This is a glossary where you can reference both general and specific terminology. The glossary is broken into six sections with some focus given to each of sectors we cover most.
- General Terminology
- Mitigation Banking & Biodiversity Offsets
- Water Quality Trading & Nutrient Trading
- Carbon Markets
- Conservation Easements
- Other Environmental Markets or Payment Schemes
Some General Terminology
Biodiversity: Biodiversity is still an evolving term and, as such, can sometimes be more confusing than helpful. The United Nations Earth Summit in 1992 defined biodiversity as “the variability among living organisms from all sources, including, inter alia, terrestrial, marine, and other aquatic ecosystems, and the ecological complexes of which they are part: this includes diversity within species, between species and of ecosystems”.
Among conservationists, biodiversity is often used as a kind of shorthand to refer to the general importance of intact ecosystems replete with many different species of plants and animals interacting.
Ecosystem: An ecosystem is a community of organisms and its physical environment.
Ecosystem Services: Ecosystem services are services that the natural environment provides to people. Among others, they include:
- water filtration
- crop pollination
- climate regulation
- flood control
- pest control
- disease control
The Millennium Ecosystem Assessment released in 2005 showed that 60% of ecosystem services are being degraded or used unsustainably.
Natural Capital: The idea of natural capital is closely related to that of ecosystem services. Natural capital includes the core and crust of the earth, the full complement of the world’s ecosystems, and the upper layers of the atmosphere. Just as economic capital provides steady financial return, natural capital provides steady environmental returns in the form of ecosystem services.
Environmental Derivatives: Derivatives are financial instruments that derive their value from the value of an underlying security: e.g. futures, options. Some people use the term “environmental derivative” to refer to financial instruments whose underlying value is an environmental benefit or asset of some kind.
Offsets & Mitigation: Offsets and mitigation are both used to describe the idea that environmental restoration or pollution reductions in one place can compensate for environmental degradation or pollution elsewhere. The principle in play is that environmental improvements in site A can “offset” or “mitigate” environmental loss in site B.
Cap-and-Trade: A cap-and-trade program is one in which a government or regulatory body first sets a limit or “cap” on the amount of environmental degradation or pollution permitted in a given area and then allows firms or individuals to trade permits or credits in order to meet the cap.
Payments for Ecosystem Services (PES): PES is an umbrella term often applied to any among a wide variety of schemes in which the beneficiaries, or users, of ecosystem services provide payment to the stewards, or providers, of ecosystem services. While PES is increasingly used as a catch all phrase, the term originated (and is most often used) in the field of sustainable development. In this context, PES frequently acts as a descriptor for schemes that do not rely upon a formal market, but rather rely upon a continual series of payments to rural landowners who agree to steward ecosystem services.
Compliance Markets & Regulatory Markets: Compliance markets, also known as regulatory markets, are markets in which buyers and sellers are required to participate in order to comply with regulatory limits on environmental destruction and/or pollution. The European Union Emissions Trading Scheme is, for instance, a compliance carbon market. And, because it is based on clearly defined government regulations, it is also a regulatory market.
Voluntary Markets: Voluntary markets are markets in which buyers and sellers engage in transactions on a voluntary basis (i.e., not because they are forced to trade by regulation). Generally businesses and/or individual consumers engage in voluntary markets for reasons of philanthropy, risk management, and/or in preparation for participation in a regulatory market.
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Specific Terminology for Different Sectors
1) Mitigation Banking and Biodiversity Offsets
Wetland Mitigation Banking
The US Clean Water Act mandates that whenever a developer wants to build on or near a wetland, they must obtain a permit from the US Army Corps of Engineers (USACE). Before issuing the permit, the Corps is supposed to weigh whether the damage is truly necessary. If the damage is indeed necessary, the Corps is supposed to require that the developer minimize any potential harm to the wetland. Finally, where damage is unavoidable, the developer is required to compensate (or mitigate) for this damage by restoring a former wetland, enhancing a degraded wetland, creating a new wetland, or, in some very rare cases, preserving an existing wetland.
The law states that developers can fulfill this “compensatory mitigation” themselves (usually at or near the development site), or they can pay third parties to mitigate for damage in their stead. If they decide to pay someone else to do the work for them, they have several options: (1) they can buy “wetland credits” from a mitigation bank, usually a for-profit entity that “creates, enhances, or restores” a wetland and then is allowed by the Corps to sell wetlands credits – measured in acres – to needy developers; (2) they can pay “in-lieu fees” to public entities or private not-for-profit organizations that, in agreement with the Corps, use the money to “protect, enhance, or restore” wetlands; or (3) they can pay a third party that is neither a mitigation bank nor an in-lieu fee provider to undertake the mitigation. These are referred to as “ad-hoc” arrangements.
