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A Green Thumb for the Invisible Hand... or, can we make the Priceless

Valuable?

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The Big Picture“Who is this guy and why is he

talking to us?”

Why Markets

What Markets

Carbon, water, biodiversityLessons and learning

In short: the Bigger Picture

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About the Ecosystem Marketplace “Bloomberg” for Emerging Markets in Ecosystem Services:

Carbon Markets , Water markets, Biodiversity Markets, Easements and Other Conservation Transactions (www.ecosystemmarketplace.com)

A Project of Forest Trends

News updated daily, with features and regular e-mail newsletters

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What are we talking about?

Essentially we are dealing with a system where the environment is an externality

How to internalize

Could ask a team of economists to tell us what it is worth… but I wouldn’t trust the findings

To me something is worth what people are willing to pay for it… not what they “say” they are willing to pay (means markets)

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“If all economists were laid end to end, they would not reach a conclusion.”George Bernard Shaw (1856 - 1950)

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“An economist is an expert who will know tomorrow why the things he predicted yesterday didn't happen today.Laurence J. Peter, US educator & writer (1919 - 1988) ”

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“An economist is someone who knows the price of everything and value of nothing.”Oscar Wilde

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Bringing Green into the Economy

Changing the signals

Changing the system

Using one of our most powerful tools (money and markets) to manage and maintain our most essential necessities (the environment, ecosystem services)

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Three Types:Government Payments

China’s Grain-for-Green

One-off Transactionse.g. someone downstream paying someone upstream to maintain a forest

MarketsRegular meetings of buyers and sellers to undertake transactions

e.g. Carbon markets

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Of these:Government Payments

Another use of tax money

One-off TransactionsWill be important in developing countries

Will develop organically and be interesting to watch

MarketsWill likely emerge first in developed countries

Will require more rules, regulations

Will be more important in terms of price discovery, internalization

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Mostly Markets

I will focus on markets

Not because they are the more important

They aren’t

In most of the world they won’t develop anytime soon

But because I think they will ultimately have a larger impact on businesses/the economy

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Enough Philosophy, Let’s talk Reality

Lots of markets out there:

Carbon

Water

Biodiversity

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CarbonIs most developed market as a result of Kyoto, European Emissions Trading

Trading in 2005 for ETS alone was around 362 mt CO2, around 400 mt in CDM

Translates to total of around $11.3 billion

In first 9 months of 2006, was >$21 billion

Is essentially a cap-and-trade market

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Carbon Climbing

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$11.3 Billion

$21.5 Billion

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EU Market763 MT

$18,839 M$US12-20 per tCO2e CCX

Vol: 8 MTValue: $27 M

$3-4 per t

Other8 MT$60 M

$US3-7/ tCO2eKyoto Markets(i.e. CDM-JI)

214 MT$ 2,354 M

$US 7-10 per tCO2e

Voluntary10-20 MT

$100-200M$10 per t

NSW GGAS16MT

$184 M$11-12 per t

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Source: New Forests/Ecosystem Marketplace, World Bank

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2006 by Volume and Value

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Source: World Bank, 2006

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Types of Projects being funded

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Source: World Bank, 2006

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Source: Walsh, 2006

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A Young and Volatile Market

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Source: Natsource

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Carbon: The US

The US may be behind, but there is movement:

CCXRGGICaliforniaOregon, WashingtonAnd now the SouthwestLots on voluntary market

TerraPass, DriveNeutral, etcWal-Mart, PG&E, etc.l

Once the US comes in, could see explosive growth

One day there will be a national market

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Carbon Market: It’s here, It’s realCan already buy credits

on E-bayNeed I say more?

Seriously though:There are carbon investment funds, carbon brokers, carbon hedge funds

Credits are being bought and sold globally

People in Uganda, Chile, etc. are getting paid to reduce emissions

World Cup, SuperBowl carbon neutral

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A New Financial Ecosystem

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A Robust Project Pipeline

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Water markets

Much less developed

Two possible kinds:

Quality

QuantityQuality likely to come in first

i.e. Nutrient trading

Science and application easier

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Nutrient trading: challenges

Not easily commoditized (not carbon)

But markets want to be global and this will happen on watershed scale so smaller size (watershed)

i.e. will be lots of little markets, not global like carbon

Could/Should become a series of large markets:

Think Chesapeake, Gulf of Mexico

Will also see outside the US (e.g. NZ, China)

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A Cost-effective Approach

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Source: Faeth, 2000 cited by Kieser, 2002

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Other water markets

Flood control?Paying for upstream watershed protection

Seen this in many places (Mexico, Costa Rica, Ecuador)

But in Mexico, Costa Rica is essentially a way to channel gov’t money

Or one-off deals like Ecuador

Problem is science is still tricky

Salinity, etc.

