Making the Priceless Valuable Ecosystem Service Payments Markets

Making the Priceless Valuable: Ecosystem Service Payments Markets Translinks Tanzania - September 2008 Michael Jenkins, Forest Trends

Markets in Transition - Ecosystems Services Trees Revenue Certified Timber Botanicals Wastewood Utilization 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: Ø Self-organized private deals Private entities pay for private services Ø Public payments to private land forest owners Public agency pays for service Ø ‘Cap and Trade’ - trading of environmental credits under a cap or floor Landowners either comply directly with regulations, or buy compliance credits Ø Eco-labelling of agricultural and tree products Consumers prefer certified sustainable supplies

Charting Payments for Ecosystem Services: The Matrix

CARBON: Carbon Markets CCX 23 Mt 72 M Voluntary OTC 42 Mt $258 M EU ETS Vol: 2, 061 Mt (CO 2 e) Value: $50 Billion JI 41 Mt $495 M CDM 791 Mt $ 15 Billion NSW GGAS 25 Mt $224 M Source: New Forests/Ecosystem Marketplace, World Bank 5

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. (Mt. CO 2 e) 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 Ø Ø Ø 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/t. CO 2 e 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 CO 2 emissions – he said avoided deforestation (AD) should be one of four key elements of global climate change mitigation strategy. Ø Stern also said AD is a “highly cost-effective way of reducing greenhouse gas emissions” due to (often) low land-use opportunity costs Ø REDD will have major co-benefits: biodiversity, water and (perhaps) equity Ø Bali Co. P 2007 committed to “urgent and meaningful action on REDD” – need to define REDD mechanism for post-Kyoto regime (20132017) at Copenhagen Ø Source: Stern, 2006

But REDD is Complex - Challenges Ø Ø Ø 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. Ø 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. Ø Payments of upstream watershed protection is already taking place in New York City as well as several countries (e. g. , Mexico, Costa Rica, Ecuador) Ø

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: Ø Flood Control Ø Salinity Control

WATER: The Benefit of Forested Watersheds on Quality Ø Ø Provide food, habitat, and temperature control for stream communities Stabilize streambanks and control sediment flux by holding the soil in place Ø Ø 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 Ø Ø Goal: attract new capital and maximize return of restoration investments Collaborative project: Forest Trends, Chesapeake Bay Foundation, and World Resources Institute Ø Ø Ø 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 Forestoration and protection: potential for high-value return

BIODIVERSITY: Biodiversity Markets Ø Not easily commoditized Ø Is an “anti-commodity” Ø Wetland Banking Ø Conservation Banking Ø Voluntary Biod. offsets Ø 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. Ø $3. 3 billion a year spent on mitigation in the U. S. Ø $2 billion in mitigation parcel purchases $1. 3 billion sold from the roughly 120 species banks and 600 wetland banks in the US Ø Ø Ø 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 ambient land value Ø Ø The industry is ~20 years old and is growing steadily

BIODIVERSITY: Biodiversity Markets – Forest Landholders Ø Ø Ø 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: Ø Forestry (International Paper, Weyerhaeuser) Ø Mining & Minerals (Rio Tinto, Vulcan) Ø Oil & Gas (Chevron, Shell) Ø Ø 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 Ø Ø Ø 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, method-ologies, 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

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