A New Markets for Environmental Services: A Corporate Manager's Guide to Trading in Air, Climate, Water, and Biodiversity Assets

The natural environment provides society with essential services—such as clean air and reliable flows of clean water—which are increasingly being valued in financial terms. Environmental markets—
some regulatory and others voluntary—are now trading credits as well as derivatives. Regulatory
environmental markets are operating in Europe, the U.S., Australia and other countries around the
world. Voluntary markets and business-to-business “payments for environmental services” (PES) deals
are also underway, in both industrialized and developing countries. These markets and transactions are sending price signals about environmental values. The result is that businesses can place a financial value
not only on environmental compliance, but also increasingly on voluntary actions.

There is, however, a bigger story here, one that can only be gleaned by stepping back to see the
broader context.

An astonishing number of environmental trends are pointing downward, as was most extensively
documented in the Millennium Ecosystem Assessment (MEA). Results from the 1,300 scientists and 95
countries involved in the study suggest that over 60% of the environmental services studied—including
dynamics related to clean air and reliable water flows—are being degraded faster than they can recover.

The response of many environmental advocates—in regulatory, scientific, and advocacy roles—has
been to seek out new approaches to conservation and incentives for restoration. One such approach is the broad set of efforts under the umbrella term ‘market-based mechanisms.’ Regulatory, cap-and-trade environmental markets are a set of market-based tools. Voluntary markets are another. Business-tobusiness, or business-to-NGO, payment for environmental service deals represent yet another approach to investing in the environment and the services that it supplies.

This Resource Guide introduces corporate decision-makers to the broad suite of market-based
mechanisms related to the environment, with a specific focus on formal markets. It is intended to assist corporate managers in assessing the potential risks and opportunities of engagement within these markets. It is not intended to compare various economic mechanisms related to environmental restoration and conservation (such as markets versus taxes), nor does it imply a preference for markets versus other economic incentives. Rather, this Resource Guide seeks to offer corporate manager’s with the background information needed to begin assessing the relevance, risks and opportunities associated
with the growing domain of environmental markets.