortage of media attention on carbon exchanges that make it possible to execute trades in standardized carbon offsets that have already been created and sanctioned. Lesser-known, however, are companies like Mission Markets, Climex, and The World Green Exchange, or the NGO Defenders of Wildlife – all of which either have or are developing platforms that in one way or another help developers find investors who are interested in the unique attributes of individual ecosystem preservation projects.
Part Five: the Commoditizers
Carbon markets have established themselves as the fastest-growing financial market on the planet, largely because the standardized nature of carbon offsets makes them easily-traded financial instruments that distill risk and reward into a solid number that a critical mass of buyers and sellers agrees on. We'll meet the companies developing means of doing the same for fragmented and illiquid markets like biodiversity offsets and wetland mitigation banking.
Part Six: the Index-Makers
In the securities world, stock indexes like the S&P 500 provide a benchmark price for the overall market and for sectors within that market. We examine the creation of indexes in markets for ecosystem services.
On July 23, the US state of Oregon took a giant step towards creating those rules when Governor Ted Kulongoski signed Senate Bill 513
. The new law doesn't create the rules, but rather provides a framework within which stakeholders and legislators can work together to agree on what works and what doesn't.
To resolve especially thorny issues, the law calls for the establishment of a workgroup
that is expected to be convened in late summer or early fall. It will work for approximately a year to develop a report and policy recommendations for the 2011 legislature. Although detailed plans for the membership and process have not been announced, suggestions from potential buyers, sellers, and regulators of ecosystem services will be solicited and considered.
Among these thorny issues is how to establish clear direction on the circumstances under which providers of ecosystem services can combine different environmental values in one transaction without double-dipping. Once this is agreed on, a landowner whose property generates wetland services
, water quality services
, biodiversity services
, and carbon sequestration
can earn income by maintaining all of these services on one property. If a piece of the property generates more than one service, he can earn income from the most valuable service, but he will most likely not be allowed to sell multiple credits from the same piece.
The bill was proposed by Defenders of Wildlife
and supported by a host of other diverse stakeholders including the Willamette Partnership
, the Oregon Homebuilders Association
, The Nature Conservancy
, the Oregon Forest Industries Council
, the Oregon Business Council
, Sustainable Northwest
, Wildlands Inc.
, Clean Water Services
, and the City of Portland.
Ecosystem Services Defined
The bill defines ecosystem services
as "benefits that human communities enjoy as a result of natural processes and biological diversity". It defines ecological values
as "clean air, clean and abundant water, fish and wildlife habitat and other values that are generally considered public goods". An ecosystem services market
is defined as "a system in which providers of ecosystem services can access financing to protect, restore and maintain ecological values, including the full spectrum of regulatory, quasi-regulatory, and voluntary markets". A payment for ecosystem services
is defined as "an arrangement through which the beneficiaries of ecosystem services pay back the providers of ecosystem services".
The new law includes formal recognition that maintaining sustainable rural landscapes is important to Oregonians, and that landowners need assistance to maintain ecological values on the land and pass it on to future generations.
The legislation acknowledges the need to restore some of Oregon's ecosystems, especially in the face of climate change. It also finds that – given appropriate oversight – ecosystem service markets can save money, lead to more efficient, innovative and effective restoration actions than pure regulatory approaches, and facilitate improved integration of public and private resources.
The bill addresses a shortage of industrial land in the Willamette Valley, created largely by previous zoning decisions that placed many industrial zones in protected wetland areas. In a somewhat misunderstood Section 3 (2)
, the bill recognizes the potential economic benefits of directing development to less ecologically-sensitive areas and providing options for developers that enhance both economic and ecological outcomes. The legislation encourages more effective approaches like the West Eugene Wetlands program, where development continued while substantial contiguous areas of wetland have been restored.
The misunderstandings associated with this provision may have been based on concerns about changing the way local governments allocate resources under the State's current land-use regulations.
SB 513 Specifics
Experiences with existing programs (see Background & Examples
, lower right) have revealed a number of thorny challenges that frustrate practitioners and stakeholders and have led to a series of policy dialogues in Oregon and elsewhere.
Sponsored by the Willamette Partnership and Defenders of Wildlife, and facilitated by the Oregon Institute for Natural Resources, these forums produced several reports (see LaRocco/Vickerman, Oregon Insider
#416/417), culminating with a report called Policy Cornerstones and Action Strategies for an Integrated Ecosystem Marketplace in Oregon
in July, 2008. An early draft of SB 513 began to address these issues.
A Summary of the Findings
Ecosystem Services Unevenly Regulated:
For example, water quality, endangered species, air quality and wetlands are regulated to varying degrees, but other resources, like forested watersheds, native prairie, and functioning floodplains are not.
