A vision for ecosystem services markets

A simple definition of a market is the bringing together of a buyer and a seller so that they can trade commodities. The simplest of markets involves a bartering system, while more sophisticated markets have prices and money exchanges. To create a market, there has to be a definition of what is to be sold, and there has to be someone willing to buy the particular commodity. Through the exchange of the buyer and seller, a price or value will emerge. This simple definition of a market can be applied to a market for ecosystem services.

Buyers are required to create a demand for ecosystem services or commodities through the provision of financial capital. Buyers may represent a company interested in purchasing carbon credits; or perhaps an organisation supplying funding for the protection of biodiversity values. Buyers will have different motivations for providing funding, such as philanthropy, "right to pollute", or corporate image. Governments are, of course, the most significant existing buyers of environmental programs such as the Natural Heritage Trust

Projects are required to deliver ecosystem services and commodities to buyers. Projects are the sellers of ecosystem services and commodities. For example, a landholder may sell carbon credits to a company, salt credits to a landholder upstream, or biodiversity credits to a philanthropic investor.

Finally, a link between buyers and sellers is required. This is the investment vehicle, which is able to draw on many funding sources (buyers) and distribute financial capital to projects. In return for funding, projects provide one or more ecosystem services. A company interested in acting as a dealer or a broker within the investment vehicle component would enter into contract with many landholders and, having acquired rights to ecosystem services on various parcels of land, would then on-sell that pool of credits to larger firms. This allows dealers or brokers to pool small amounts of an ecosystem service associated with each project into volumes of interest to buyers.

A framework for markets for ecosystem services is described in the figure below. In this instance, buyers of environmental outcomes provide capital to a pool of funds that are available to finance on-ground works. Landholders undertaking projects with environmental benefits may then access these funds. As indicated in the figure, funding need not be limited to trades between landholders. Other potential investors could include biodiversity funds, corporations offsetting carbon emissions or impacts on water quality, or ethical investment funds.

A fully mature market for sustainable agriculture of the kind outlined here may seem distant. However, as our knowledge of links between land management practices and environmental outcomes improves it will be necessary to reward good land management practices and penalise those that have adverse impacts. High impacting land practices will be permitted as long as they are offset by other activities that ensure environmental thresholds are not crossed and that overall catchment targets can be achieved.

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