As a result of these requirements for wetlands mitigation, a burgeoning market for wetlands mitigation has developed in the US. A report by the Environmental Law Institute estimates that between 1992 and 2002 there has been a 376 percent increase in the number of private wetlands banks in the US. They estimate that in 2002 there were 219 approved banks, with some 95 more pending approval. No one knows for sure, but the market for environmental mitigation in the US is estimated to be worth hundreds of millions of dollars.
Stream Mitigation Banking
Stream mitigation banking began in 1996 when the US Army Corps of Engineers (USACE) started specifically regulating impacts to streams in its nationwide permits. Stream mitigation banking works much like wetland mitigation banking (see above) except that the banks and credits are associated with stream restoration projects rather than wetland restoration projects. And instead of acres of wetlands created, enhanced, or restored, mitigation is measured in “linear feet” of stream banks “created, enhanced, or restored”.
Conservation banking is the application of the “mitigation” or “offset” approach to endangered species. When developers expect to harm an endangered species (whether listed at the federal or state level), they are forced to “offset” or “mitigate” the damage through the creation of habitat for a similar number of plants and animals somewhere else. Traditionally, developers mitigated for the damages by purchasing new property or modifying existing landholdings to support the impacted species. The investment required to site these areas was significant and land management responsibilities were onerous. Many developers are now finding that they would rather buy “mitigation credits” from a so-called “conservation bank” that has already achieved the mitigation and has obtained approval from the Fish and Wildlife Service to sell these “mitigation credits.”
Conservation banking officially began in California in 1995 when the state released an Official Policy on Conservation Banks and approved the Carlsbad Highlands Bank in San Diego County. Established by Bank of America, the conservation bank provided coastal sage scrub habitat for the California gnatcatcher. California’s Department of Transportation was the bank’s first customer, buying eighty-three acres to mitigate a highway project.
Through activities that are beneficial to the conservation of biodiversity, biodiversity offsets are intended to compensate for the residual, unavoidable harm to biodiversity caused by a development project. In the case of mining, offsets can take a variety of forms: the creation of new protected areas; the launch of conservation projects outside of the project area; projects building the capacity for conservation. At their most basic level, any activity that will be considered sufficient compensation for the damage caused by a mine or other development project may be dubbed a biodiversity offset.
For ecosystem marketplace articles on mitigation banking and biodiversity offsets, see: Banking on Conservation: Species and Wetland Banking in the US [pdf]; How the Recession is Altering the Mitigation Banking Landscape; Is this Man’s Ã¢â‚¬ËœNutrient Farm’ the Mitigation Bank of Tomorrow.
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2) Water-Quality Trading & Nutrient Trading
Hypoxia: Dropping oxygen levels in deep waters characterize an environmental event known as hypoxia. Hypoxia can occur naturally, but is more frequently caused by the human-driven contamination of surface waters. There are now at least 150 manmade hypoxic dead zones in global waters. North America, South America, Europe, and Asia all suffer from dead zones of varying severity, and some dead zones affect an underwater territory the size of a small country…or two.
Total Maximum Daily Load (TMDL): Water-quality trading is akin to emissions trading, in that it sets limits (caps) on the amounts of pollution that enters a waterway, and then lets emitters trade to meet these limits. The TMDL for a watershed is the limit or cap on the amount of pollution allowed in the watershed. Theoretically, TMDLs represent the maximum amount of pollution that a watershed can endure without suffering any ecosystem degradation.
Point Sources & Non-Point Sources: Most watersheds contain two types of polluters – point sources and non-point sources. Point sources are industrial enterprises that emit nutrients (i.e., pollutants) directly into a watershed from a single pipe or point. Non-point sources, on the other hand, are agricultural or municipal polluters whose pollution washes into a watershed over a diffuse area. For a variety of political, social, economic, and logistic reasons, point sources usually are regulated, while non-point sources are not.
Nutrient Trading: Studies in the United States have found that non-point sources, in particular agricultural polluters, account for more than 80% of the country’s nitrogen and phosphorous discharges. Clearly, if eutrophication (caused by an excess of nitrogen, phosphorous, and/or silica) is to be avoided in many watersheds, non-point sources must be incorporated into schemes for curbing nutrient discharges. The idea of nutrient trading has risen to ascendancy during the last decade because it offers a cost-effective way of doing just this.