Section 2 of SB 513 begins to address this problem by establishing a policy in Oregon to "support the maintenance, enhancement and restoration of ecosystem services throughout Oregon, focusing on the protection of land, water, air, soil and native flora and fauna."
The bill does not require that these resources be protected through regulation, but goes beyond the "no-net-loss" requirement for wetlands by suggesting the need to restore some ecological systems that have been degraded and require restoration. It also sets the stage for more specific policies that address the conversion of the forest land base to other uses, or the destruction of pollinator habitat by industrial farming practices. This provision suggests a need to quantify the ecosystem services provided by different land uses and management practices in order to determine when they are being compromised and when they are showing improvement.
Agencies are/were not explicitly authorized to engage in adaptive management under Oregon law.
Background & Examples
For readers who are unfamiliar with these concepts, a few examples of existing and emerging markets may be useful.
Wetland Mitigation Banks
The most mature domestic market for ecosystem services is probably wetland mitigation banking. Wetlands are protected by the federal Clean Water Act. The national policy of "no-net-loss" triggers mitigation responsibilities for developers and others whose activities impact wetlands. A historic preference for on-site, in-kind mitigation projects produced a rash of criticism from the scientific and conservation communities, who documented the failure of many of these projects to replace lost or degraded ecosystem functions and values. Under "on-site/in-kind" mitigation sites tended to be small, located in developed areas, and inadequately maintained over time. In contrast, utilizing wetland mitigation banking a landowner or restoration business can restore or enhance a large, properly situated wetland and provide long term management to protect its ecological values. Credits are generated and approved by regulators, then sold to developers to offset the adverse impacts to wetlands on the development site. Although some wetland banks have been more successful economically and ecologically than others, the general trend in wetland mitigation banking has been toward improvement in both the regulations guiding the process and the on-the-ground results.
Another example, somewhat unique to Oregon, is a water quality trading program operated by Clean Water Services (see Biorn-Hansen, Insider #293 and Logue, Insider #311). This special district provides sewer and water services to Washington County. It must comply with the federal Clean Water Act, which regulates discharges of warm water from its treatment facilities. The Oregon Department of Environmental Quality authorized a water quality trading program in which Clean Water Services compensates landowners for providing riparian vegetation that shades streams and cools the water. This approach provides a much broader spectrum of benefits than traditional engineering solutions, including improved fish and wildlife habitat, aesthetic and recreational values. It also pencils out at about ten percent of the cost of cooling towers at the "end of the pipe."
A quasi-regulatory market prominently featured in the news and policy debates is carbon trading. In a regulated version of this market ("cap and trade"), carbon dioxide emissions are capped, and companies are allowed to buy and sell credits or allowances not needed for compliance. Since neither Oregon nor the federal government have yet adopted laws that mandate and guide a cap and trade market in the US, trades in this country are voluntary, though some are driven by the anticipation of future regulation.
An emerging ecosystem market is conservation banking, common in California but rare elsewhere. This program addresses the loss of endangered species habitat by allowing landowners to establish banks with suitable habitat and sell the credits to developers who impact habitat for the same species. Oregon's first example, the Agate Desert Conservation Bank, is operated by the Oregon Department of Transportation to offset impacts from several highway construction projects. The 80-acre bank contains vernal pools, prairie and oak savanna in the Agate Desert area near Medford.
Internationally, some voluntary markets have emerged. For example, Forest Trends and the Katoomba Group have been working for years to develop a Business and Biodiversity Offsets program. It is supported by conservationists and progressive companies that believe it is their best interest to avoid harming, or even improve the survival prospects of local flora and fauna, especially endangered species, even though they are not technically required to do so.
Government Incentive Programs
Finally, there are many government incentive programs that provide assistance to landowners to improve air or water quality, protect wildlife habitat, reduce carbon dioxide emissions, or address other environmental challenges. To the extent that these programs are outcome-based, they may be considered to be payments for ecosystem services. For example, under the federal Farm Bill, there are dozens of programs to conserve wetlands, rangelands, rare habitat, and to improve water quality. Although not market-based, these programs share many features of ecosystem service markets.
Based on a court decision in the Deschutes Basin (Waterwatch of Oregon, Inc. vs. Oregon Water Resources Commission
, 112 P.3d 443(2005), a representative of the Oregon Attorney General's office suggested that agencies were not explicitly authorized to modify management activities in accordance with new information gained through monitoring the results of previous actions.
Section 4 (1) in SB 513 explicitly encourages State agencies to "adopt and incorporate adaptive management mechanisms in their programs in order to support the maintenance, restoration, and enhancement of ecosystem services." This provision is especially relevant in the face of climate change, where so many uncertainties surround predictions about temperature, precipitation, and the response of Oregon's flora and fauna to inevitable changes.
Narrowly-focused mitigation approaches remain embedded in agency policy and culture.
