Nature's Value in the Marketplace: Australia's New Conservation Program and the Complexities of Biodiversity Markets

The year of 2022 may end up being a significant turning point for conservation in Australia with Australia pledging to protect and restore 30% of diverse land habitats under the United Nations' Convention on Biological Diversity. The Taskforce on Nature-related Financial Disclosures completed its final draft framework with a dedicated Consultation Group for Australia & New Zealand. Additionally, the Australian government introduced a Nature Repair Market Bill to lay the foundations for a nature repair market that will aim to help restore landscapes and provide habitats for threatened species.

What is a Nature Market?

Broadly speaking, the hope of nature markets is to financialise the functions and capital of the natural world to better capture its true value and contribution to humanity (e.g., water purification, climate regulation, pollination, etc.). Currently, this value is nearly entirely disregarded in global financial systems. Proponents of nature markets hope that well designed and regulated nature markets will lead to more informed decision-making that better accounts for the full costs and benefits of human activities on the environment and thus preserves more of the natural world.

To cut to the chase, there are some serious limitations with nature markets. However, there also exists the possibility that, if well-designed and properly regulated, these nature markets could play a role in achieving conservation goals.

Whether or not you are for or against the concept of nature markets, recognising and understanding these limitations is crucial step. So, first, the limitations.

Limitations of Market-Based Approaches for Nature Conservation

Government Accountability

Perhaps most importantly, nature markets should not be seen as not a replacement for strong environmental policy (e.g. proper regulation of land clearing) and significant government spending on conservation and environmental management. Establishing a voluntary market for Biodiversity Certificates in Australia is unlikely to significantly safeguard the nation's remaining biodiversity values because it fails to address the underlying causes of biodiversity decline. Instead, these policy experiments may only serve to further distract from the government's responsibility to effectively regulate land clearing, ensure environmental compliance, and properly fund conservation and environmental management programs. Nature is a public good. Relying on the private sector for funding, particularly in the context of recent substantial tax cuts, may only serve to further diminish governmental accountability.

Poor Track Record

Ensuring integrity is difficult and similar offset markets, such as Victoria's Net Gain Accounting system, have been easily manipulated in the past leading to continued environmental degradation. Similarly, schemes aimed at preserving forests for carbon offsets or credits have been plagued by issues like human rights violations and questions over credibility.

Ensuring market participants don't manipulate their plans or reporting to overstate their outcome will likely require extensive documentation, auditing, and oversight, but scientifically credible environmental accounting standards are in development. Any financial market is susceptible to fraud, and the unique complexities of nature markets may create novel opportunities for deception and misconduct, but also opportunities for novel regulatory approaches.

High Complexity and Transaction Costs

The complexity of the natural world makes it extremely difficult to develop market infrastructure that can deliver desired natural outcomes. Even assuming we can accurately value nature, the cost of credibility and good governance may conflict with the returns sought by investors. Creating a nature repair market requires a complex governance framework, including measurement systems, certification, registration, trading, monitoring, reporting, accounting, auditing, and administration. This complexity can lead to high transaction costs, which may deter private investment in biodiversity credits. Indeed, the demand for voluntary credits remains largely untested and is likely overestimated.

Accurately measuring biodiversity outcomes continues to be subjective, complex, and resource-intensive and environmental outcomes may take years or even decades to materialise, making immediate verification difficult, but new technologies provide some hope.

Ethical Concerns

The very idea of financialising biodiversity may be questioned on ethical grounds. Market-based approaches may not take into account the cultural, spiritual, or community values associated with nature and biodiversity. The approach downplays the variety in ethical systems and different ways humans understand the value of nature, reducing all values to individual preferences. Different values that cannot be summed together are ignored, assuming away the normal state of incommensurability. Furthermore, market-based approaches prioritise those who can pay for conservation, potentially leading to unequal access to natural resources. This can exacerbate social inequalities, as wealthier individuals, corporations, or countries may have more influence over conservation decisions.

Valuation Methods

There are issues with the economic methods for valuing non-market goods. For example, environmental Cost-Benefit Analysis (CBA) methods have limited applicability and only apply to marginal changes, not large-scale changes like mass extinction or climate change. Such phenomena are complex, multifaceted, and often involve non-linear relationships and feedback loops. Similarly, the Preference Valuation Method presents challenges, particularly when respondents may lack the essential information to make well-informed judgments about intricate environmental matters. This lack of understanding can lead to over or under-valued estimates, illustrating a potential gap between the values assigned in theoretical models and the actual challenges and complexities faced in real-world environmental conservation.

Key Ingredients for a Nature Market

Prof. Hugh Possingham is currently the chief scientist of Accounting for Nature, and is a self-professed optimist when it comes to conversation and nature markets. In a talk he gave to Landcare Australia as part of the Landcare Farming Webinar Series he offered the following requirements for a functional nature market, which sound sensible to me (even if they are difficult (impossible?) to achieve in practice due to the issues raised below).

Verifiable Outcomes

The market must focus on rewarding outcomes rather than just actions or inputs. The actions taken must lead to tangible biodiversity outcomes, such as increasing native vegetation or the numbers of declining and threatened species.

Additionality

The actions must be additional, meaning that they wouldn't have been undertaken without some sort of reward or incentive. Determining what is truly additional and what actions were already intended can be complex.

No Leakage

"Leakage" refers to a situation where improvements in one area might lead to negative impacts in another. For example, someone might improve one part of their property and receive payments for it, only to use those funds to remove nature from other parts of their property, resulting in no net benefit across the landscape.

Integrity of the Market

The market's integrity involves preventing things from going wrong, such as paying for things that aren't received or people getting paid for things they don't do. Ensuring the integrity of the market is described as one of the most challenging aspects.

Conclusion

Many of the requirements of a functional nature market highlighted by Prof. Possingham help to provide focus to some of the key risks and limitations outlined.

Crafting regulations that are both effective and flexible enough to accommodate the diverse and dynamic nature of biodiversity can be a daunting task. Maintaining the confidence and trust of participants and the public will require transparency and accountability, which will be particularly important to foster in a complex and evolving market.

The world's first and largest market-based climate policy, the EU Emissions Trading Scheme, has now demonstrated that novel markets to address sustainability can work effectively when properly designed, as evidenced by the 14-16% reduction in carbon dioxide emissions among regulated manufacturing firms.

Personally, my main issue with nature markets has been an ethical one, which I have touched upon in another post. But, ultimately, I believe well-implemented nature markets may be a useful tool (among others) in our efforts to abate the current biodiversity crisis.