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Bringing Efficient and Effective Ecosystem Markets to Scale 2: Challenges & Solutions

Walsh, Sheila 11/21/2011

In Part I of this piece (published in last month’s Chronicles), I reviewed the challenges and issues around generating efficient and effective markets for ecosystem service payments. The excitement around the promise of such markets is justified — but only if we can help such efforts overcome and address these challenges and issues. The good news is that the Conservancy and others can and are addressing these challenges. I summarize these initiatives below and sketch out some ways forward. 

Avoid Maslow's Hammer
Although markets promise an efficient solution to resource-use problems, there is no guarantee that the result will be consistent with conservation goals. Knowing when markets might not be the appropriate tool is important for avoiding Maslow's Hammer — the tendency to use a familiar tool as a solution to every problem. "If people value competing uses [e.g. like resource extraction] more highly [than uses that are compatible with conservation]...then market-based solutions will not protect the resource in question," says Timm Kroeger, an environmental economist for the Conservancy’s Central Science team. People may value extractive uses of ecosystems — such as timber — more than conservation because these people 1) lack information about the benefits they get from a conserved ecosystem, 2) do not bear the full costs of the resource extraction, or 3) simply care more about the things that resource extraction provides. "Issues #1 and #2 are a problem, because society as a whole loses," says Kroeger.

The Conservancy can play an important role in reducing these classic market failures by providing information on the benefits people get from conservation and by advocating for policies that force users to bear full costs through regulatory markets. For example, our science has helped ensure that conservation easements serve a valid "conservation purpose," which is one requirement for landowners to receive tax deductions. However, to engage new stakeholders in ecosystem markets, we may need to increasingly provide information on the economic value of ecosystem services, especially services that are not currently valued in the marketplace. In contrast, in cases in which users care more about resource extraction than conservation, payments may not be sufficient to avoid resource extraction — and the Conservancy may be better off buying land outright or using other traditional conservation strategies to achieve a conservation goal.

Don't Just Hit Repeat: Design and Evaluate Markets for Different Contexts
Just as market-based solutions will not be the best strategy for all problems, different types of market structures and payment schemes will be more successful in certain contexts (Jack et al. 2008). Basic science and project evaluation are key to the Conservancy's ability to verify the effectiveness of market-solutions and replicate successful designs. The recent development of a protocol for monitoring and evaluating water funds is a critical step for the Conservancy, as we are involved in the planning of many new water funds around the world. Evaluations will determine whether 1) the funds are delivering freshwater services to payers, 2) recipients of payments see welfare improvements, and 3) there are significant improvements in the ecosystem. According to the Conservancy’s Tim Boucher, who helped evaluate the effects of the Quito water fund on the Andean Páramo, demonstrating this triple bottom-line is the "biggest thing with scaling up water funds."

In addition, it is important to know that payments for ecosystem services and other market strategies are delivering better results at a lower cost than non-market alternatives. Our science can help us identify when socioeconomic1 and ecological factors may increase costs. For example, payment schemes need to be more complex and potentially more costly when the benefits from the next unit of conservation are not constant due to differences across ecosystem states or places. If the Conservancy wanted to apply a water funds model to shallow lakes, such as those in the Midwestern United States, the payment scheme would need to account for the fact the lake ecosystem has threshold effects. Payments would not yield positive benefits until a critical level of pollution reduction has occurred that would flip the lake to a state characterized by clear waters, piscivorous fish and benthic algae (Hein 2006).

Set the Standard
Science and evaluation can also be a means to scaling up markets by helping define the rules and set the standards for new regulatory markets or by helping encourage voluntary engagement in emerging markets. For instance, the Clean Development Mechanism under the Kyoto Protocol doesn't currently allow for forest carbon credits because of unresolved concerns about their effectiveness, especially at the project level.

To help resolve these issues, the Conservancy's Forest Carbon Team is working on "domestic and international flagship projects that demonstrate scalability of emissions reductions,” says Bronson Griscom, a scientist on that team. One such TNC flagship project in Brazil covers an area the size of Panama. By using subnational scale projects, "TNC is trying to be a thought leader for these standards that nations can use," adds Griscom.

Although forest carbon credits have already been sold on voluntary markets to companies and individuals, the Conservancy will play a role in getting countries to become buyers of such credits by providing the science to help establish standards for an international system under the next iteration of the Kyoto Protocol. Similarly, the Conservancy’s Louisiana program is setting the bar for voluntary forest carbon markets by recently sponsoring the first third-party-validated forest carbon offset projects in the United States. Such validation is key to showing investors that the credits meet science-based standards.

Engage New Actors and Generate Demand
Even if everyone agrees on the rules of the game, it has to be worth it to play. The Conservancy can engage new actors and help generate demand for these markets by using science to demonstrate the value of ecosystem services. That’s the aim of TNC’s collaboration with the Dow Chemical Company, for which the Conservancy is developing new methods that use biophysical modeling and economic valuation to help businesses consider the value of ecosystem services in their decision-making. When businesses understand how ecosystems (a) contribute to their increased production by providing key inputs like water or (b) help reduce costs by mitigating natural hazards or pollution, they might become more involved in ecosystem markets and make greater investments in conservation.

Dollars and cents might not be the main motivation for some stakeholders, but it might be critical to making conservation feasible. According to Josh Parrish of the Conservancy’s Working Woodlands program in Pennsylvania, economic value is about 10th on the list of reasons why people want to conserve their forests. The first? Commonly, it’s that they care about spiritual or recreational values associated with biodiversity. But the problem with capitalizing on that motivation is that there is not a lot of demand for biodiversity credits.

