Business Needs Healthy Oceans, too. So, why Isn’t the Private Sector Biting?

Henry Teitelbaum

When the ocean degrades, everyone loses – and that includes fishermen who lose their catch, ocean-side properties that lose their protection, and tourism operators who lose their tourists.  The private sector, therefore, has much at stake – and should be scrambling for ways to head off disaster.  That’s not happening, however.  Is the problem the message – or the messenger?

When the ocean degrades, everyone loses – and that includes fishermen who lose their catch, ocean-side properties that lose their protection, and tourism operators who lose their tourists. The private sector, therefore, has much at stake – and should be scrambling for ways to head off disaster. That’s not happening, however. Is the problem the message – or the messenger?

17 March 2010 | If anyone knows how to get stakeholders involved in schemes that protect the environment by paying people to act as guardians of the ecosystem, it’s Al Appleton. The former head of New York City’s water, sewage, and environmental protection operations, he helped initiate parts of the city’s landmark watershed agreement that pays farmers in the surrounding Catskill Mountains to protect the watershed – a scheme that has saved the city billions in filtration costs over the years.

Despite its success – and despite the efficacy of demonstration projects across the United States – that scheme remains one of the few payments for watershed services projects delivering results on a large-scale. That, says Appleton, is because a successful project requires more than intelligent market models if businessmen are going to get involved.

For one, he says, successful projects need scale if they are to become interesting for businesses. For another, he adds, the public and non-profit sectors need to understand the entrepreneurial mentality by which business people operate.

“You people who are on the cutting edge of environmental economics… need to really get much more involved in creating a climate of opinion that makes ecosystem services proposals more attractive,” he told delegates to the recent Forest Trends Marine Ecosystem Services (MARES) Katoomba Meeting in Palo Alto, California.

He added that a similar awareness of the needs of elected officials must also be taken into account when designing solutions to specific ecosystem challenges.

“Politicians hate incrementalism,” he says, because of the risk that the projects either won’t solve the problem or will do so in a timeframe that won’t justify their investment of political capital. With these stakeholder considerations in mind, Appleton says that as efforts to take on the challenge of creating deep ocean ecosystem markets gather momentum in addressing issues related to acidity, temperature, nitrogen runoff, plastic waste, pirate fishing or fish farming, it’s strategically very important to think big and to “hit the first targets with care” so as to build credibility for further attempts at creating ecosystem markets.

Where to Begin

Beyond structure, schemes designed to save the oceans by enticing payments for specific marine ecosystem services face the same challenges faced years ago by schemes designed to slow global warming by paying to save the rainforests and reduce greenhouse gas emissions from deforestation and forest degradation (REDD). Chief of these is that much scientific research needs to be done to gain the understanding of how marine ecosystems work, how they interact with each other and terrestrial ecosystems, and how market-based mechanisms can be applied in support of them.

MARES Program Director Tundi Agardy says the challenge is compounded by the fact that humans, as terrestrial beings “have difficulty understanding the ways in which we influence marine environments.”

She says we also are just beginning to understand the true value of marine ecosystem services for communities, economies and to businesses. There remains much uncertainty as well over what critical thresholds exist in marine ecosystems, a consideration that should influence how and where resources are allocated.

Speaking at the same event, Forest Trends MARES Program Manager Winnie Lau said it is critical to develop a range of voluntary market-based mechanisms, notably through the Payment for Ecosystem Services model, but also through water quality services, ocean zoning, marine spatial planning, and leasing activities to attract private financing for sustainable coastline and ocean resource management. To do this effectively, she says the private sector needs to forge closer partnerships with communities, with governments, and with regulators as well as with existing terrestrial ecosystem service providers.

The Evolving Tool Chest

Agardy says that while much work has been done to apply the models that have been used successfully to preserve terrestrial ecosystems in marine protected areas, marine parks, coastal parks and in wetlands preservation, “what we haven’t done is really apply these new tools to the marine environment on a full scale.”

There’s also a lag in the legal and regulatory framework that underlies marine conservation efforts, though this too is evolving quickly, according to Agardy.

“Many countries are shifting to a much more strategic view of marine conservation ecosystems”, she says, with a “real emphasis on marine spatial planning and zoning in almost every coastal country in the world.”

This is a very important development from a commercial perspective, Agardy notes, because clear and codified property and use rights are a pre-condition to setting up markets tied to fisheries, water quality, carbon sequestration and other services.

The Externality Quandary and the Need for Legal Drivers

Ricardo Bayon, of EKO Asset Management Partners (and co-founder of Ecosystem Marketplace), reminded MARES participants that ecosystem markets, far from being a product of free enterprise and private sector innovation, are fundamentally reliant upon governments and government-sponsored regulation for their creation. This is particularly true of wetlands, which do not produce readily identifiable products of interest to consumers or industry, but are nevertheless essential habitats for fish and the preservation of coastline.

“Nobody wakes up in the morning wanting a bowl of wetlands,” he says, citing a friend from the wetlands mitigation banking sector, so “most of these markets are in fact created by governments and by rules set up by governments” to achieve policy goals.

