Making the Priceless
Valuable:
Ecosystem Service Payments Markets
Translinks
Tanzania - September 2008
Michael Jenkins,
Forest Trends
Markets in Transition - Ecosystems Services
Services
Trees
Revenue
Certified Timber
Botanicals
Wastewood Utilization
Carbon
Carbon Credits –
Reforestation/Afforestation
Biofuels
Conservation Carbon
Biodiversity
Pharmaceuticals/
Natural Medicine
Personal Care/ Cosmetics
Conservation
Watershed
Conservation &
Restoration
Eco-tourism Protection
Biodiversity Credits & Offsets
User Fees
Mitigation
Salinity Credits
New Finance: Payments for Ecosystem Services
Types of PES:
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Self-organized private deals
Private entities pay for private services
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Public payments to private land and
forest owners
Public agency pays for service

‘Cap and Trade’ - trading of environmental
credits under a cap or floor
Landowners either comply directly with
regulations, or buy compliance credits
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Eco-labelling of agricultural and tree
products
Consumers prefer certified sustainable supplies
Charting Payments for Ecosystem Services: The Matrix
CARBON: Carbon Markets
Voluntary
OTC
42 Mt
$258 M
EU ETS
Vol: 2,061 Mt (CO2e)
Value: $50 Billion
JI
41 Mt
$495 M
CDM
791 Mt
$ 15 Billion
NSW GGAS
25 Mt
$224 M
5
Source: New Forests/Ecosystem Marketplace, World Bank
CARBON: Growth of Carbon Markets
Carbon Market Transaction Volumes and Values, 2006 and 2007
Markets
Voluntary OTC Market
Chicago Climate Exchange (CCX)
Total Voluntary Markets
VOL. (MtCO2e)
2006
2007
14.3
42.1
10.3
22.9
24.6
65.0
VALUE (US$mill)
2006
2007
58.5
258.4
38.3
72.4
96.7
330.8
EU-ETS
Primary CDM
Secondary CDM
Joint Implementation
New South Wales
Total Regulated Markets
1,1044
537
25
16
20
1,702
2,061
551
240
41
25
2,918
24,436
6,887
8,384
141
225
40,072
50,097
6,887
8,384
495
224
66,087
TOTAL GLOBAL MARKET
1,727
2,983
40,169
66,417
Sources: Ecosystems Marketplace, New Carbon Finance, World Bank
OTC = Over the Counter
CARBON: Forest Carbon in the Voluntary Market
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Forest carbon is < 1% of total market since effectively excluded from
regulatory markets (high transaction costs in CDM)
Forest carbon composed ~20% volume of Voluntary Market
Voluntary carbon prices are increasing – for OTC trades from
$1.80/tCO2e in 2006 to $3 in 2007. Forest carbon prices are above
average: $7-8 for afforestation and $4.8 for AD projects
Voluntary market allows innovation, e.g., development of
methodologies and standards for REDD; ‘gourmet carbon’ combines
carbon and equity objectives
Key role of standards to ensure quality and reassure buyers, e.g.,
combination of CCB and VCS standards
Potential of Avoided Deforestation or REDD
Stern Review (2006): deforestation contributes
about a fifth of CO2 emissions – he said avoided
deforestation (AD) should be one of four key
elements of global climate change mitigation
strategy.
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Stern also said AD is a “highly cost-effective
way of reducing greenhouse gas emissions” due
to (often) low land-use opportunity costs
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REDD will have major co-benefits: biodiversity,
water and (perhaps) equity
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Bali CoP 2007 committed to “urgent and
meaningful action on REDD” – need to define
REDD mechanism for post-Kyoto regime (20132017) at Copenhagen
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Source: Stern, 2006
But REDD is Complex - Challenges
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Baselines are difficult due to future uncertainty
Ex-post payments but up-front costs: how to
fund ‘Readiness’, e.g., baselines, REDD
planning, national carbon infrastructure, etc.
National strategy is vital due to leakage, but so
is a project approach involving private sector
investment – ‘nested approach’
Equity concerns, e.g., compensating the ‘bad
guys’; community conservation has potential,
but ‘additionality’ and transaction costs (role for
ODA/philanphropy finance?)
Deforestation is highest where governance is
worst
WATER: Payments for Watershed Services
Demand for clean water is increasing
rapidly: water use has increased at twice the
population rate. 40% of cities depend on
forest areas for water.

Investment in watershed management is
cheaper than treatment or obtaining new
water supplies. In the US, each $1 in
watershed protection saved $7-200 in
filtration/water treatment.
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Payments of upstream watershed protection
is already taking place in New York City as
well as several countries (e.g., Mexico, Costa
Rica, Ecuador)
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WATER: The “Dead Zone” Problem
Source: New Scientist
WATER: Payments for Watershed Services - Types
Nutrient Trading:
Is essentially cap-and-trade applied to
watersheds - Those who pollute more buy
from those who pollute less.