As previously noted, historically on-site/in-kind mitigation efforts have produced limited ecological benefits and often irritate developers who are not expert ecologists and do not generally want long-term management responsibilities. Section 4 (2) of SB 513 encourages state agencies to use ecosystem services markets to address mitigation needs, after carefully avoiding impacts to the most sensitive areas, and minimizing damage to others.
The bill explicitly requires that agencies "consider mitigation strategies that recognize the need for biological connectivity and the overall ecological viability of restoration at landscape scale rather than exercise an automatic preference for on-site, in-kind mitigation."
To address the remaining policy issues, SB 513 directs the Oregon Sustainability Board to convene a workgroup to prepare a report and policy recommendations for the 2011 legislature. Staff support is to be provided by the Oregon Watershed Enhancement Board. The workgroup will be composed of diverse interests including – but not limited to – local, state and federal agencies; Indian tribes; conservation organizations; developers and landowners from the private sector.
Representatives must "be active in improving the ecological effectiveness of ecosystem services markets", and the law mandates the group work on the following issues:
The workgroup will study and propose over-arching goals to guide the development of integrated ecosystem service markets in Oregon that are efficient, coordinated, and designed to produce positive ecological and economic outcomes with reasonable administrative costs to all participants. The purpose of this section is to encourage agencies to work together to develop an integrated system rather than continue in silos.
The workgroup will identify the entities that would be the most appropriate to guide, facilitate, and implement an ecosystem service market in Oregon. This section opens the door to a discussion of a potential role for a lead agency or private sector entity (like a non-governmental organization) to manage transactions. For example, the Green Building Council oversees green building standards and certification without government management. The Willamette Partnership has emerged as a facilitator and market manager in the Willamette Basin and beyond.
The workgroup will address the need for consistent methodology to describe and quantify ecological values and in doing so consider methodologies that have been developed or are in the process of being developed. This section recognizes that substantial work has been done in this arena, especially under the "Counting on the Environment" project managed by the Willamette Partnership, and by Parametrix working with the Oregon Department of Transportation. The Oregon Institute for Natural Resources also has a grant from the federal Transportation Research Board to refine these tools. SB 513 also highlights the need to develop a full complement of tools to quantify these services, ideally with an appropriate balance between the need for precision and practicality.
Evaluation & Accounting:
The workgroup will make recommendations concerning the development of appropriate ecological evaluation and accounting systems. The goal in this section is to promote more consistent approaches.
The workgroup will consider the appropriate role of government participation in ecosystem service markets in order to ensure that the activities of state agencies are well-coordinated and maintain a positive influence in maximizing ecological, social, and economic benefits for the public and private sectors.
This section highlights a significant difference of opinion concerning the role of government in managing ecosystem service markets. Some agencies have proposed selling ecosystem services (like wetland credits, carbon sequestration benefits, or improved habitat) to the regulated private sector from their publicly held lands. Some private actors consider the sale of ecosystem services from public lands to be unfair competition, and some conservation interests object for other reasons.
A related issue involves the degree to which government agencies control the market transactions. While most agree that some role is appropriate, some fear that overly prescriptive regulations will raise transaction costs and create enough uncertainty to strangle the markets.
Bundling & Stacking:
The workgroup will consider rules concerning the "bundling" and/or "stacking" of ecosystem services (i.e. the production and sale of multiple eco-credit types from the same actions/land parcels). Landowners want to be able to sell multiple ecosystem services from the same property, but some regulators consider this practice to be double-dipping. While there are technical solutions to the bundling and stacking problem, different approaches by different agencies complicate the application.
The workgroup will propose policies to stimulate the demand for payments for ecosystem services, in particular the development of voluntary or regulatory markets.
This effort will address policy options for rewarding public and private sector entities for using market-based approaches that create demonstrable ecological improvements. For example, developers may agree to purchase credits from conservation banks to avoid the delays and costs associated with on-site mitigation. Another option is to address the unevenness of regulations to facilitate a more holistic approach to conservation and mitigation. Improving the certainty for investors by adopting clear and consistent rules and providing insurance to cover unforeseen events will all help encourage buyers to participate. It is generally recognized that regulations create markets, but the workgroup may consider creative policy options or incentives that stimulate investment without new regulations.
Oregon has already established a leadership position in the ecosystem markets arena, especially with respect to multi-credit markets focused on ecological integrity. Successful implementation of the workgroup process could have a profound and positive impact on the development of markets in Oregon and nationally.
Sara Vickerman is Senior Director for Biodiversity Partnerships for Defenders of Wildlife. She can be reached at SVickerman@defenders.org.
This article has been adapted from a story in the August edition of the Oregon Insider, a monthly digest of environmental management and regulatory news.
Please contact David Light (firstname.lastname@example.org) for permission to reprint or distribute this content.