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Biodiversity

Is toughest nut to crack

Not easily commoditized

Is an “anti-commodity”

Besides, what do we mean by Biodiversity?

Ecosystems?

Species?

Genetic diversity?

All of the above?

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And yet there is movement…

Wetland Banking and Conservation Banking (US)

Bio-banking (Australia)

Voluntary Biod. offsets (Global)

Gov’t payments for biodiversity (Global)

Such as Bush Tender, Eco-Tender, Bush Broker in Australia

Program in Mexico, China

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Wetland/Stream Banking

Is sometimes classified a water market, but is a market for an ecosystem (ergo Biodiversity market)

Even if the driver is Clean Water act (Section 404)

Driver is “no net loss of wetlands”

If damage, must offset

About $1 billion market

Poised for growth (regs)

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Conservation Banking

Like wetlands, but speciesDozens (@70) in the US

Most in California

Poised for growth in Texas, Florida, etc.

Species credits selling for hundreds of thousands of $Private bankers entering marketMarket worth about $45 million

Being exported to Australia, elsewhere

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Biobanking in Australia

Includes covenant that is transferred with the land

Creates “Biobanking trust fund”

Is in perpetuity

There are provisions for “Conservation Brokers” to help landowners establish and sell credits

Non-profits

For-profits

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Voluntary: The Business Benefits

Better relationships with local communities, regulators, environmentalists, others.

An enhanced reputation and “social license to operate”

Increased “regulatory goodwill”

Easier access to capital and associated competitive advantages

Influencing regulation and policy

“First mover” advantage

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Other existing or possible markets:

Watching many, still in infancy:

Pollination

Disaster prevention

Conservation Easements (and associated tax credits)

Have a large list (matrix)

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One-off payments, Transactions

Beyond formal markets, lots of one-off deals

Voluntary payments, agreements between buyers and sellers

Like FONAG in Ecuador

This is likely the way to go in developing countries

Markets require considerable institutional infrastructure

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Lessons:Property Rights

Important role for Gov’t

Trust (credit=”credere”)

Allocation

Enforcement

Beware PerfectionDon’t wait on perfect science

Size matters

Information is power

Communication/Implications

Not always the right tool

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The Perils of Allocation

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...And “Loose-Lips” Volatility

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Lessons: Certainty

Fifth: Beware the search for perfection

It is good to have sound science, but don’t let that paralyze you

Markets are iterative and can be adaptive, can help get data

They approach perfection in little tiny baby-steps

Can “trade first, ask later”

Don’t get mired in the numbers

Monitor, then change

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Lessons: Information is power

Seventh: Transparency and Systems

Registries (double counting)

Certification (approval)

Verification (monitoring)

Bringing together buyers and sellers

Timely data (again the EU ETS collapse)

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Last but not Least: Communication

In the end, for environmental markets to be sustainable, people (beyond us wonks) will need to understand that we either pay for ecosystem services, or we risk losing them

This is a communications challenge

And it is one all markets share

Is the big long-term challenge

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In Other words:

With scarcity the whole economic system will change

Risks and Rewards will change

Can’t take nature’s services for granted

What isn’t valued is over-used

Think what would happen if electricity were free

Then think what would happen to generating companies

That is what is happening to nature

Smart companies will stay in front of this wave

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Or to put it another way...

Let’s put a value on what has for too long remained priceless

Let’s let markets do their magic and aggregate information, discover prices, wring out efficiencies

But let’s use markets where they can do the most good

Tremendous tool but not every job needs a hammer...

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Galileo Galilei“What greater stupidity can be imagined than calling jewels, silver, and gold ‘precious’ and earth and soil ‘base’? People who do this ought to remember that if there were a greater scarcity of soil as of jewels or precious metals, there would not be a prince who would not spend a bushel of diamonds... to have enough soil to plant a jasmine in a little pot, or to sow an orange seed and watch it sprout, grow and produce its handsome leaves, it fragrant flowers, its fine fruit.”

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