After years of regulation, many factory owners have already invested enough in pollution abatement, that further efforts to reduce their discharges (i.e., an upgrade to the next-better technology) would be prohibitively expensive. Farmers, by contrast, often can reduce their pollution levels relatively cheaply by changing tilling, planting, and/or fertilization practices. Studies suggest that, in some instances, point-source reductions can be up to 65 times as expensive as non-point source reductions.
Nutrient-trading schemes capitalize on this cost discrepancy by setting discharge limits for point sources without stipulating how the limits must be met. The result is that industrial polluters often opt to pay farmers to reduce their pollution emissions along a river rather than invest in expensive technology to further limit their own discharges. This system allows industrial factories to operate within the watershed’s overall discharge caps at a lower cost than they otherwise might. In effect, the factories are purchasing pollution permits from farmers at a market price that is amenable to both parties. Such ‘cap-and-trade’ systems, many argue, allow communities to meet pollution standards in the most cost-effective way possible. Trades between point sources also are feasible, but the significant cost savings associated with nutrient trading derive, at least in theory, from the non-point/point trades just described.
For Ecosystem Marketplace coverage of nutrient trading see: Nutrient Trading and Dead Zones: Can They Wake Each Other Up?; Hunter River Salinity Trading Scheme; Is this Man’s Ã¢â‚¬ËœNutrient Farm’ the Mitigation Bank of Tomorrow?
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3) Carbon Markets
Climate: The long-term average weather of a region including typical weather patterns, the frequency and intensity of storms, cold spells, and heat waves. Climate is not the same as weather.
Global Warming: The progressive gradual rise of the Earth’s average surface temperature thought to be caused in part by increased concentrations of GHGs in the atmosphere. (Since emission of GHGs into the atmosphere could, paradoxically, lead to cooling of some parts of the world, most people now prefer to use the term “climate change” as opposed to “global warming”)
Greenhouse Effect: The greenhouse effect is the insulating effect of atmospheric greenhouse gases (e.g., water vapor, carbon dioxide, methane, etc.) that keeps the Earth’s temperature about 60 °F warmer than it would be otherwise.
Greenhouse Gas (GHG): Any gas that contributes to the “greenhouse effect.”
Carbon Dioxide (CO2): CO2 is a colorless, odorless, non-poisonous gas that is a normal part of the ambient air. Of the six greenhouse gases normally targeted, CO2 contributes the most to human-induced global warming. Human activities such as fossil fuel combustion and deforestation have increased atmospheric concentrations of CO2 by approximately 30 percent since the industrial revolution. CO2is the standard used to determine the “global warming potentials” (GWPs) of other gases. CO2 has been assigned a 100-year GWP of 1 (i.e., the warming effects over a 100-year time frame relative to other gases).
Carbon Dioxide Equivalent (CO2e): The universal unit of measurement used to indicate the global warming potential (GWP) of each of the 6 greenhouse gases. It is used to evaluate the impacts of releasing (or avoiding the release of) different greenhouse gases.
Global Warming Potential: The GWP is an index that compares the relative potential of the 6 greenhouse gases to contribute to global warming (i.e., the additional heat/energy which is retained in the Earth’s ecosystem through the release of this gas into the atmosphere). The additional heat/energy impact of all other greenhouse gases are compared with the impacts of carbon dioxide(CO2) and referred to in terms of a CO2 equivalent (CO2e), i.e., Carbon dioxide has been designated a GWP of 1, Methane has a GWP of 23. The latest officially released GWP figures are available from the IPCC in their publication Climate Change 2001: The Scientific Basis.
Greenhouse Gas Offsets & Carbon Credits: Greenhouse gas offsets, also known as carbon credits, are marketable certificates representing reductions in greenhouse gas emissions. Offsets generated by emission reductions in one place, the theory goes, may be used to cancel out excess greenhouse gas emissions anywhere in the world. GHG offsets and carbon credits are generally sold as tons of carbon dioxide (CO2) or carbon dioxide equivalent (CO2e), with each credit representing a pollution reduction of one ton worth of CO2.
Compliance/Regulatory Carbon Market: Compliance carbon markets and regulatory carbon markets are one and the same. The term refers to markets that are driven by regulatory caps on the amount of atmospheric pollution an entity or individual can emit without incurring fines.
Voluntary Carbon Market: Most published data on the carbon market reflects compliance requirements that have essentially commoditized carbon as a tradable good with a fairly standardized price and quality. In parallel with this compliance market, voluntary activity by businesses and individuals wanting to reduce GHG emissions for reasons other than statutory compliance grew substantially in 2005. This side of the market essentially represents consumer demand for action on global warming and has the potential to be an active driver of change as the international community struggles to fully implement an effective climate change framework. While maturing quickly, the voluntary market remains small, fragmented, and multi-layered.