So the Working Woodlands program uses revenue generated from carbon credits to finance the cost of improved forest management and long-term conservation agreements. This program suggests that we should look for more opportunities to use demand for one ecosystem service to help sustain other services or biodiversity that either have less demand or are not amenable to markets. Improving our understanding of trade-offs or synergies between ecosystem services and mapping this understanding against market demand could help us identify new conservation financing options. However, when new opportunities arise to sell credits for other services or biodiversity, landowners and Conservancy staff need to be aware of the benefits and problems associated with "stacking" multiple credits from a single piece of land, as well as the various changing policies surrounding this practice (see Cooley and Olander 2011).


Build the Infrastructure
The Conservancy can also help build the infrastructure that supports markets and market transactions. In Oregon, the Conservancy has acted as a science advisor and experienced practitioner to help design both an integrated ecosystem service marketplace as well as new laws to support ecosystem markets along with other partners. According to Cathy MacDonald, director of conservation programs for the Conservancy’s Oregon program, TNC's greatest contribution to establishing the marketplace has been in scientific input for an ecosystem credit accounting system that establishes metrics for credit types, market rules and a trading platform for the Willamette Basin. Now, the Willamette Partnership is working toward scaling this market infrastructure to the regional level in a way that reduces overhead costs for market building.

Another key concern about scaling up to the regional level is matching the market to the scale of the ecosystem and institutions. One challenge: Making the scale of the market big enough that there is enough competition to result in efficient outcomes, but making sure that trading of credits maintains ecological and institutional integrity. The Conservancy should leverage our partnerships with local organizations and landscape-level expertise to meet these challenges.

Take Action to Mainstream Ecosystem Markets as One of Many Conservation Strategies
The Conservancy has made significant progress with ecosystem markets, but markets and other incentive-based strategies are still not a regular part of our conservation toolbox and are not operating at scale. Drawing on the examples and lessons from our own work and that of others, we should take the following actions to mainstream ecosystem markets:

  • Consider ecosystem markets and other incentive-based strategies2 alongside non-market conservation strategies in the conservation business planning process (see Question 4 in the Roadmap for PET Recommendations: What range of strategies was considered?).
  • Increase capacity in economics, finance, policy and law through trainings and new hires.
  • Enhance collaboration between scientists, conservation practitioners, and experts
  • in finance, law and policy to research, develop, implement and evaluate market strategies, starting with the conservation business planning process.
  • Create communities of practice for ecosystem markets on connect.tnc.org.
  • Evaluate key market strategies — by comparing them with non-market strategies or to having done nothing — before replicating
  • Generate demand for ecosystem services and support for ecosystem market policies through a set of strategic collaborations that researches and broadly communicates the value of ecosystem services to key actors (e.g. private resource owners, community groups, businesses  and governments).
  • Advocate for policy to create markets when appropriate and provide infrastructure for markets to function at appropriate scales given the ecology, economics, and institutions relevant to the ecosystem service and potential buyers and sellers. (Think “whole systems.” )
  •  Review and identify gaps and opportunities for scientific research and policy advocacy across key ecosystem services and invest in a set of projects and policy initiatives to meet these needs.

Many of these actions could become a part of existing or new planning processes (as recommended by the Planning Evolution Team) and support the new Global Framework. Fundamentally, however, mainstreaming ecosystem markets to meet new conservation challenges is about evolving and expanding the type of pragmatic market and incentive-based solutions — such as buying land and setting-up easements — that have been a cornerstone of the Conservancy’s work to include a range of ecosystem services as well as private and public actors.


Cooley, D., and L. Olander. 2011. Stacking Ecosystem Services Payments Risks and Solutions. Nicholas Institute for Environmental Policy Solutions Working Paper NI WP 11-04. http://nicholasinstitute.duke.edu/ecosystem/land/stacking-ecosystem-services-payments

Hein, L. 2006. Cost-efficient eutrophication control in a shallow lake ecosystem subject to two steady states. Ecological Economics 59:429-439. http://upi-yptk.ac.id/Ekonomi/Hein_Cost.pdf

Jack, B.K., C. Kousky, and K. Sims. 2008. Designing payments for ecosystem services: Lessons from previous experience with incentive-based mechanisms. Proceedings of the National Academies of Science 105(28): 9465-9470. http://www.pnas.org/content/105/28/9465.full Resource Economics 49(1):101–119.

Russell, C.S. 2001. Monitoring, enforcement, and the choice of environmental policy instruments. Regional Environmental Change 2:73-76.

Peters-Stanley, M., K. Hamilton, T. Marcello, and M. Sjardin. 2011. Back to the future: State of the voluntary carbon markets 2011. Ecosystem Marketplace/Forest Trends and Bloomberg New Energy Finance. www.forest-trends.org.


1The cost of a PES program may be lower if payments are made to some of the poorest landholders because less money is needed to compensate these landowners; however, higher payments may be needed to significantly reduce poverty (Jack et al. 2008). Also, the poorest people may own some of the lowest quality lands, which may result in low ecosystem service delivery or conservation benefit. These potential trade-offs of cost-effectiveness, poverty alleviation, service provision and conservation in different contexts underscore the Conservancy's need to articulate how we want to prioritize these various outcomes.

2For a description of various types of ecosystem markets and payment for ecosystem service schemes see Ecosystem marketplace. For a taxonomy of incentive-based strategies (including markets) see Jack et al. 2008

Image credit: Joost J. Bakker IJmuiden/Flickr.