Ex. Chesapeake, Gulf of Mexico,
Yellow River (China)
Upstream Watershed Protection:
Ex. Mexico, Costa Rica, Ecuador
Other:
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Flood Control
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Salinity Control
WATER: The Benefit of Forested Watersheds on Quality
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Provide food, habitat, and temperature
control for stream communities
Stabilize streambanks and control
sediment flux by holding the soil in place
Filter pollutants by removing suspended
solids from surface runoff
Function as a sink by taking up and
sequestering nutrients in plant tissue
WATER: The Chesapeake Fund
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Goal: attract new capital and maximize
return of restoration investments
Collaborative project: Forest Trends,
Chesapeake Bay Foundation, and
World Resources Institute
Regional pilot with the potential to scale
and model in other watersheds
Focus on “offsetting” nitrogen emissions
by investing in water quality protection
and restoration projects
Forest restoration and protection:
potential for high-value return
BIODIVERSITY: Biodiversity Markets
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Not easily commoditized
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Is an “anti-commodity”
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Wetland Banking
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Conservation Banking
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Voluntary Biod. offsets
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Gov’t payments for biodiversity
–
Such as Bush Tender, Eco-Tender in
Australia
–
Program in Mexico
BIODIVERSITY: Biodiversity Markets
Environmental Mitigation:
Largest Biodiversity Offset Market in the U.S.
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$3.3 billion a year spent on mitigation in the U.S.
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$2 billion in mitigation parcel purchases
$1.3 billion sold from the roughly 120 species banks and 600 wetland banks in
the US
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Credits sell from $4,000 to $450,000 an acre
Banks are usually 30 to 400 acres (some as big as 1500)
Can be profitable, a known bank started selling credits for $1,500 and 10
years later they were selling for $125,000 - due to demand and ambient land
value
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The industry is ~20 years old and is growing steadily
BIODIVERSITY: Biodiversity Markets – Forest Landholders
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Forest landowners have the advantage of
already owning the land. This is the big
expense in selling mitigation credits.
Forestry Opportunity: generate income from
existing conservation parcels generate
mitigation for internal permitting
Sectors involved:
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Forestry (International Paper,
Weyerhaeuser)
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Mining & Minerals (Rio Tinto, Vulcan)
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Oil & Gas (Chevron, Shell)
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Electric Utilities (Southern California
Edison, EPRI)
Finance (Bank of America)
Financing: Driving Sustainability into Natural Resource
Management - A New Business Model for Forest Land Owners
ROI, Shareholder Value, Ratings, Capital
Timber Activities
Sales, Profit, Pricing, Margins
Tangible Value
Drivers
Non Timber Activities
Watershed Credits
Carbon Credits
Conservation Credits
Recreation
Extractive
Other
New Revenue Streams
Cost Efficiency
Risk Management
Asset Value – Land Appreciation
Diversity of Income Streams
(minimized cyclicality)
Intangible Value
Drivers
Reputation (PR, Brand)
Stakeholder Licence to Operate
• protection of asset
• stakeholder & local community
relations
Innovation
Talent Attraction & Retention
Biodiversity/Natural Capital
More Finance from PES … But Big Challenges Remain
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Need to tackle policy, market and governance failures, e.g., illegal
logging, weak property rights, weak compliance, etc. These cause
high opportunity costs so SFM can’t compete with alternative land
uses – so the challenge is forest finance AND incentives
Challenges of REDD, e.g., start-up costs, government capacity,
equity, nested approach, etc. – needs multiple financing and
partnerships
The adaptation challenge – can we combine mitigation with
adaptation?
How to combine equity and environmental objectives (trade-offs
between these objectives have been more common in the past)
Global food and energy needs versus environment
A New Challenge: Creating Ecosystem Markets
Roles for ODA and/or philanthropy finance
1. Promoting an enabling regulatory and
governance environment, including
monitoring FLEG and secure property
rights
2. Capacity building for PES: new institutions
dedicated to PES (e.g. FONAFIFO),
national certifiers/verifiers, carbon
registries, business development services
for PES, etc.
3. Ensuring equity: subsidising transaction
costs, promoting secure tenure, SMFE
finance, collective institutions for PES, etc.
4. Venture capital role - up-front investment
for innovative PES mechanisms to
leverage other private sector investors
Roles for ODA and/or philanthropy finance
5. Tackling risk constraints to new
instruments, e.g., innovative approaches
to insurance and re-insurance
6. ‘Product development’ role: pilot projects
to develop new approaches, methodologies, metrics, standards, etc. with
communities/low income forest people
7. Facilitating information flows on new
markets – PES, forest investors,
technical assistance, etc.
8. Catalysing collaboration between
donors, i.e. CPF members, UNFFUNFCC, Millennium Development Goal
programs
Some Other Resources