Verified Emissions Reductions (VERs): Verified Emissions Reductions (VERs) are reductions in emissions of greenhouse gases that have been officially verified by a third-party verifier; usually verifiers approved by CDM Executive Board. VERs are often seen as the currency of the voluntary carbon market, as opposed to CERs (Certified Emissions Reductions), which are the currency of the Kyoto Protocol’s Clean Development Mechanism and EUAs (European Union Allowances), which are the currency of the EU ETS.
Carbon Sinks: The term carbon sink refers to any process that removes more carbon dioxide from the atmosphere than it releases. Both the terrestrial biosphere and oceans can act as carbon sinks.
Carbon Sequestration: Carbon sequestration is the process of removing atmospheric CO2, either through biological processes (e.g., plants and trees), or geological processes through storage of CO2 in underground reservoirs.
Land Use, Land-Use Change and Forestry (LULUCF): Land uses and land-use changes can act either as sinks or as emission sources. It is estimated that approximately one-fifth of global emissions result from LULUCF activities. The Kyoto Protocol allows Parties to receive emissions credit for certain LULUCF activities that reduce net emissions. The European Union Emissions Trading Scheme, on the other hand, does not currently allow the trading of credits generated by LULUCF activities.
Afforestation: Afforestation is an example of a type of LULUCF activity and refers, specifically, to the planting of new forests on lands that have not been recently forested.
Kyoto Protocol to the UN Framework Convention on Climate Change: An international agreement adopted in December 1997 in Kyoto, Japan. The Protocol sets binding emission targets for developed countries that would reduce their emissions on average 5.2 percent below 1990 levels.
Annex I Parties: The 40 countries plus the European Economic Community listed in Annex I of the UNFCCC that agreed to try to limit their GHG emissions: Australia, Austria, Belarus, Belgium, Bulgaria, Canada, Croatia, Czech Republic, Denmark, European Economic Community, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Japan, Latvia, Liechtenstein, Lithuania, Luxembourg, Monaco, The Netherlands, New Zealand, Norway, Poland, Portugal, Romania, Russian Federation, Slovakia, Slovenia, Spain, Sweden, Switzerland, Turkey, Ukraine, United Kingdom, United States.
Kyoto Mechanisms: The Kyoto Protocol creates three market-based mechanisms that have the potential to help countries reduce the cost of meeting their emissions reduction targets. These mechanisms are Joint Implementation (Article 6), the Clean Development Mechanisms (Article 12), and Emissions Trading (Article 17).
Emissions Trading: Emissions trading is a market mechanism that allows emitters (countries, companies, or facilities) to buy emissions from or, sell emissions to, other emitters. Emissions trading is expected to bring down the costs of meeting emissions targets by allowing those who can achieve reductions less expensively to sell excess reductions (e.g., reductions in excess of those required under some regulation) to those for whom achieving reductions is more costly.
Clean Development Mechanism (CDM): The Kyoto Protocol requires that industrialized countries reduce their carbon emissions to five percent below 1990 levels, either by cutting/trading emissions domestically or via two so-called “mechanisms for flexibility.” The option known as the Clean Development Mechanism (CDM) allows companies in industrialized countries to fund greenhouse gas reduction projects in the developing world in exchange for carbon credits The CDM is the Kyoto Protocol’s primary means of involving developing countries in its attempts to reduce greenhouse gas emissions.
Certified Emissions Reductions (CERs): Reductions of greenhouse gases achieved by a Clean Development Mechanism (CDM) project. An emissions reduction becomes “certified” when it is approved for sale by the Clean Development Mechanism’s Executive Board. A CER can be sold or counted toward Annex I countries’ emissions commitments. Reductions must be additional to any that would otherwise occur.
Joint Implementation (JI): The Kyoto Protocol requires that industrialized countries reduce their carbon emissions to five percent below 1990 levels, either by cutting/trading emissions domestically or via a variety of so-called “mechanisms for flexibility.” The option known as the Joint Implementation (JI) program allows industrialized countries to meet part of their required cuts in greenhouse-gas emissions by paying for projects that reduce emissions in other industrialized countries. In practice, this will likely mean facilities built in the countries of Eastern Europe and the former Soviet Union, the “transition economies” paid for by Western European and North American countries.
