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Natural Capital Concepts in Practice: Experience in the US (and farther South) Brian C. Murray Director for Economic Analysis, Nicholas Institute for Environmental Policy Solutions Research Professor, Nicholas School of the Environment Duke University Presented at “Big Ideas for Sustainable Prosperity” University of Ottawa, April 29, 2014 Natural Capital and Ecosystem Services Nature as a capital stock Ecosystem services (flows) http://educatoral.com/WoSAchievements.htm The economic value of the natural capital Derives from the economic value of the Ecosystem services it generates Source: Millennium Ecosystem Assessment The Proposition • Markets work well to determine what services ecosystems provide – Markets favor traditional commodities • Some non-traditional ecosystem services are as valuable (or more) than some traditional commodities – But they have no markets • Can correct this problem by creating markets (or other forms of payment) for a wider range of ecosystem services – Payments for Ecosystem Services (often public to private) – An economic incentive alternative to command-based regulation Putting ecosystem services into practice: US Top-down “Green GDP” Federal land management decisions Public Payments for Ecosystem Services Ecosystem Service markets Bottom-up Land trusts, water funds, and other “Coasean” solutions Conservation Reserve Program Wetlands Reserve Program Coase Solution 1: Conservation Land Trusts Conservation Land Network Coase Solution 2: Water Funds • A form of PES (or PWS for watersheds) that has become more common in South America over the last decade (e.g., Ecuador, Colombia, Bolivia) • Idea: Establish a central fund where principal stays (largely) intact, but interest earnings are used to pay for practices that improve watersheds – Maintained principal => sustainable – Can take a while to build enough principal to generate interest • May be supplemented with direct payments up front for the services Fondo de Proteccion del Agua (FONAG), Ecuador What are Ecosystem Service Markets ? DEMAND Individual (firm) Willingness to Pay (WTP) for ES SUPPLY Market •Price •Quantity exchanged Marginal cost of ES provision Ideal; markets with many buyers and sellers – decentralized trade Q: What drives private demand for an ecosystem service? Altruism Pure self interest Government regulation with flexible means of compliance Examples of Ecosystem Service Markets • Wetlands mitigation banking • Water quality (nutrient) trading • Habitat Conservation banking (endangered species offsets) The Big Kahuna – Climate mitigation payments for sequestered carbon U.S. Forest carbon offsets in California compliance markets - entities can meet up to 8% of compliance obligations w/offsets - 7.5 million tons of offsets issued since inception (2013), forest carbon largest category Global Reduced Emissions from Deforestation Blue carbon – coastal and marine And Degradation: REDD+ ecosystems Are PES programs living up to the hype globally? PES type 2020 market projection (in 2006) Actual market in 2020 market 2012 projection (in 2012) Forest carbon offsets: compliance $5-8 billion $26 million $470 million Forest carbon $10 million – offsets: voluntary $5,000 million $156 million $10 million – $5,000 million Watershed trading: compliance $1,000 million $20 million $43 million Watershed payments: voluntary $2,000 million $5 million $50 million From Katoomba Group periodic “Matrix” assessment Courtesy of Jim Salzman (Duke) Why are ES markets not scaling up? • Lack of regulation to drive demand • Low prices where demand exists • Transaction costs – Search costs – Rules complexity • Skepticism – Severity of environmental problems – Lack of faith in (and even hostility to) markets in some places Big Idea: Getting serious about non-point water pollution from agriculture • Need to bring agriculture under tighter regulation or create huge payments for them to reduce N and P • Market-based approaches such as nutrient trading Figure from Nguyen et al (2006) A Guide to Market-based Approaches to Water Quality are likely essential as a cost-effective compliance mechanism Source: NOAA What does agriculture look like in a green economy? • Our natural ecosystem stresses are largely driven by the need to produce food – and increasingly, biofuels • What is greener? – Low impact, land extensive farming? – Intensive “modern” agriculture • Much emphasis on raising productivity of agriculture, especially if it is land-saving – Can have perverse effects • What role for radical changes in agriculture? – Vertical farming – GMOs – Major dietary shifts Thank You [email protected]