natural capital concepts in practice: experience in the us (and farther south) brian c. murray...

Natural Capital Concepts in Practice:

Experience in the US (and farther South)

Brian C. MurrayDirector for Economic Analysis, Nicholas Institute for

Environmental Policy SolutionsResearch 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

http://educatoral.com/WoSAchievements.htm

Nature as a capital stock Ecosystem services (flows)

Source: Millennium Ecosystem Assessment

The economic value of the natural capitalDerives from the economic value of the Ecosystem services it generates

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

“Green GDP”

Federal land management decisions

Public Payments for Ecosystem Services

Ecosystem Service markets

Land trusts, water funds, and other “Coasean” solutions

Top-down

Bottom-up

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

Individual (firm) Willingness to Pay (WTP) for ES

MarketMarginal cost ofES provision

•Price•Quantity exchanged

Q: What drives private demand for an ecosystem service?

Pure self interestAltruism

Government regulation with flexible means of compliance

DEMAND SUPPLY

Ideal; markets with many buyers and sellers – decentralized trade

What are Ecosystem Service Markets ?

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

Reduced Emissions from Deforestation And Degradation: REDD+

Blue carbon – coastal and marineecosystems

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

U.S.

Global

Are PES programs living up to the hype globally?

PES type 2020 market projection (in 2006)

Actual market in 2012

2020 market projection (in 2012)

Forest carbon offsets: compliance

$5-8 billion $26 million $470 million

Forest carbon offsets: voluntary

$10 million – $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 are likely essential as a cost-effective compliance mechanism

Figure from Nguyen et al (2006) A Guide to Market-based Approaches to Water Quality

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

Brian.Murray@duke.edu