European Union Emissions Trading Scheme (EU ETS): The European Union Emissions Trading Scheme (EU ETS or, simply, ETS) is the world’s largest mandatory carbon dioxide (CO2) emissions-trading scheme. It is also the world’s first such scheme that operates at the multi-national level. Since 1 January 2005, the ETS has imposed CO2 emissions targets on roughly 4,500 industrial companies across the 25 countries of the European Union.
European Union Allowances (EUAs): European Union Allowances (EUAs) are the currency of the EU Emissions Trading Scheme (ETS), the world’s first mandatory carbon dioxide (CO2) emissions-trading scheme.
For articles about the carbon markets, see:
- Merryl Lynch Inks Massive Voluntary Forest Deal
- Sierra Gorda Taps Voluntary Markets for Carbon and Environmental Offsets – Again
- Eight is Not Enough for RGGI Scheme
- Hitting the Target in New South Wales
- Natsource Creates Carbon Credit Pool
- Voluntary Carbon Market Climate Wedge
- A Drive to Offset Emissions
- China Leads the Pack in Rush for CDM Projects
- After the Storm
- California at the Forefront
- New Science: Should Carbon Credits Grow on Trees?
- EU ETS Turns One
- Using Forest Carbon Credits in the EU ETS
- Voluntary vs. CDM Carbon Projects in Mexico
- eBay Shoppers and Subsistence Farmers Meet on Virtual Ground
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4) Conservation Easements
Conservation easements are legal contracts that restrict the use and development of a piece of land, usually in perpetuity. They have been used for a variety of purposes: to conserve valuable ecosystems, as well as to preserve farms and a rural way of life.
During the past two decades, the growth in the use of easements across the US has expanded rapidly. Land trust holdings – which use easements to accomplish their goals – have mushroomed in large part because of tax incentives encouraging landowners to donate conservation easements on their land. Congress made easement donations tax-deductible in 1976, and state revenue collectors have continued to sweeten the pot ever since.
Transferable Development Rights (TDRs)
Under a TDR program, development rights are transferred from “sending zones” which are designated for protection to “receiving zones” which are designated for future growth. Conservation easements provide permanent protection from development in the sending zone.
For Ecosystem Marketplace coverage of conservation easements and TDRs, see:
- Easements and Tradable Tax Credits: Bursting Bubble or Self-Correcting Mechanism
- Spotlight on Conservation Easements
- Grown Up and Going for a New Look
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5) Other Environmental Markets or Payment Schemes
Individual Transferable Quotas & Individual Fishing Quotas
In the last three decades, several countries have turned to transferable quotas to manage their commercial fisheries. This system sets a maximum total allowable commercial catch, then gives fractions of the right to catch fish to members of the fishing industry. The quotas can then, depending on the individual quota management system, be bought, sold, traded, and leased on the open market. The quotas themselves commonly known as individual transferable quotas (ITQs), or individual fishing quotas (IFQs) are a form of property right, giving each fisherman the right to catch a designated portion of the total catch in perpetuity. In structure, then, fisheries quota markets resemble sulfur dioxide and other cap-and-trade systems with the ocean’s greater uncertainty thrown into the mix.
For more on ITQs and IFQs, see: Sustainable Fisheries: Can Market Mechanisms Help Get Us There?
Forest Stewardship Council (FSC): The Forest Stewardship Council (FSC) is an international network to promote responsible management of the world’s forests. Frequently, wood and paper products will be marketed as FSC-certified which indicates that they have been produced and sourced in a manner that meets environmental and social standards set by the FSC.
For coverage related to the Forest Stewardship Council, see: Transforming Markets & Supply Chains.
Renewable Energy: Renewable, or green, energy sources produce energy without many of the associated ills – pollution, waste and risk – that plague more traditional sources of energy. Consequently, millions of industrial and residential consumers are now showing they are willing to pay more for green power sources such as wind, solar, and biomass resources.
Renewable Energy Credits (RECs) & Green Tags: RECs also known as tradable renewable certificates, or green tags, represent the environmental attributes of a unit of electricity generated from renewable fuels.
In a typical REC scheme, the government determines a renewable energy target and then allocates responsibility for meeting it to the energy suppliers under its jurisdiction. Utilities then can meet their respective targets by either generating green energy themselves, or by buying RECs from elsewhere. This system allows RECs – essentially the “greenness” of the renewable energy” – to be sold separately from the electricity itself. Thus, RECs are flexible and can easily be traded on regional scales, encouraging the most efficient development of renewable energy sources.
For more on REC markets, see: What Makes Energy Green? And Can It Be Traded?; Looking for Carbon in Renewable Energy; De-Certification Puts REC Self-Regulation to Test
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