Ecosystem Service Market Development: The Role and Opportunity for Finance

Executive Summary
Intact ecosystems on rural lands provide critical services to residents of Oregon and other regions. These services include but are not limited to regulation of climate through carbon sequestration, provision of clean freshwater for cities and towns, support of fisheries that sustain us, and preservation of intact, wild landscapes of great spiritual and recreational value. Historically, these services have been available for free as landowners do not receive payments for the value they provide through sustainable management. Typically, they were noticed only when reduced or eliminated. Perceiving their loss as a failure of a market economy to provide for the common good, environmental economists advocated for payments for ecosystem services as a way to align economic incentives with land and water stewardship. The creation of tradable credits for the development or preservation of ecosystem services has emerged as a method to provide such payments. These credits are financial assets that can be sold to fund landowners’ investment in stewardship projects. Earning a financial return for good environmental stewardship of property holds the promise of simultaneously protecting the environment and providing economic opportunity in rural areas, thus supporting societal interests in rural sustainability.

Though markets for different types of ecosystem services credits vary, a paucity of transactions in the early stages of market development is a challenge. The extreme thinness of markets can be selfreinforcing, with few landowners willing to develop additional credits without strong prospects for a sale. The lack of supply of credits, in turn, leaves potential buyers discouraged. This broad chicken-and-egg dynamic has meant that the potential to harness credit markets to meet environmental goals has been largely unrealized. One potential obstacle to the emergence of markets for these credits is a lack of financing for projects seeking to develop ecosystem services and their credits (hereafter ES projects). The research effort described here seeks to develop innovative financial mechanisms and approaches to meet this need. This report presents findings from research including a theoretical inquiry, interviews with national and international leaders in ES finance, and the proceedings of a workshop entitled Enhancing Rural Sustainability: Financial Tools for Ecosystem Services Transactions…