Albert Cho of Cisco Systems says laws don’t just provide a whip to markets’ carrot – they provide clear rules upon which all participants can rely. This regulatory certainty reduces market risk and creates consensus around how to incentivize private-sector risk-taking, and in aligning the design of the market with long-term political goals.

Linda Sheehan of the California Coastkeeper Alliance, says that a “strong regulatory system supported regularly with strong science can create and uncover the hidden costs that don’t appear on balance sheets.” This, in turn, allows the emergence of markets that are much more closely tailored to achieving the environmental goals that societies seek. But she warned against regulation for regulation’s sake. “The goal is not a suite of regulatory tools, but a market that reflects the cost of healthy ecosystems.”

Science and Technology: the Sharpening Saw

Science, technology and our understanding of marine ecosystems and their connectivity to terrestrial and wetlands ecosystems have made enormous advances in recent years. This has opened up opportunities to measure with an improving degree of accuracy the inter-relationships that exist between them. Peter Mumby of the University of Exeter says this has significant implications for the creation of new ecosystem services because the increasing reliability of sonar and satellite mapping makes it easier to determine the impact of a service and to choose where it is most likely to be effective.

“Mapping can help determine the value of a particular mangrove or reef for maintaining ecosystems,” he says, making it possible to more precisely estimate the survivorship of fish that rely on the former to reach a level of maturity that is optimal for survival on the latter.

Besides the implications for fisheries, the ability to predict differences in biomass that result from the protection or restoration of particular ecosystems and coastal habitat has implications for a host of private sector stakeholders. These include those who have interests in making carbon sequestration mappable, in improving coastal defenses against storms and erosion, in selecting building materials or in promoting tourism.

Mumby noted, as an example, how the potential for coastal marine ecosystem services to shore up terrestrial coastlines should enable coordination with the insurance industry in making solutions more effective as well as in scaling them up.

Learning from Success: Iceland and New Zealand

Besides outlining the enormous profit potential in developing market-based ecosystem services, such as the $2.4 trillion estimated value of business services to be derived from maintaining a frozen Arctic alone, the MARES Katoomba meeting also brought attention to some of the ongoing market-based marine projects that have been successfully delivering profits since the 1970s.

Jim Sanchirico of the University of California at Davis, says there are very successful fishery management programs in Iceland and New Zealand, with the latter now having demonstrated that fish species entered into a program that reduces the Total Allowable Catch can actually produce higher profitability than those that don’t.

Operating on the hypothesis that as fish stocks rebuild, the cost of fishing will fall and the consolidation of the fishing fleets will produce greater efficiency, he found that the annual growth rate in sales of the fish entered into the quota system was 9%, versus only 1% for fish for which quotas were not restricted.

In a final presentation, Bettina von Hagen of the EcoTrust advised attendees at the meeting to be mindful of opportunities to “leverage funding and sympathetic players.” She cited one example in Oregon where by taking ownership of a relatively small plot of watershed property adjacent to a much larger area of publicly owned property, EcoTrust has been more effective at meeting biodiversity challenges and critical needs than if it had been working with just the isolated plot. Similarly, she said it is important to be mindful of regulatory changes, tax incentives and industry restructuring for opportunities to develop new markets.

She also called on ecosystem market designers to look for ways to assist distressed communities by showing them how to create jobs from new services to the natural resources that they have available.

“If your only currency is timber, you’re going to make certain choices that are not optimal, when you have a forest that produces this whole range of goods and services,” including carbon storage, habitat creation, salmon spawning, recreation and scenic attractions.

“You have to look for value in the most unexpected places,” von Hagen said.

Henry Teitelbaum is a London-based international financial journalist and author, most recently of The PFI Market Intelligence Report, PPP: Challenge and Opportunity After the Financial Crisis, which was published by Reuters in September 2009. He is reachable at [email protected]

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What is MARES?

The Sixteenth Katoomba Meeting took place on February 9 and 10 in Palo Alto, California, and focused on the role that payments for ecosystem services (PES) can play in promoting sustainable use of ocean resources.

Leading up to the meeting, Ecosystem Marketplace commissioned this series of articles to shed light on these issues.

Part One, Uncharted Waters, provides an introduction to the ocean’s ecosystem services and the evolving schemes for identifying their value and bringing this value into our modern economy.

Part Two, The “New” Ecotourism, examines the role that environmental finance can play in ensuring the viability of living ecosystems by persuading mainstream tourism providers to pay for the natural beauty these living ecosystems provide.

Part Three, Will Catch Shares Help Reel in Overfishing? examines the role that catch shares can play in promoting efficient management of fish stocks.

Part Four, What can Oceans Gain from Freshwater WQT?, examines existing schemes that provide an economic incentive for keeping lakes and streams clean, and asks whether these schemes can be expanded to include the oceans.

Part Five, Mangrove Forests as Carbon Sinks, examines the potential for using carbon finance to save and restore mangrove forests around the world.

Part Six, Marine Biodiversity Offsets, examines existing that provide an economic incentive to preserve natural habitat for endangered species on land, and provides a guide for adapting these schemes to the ocean.