Markets for biodiversity services

Markets forBiodiversityServicesPOTENTIAL ROLES AND CHALLENGES

Historically, it has been the responsibility of gov-

ernments to ensure biodiversity protection and

provision of ecosystem services. The main instru-

ments to achieve such objectives have been

• direct resource ownership and management by govern-

ment agencies;

• public regulation of private resource use;

• technical assistance programs to encourage improved

private management; and

• targeted taxes and subsidies to modify private incentives.

But in recent decades, several factors have stimulated

those concerned with biodiversity conservation services to

begin exploring new market-based instruments. The model

of public finance for forest and biodiversity conservation is

facing a crisis as the main sources of finance have stagnat-

ed, despite the recognition that much larger areas require

protection. At the same time, increasing recognition of the

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By Michael Jenkins, Sara J. Scherr, and Mira Inbar

This article was published in the July/August 2004 issue of Environment. Volume 46, Number 6, pages 32–42. Information on Environment is accessible via http://www.heldref.org/env.php.This article is © The Aspen Institute and is published with permission. It was originally prepared for the institute's Biodiversity Policy Forum in April 2004.

34 ENVIRONMENT JULY/AUGUST 2004

roles that ecosystem services play inpoverty reduction and rural develop-ment is highlighting the importance ofconservation in the 90 percent of landoutside protected areas. It is thusurgent to find new means to finance theprovision of ecosystem services, yetunder current conditions private actorslack financial incentives to do so.

Crisis in BiodiversityConservation Finance

Financing and management of natur-al protected areas has historically beenperceived as the responsibility of thepublic sector. According to the UnitedNations Environment Programme,there are presently 102,102 protectedareas worldwide, covering an area of18.8 million square kilometers. Seven-teen million square kilometers of theseareas—11.5 percent of the Earth’s ter-restrial surface—are forests. Two-thirds of these have been assigned toone of the six protected-area manage-ment categories designated by theWorld Conservation Union (IUCN).

However, over the last few decades,severe cutbacks in the availability ofpublic resources have undermined the

effectiveness of such strategies. Protect-ed areas in the tropics are increasinglydependent on international public orprivate donors for financing. Yet bud-gets for government protection andmanagement of forest ecosystem ser-vices are declining, as are internationalsources from overseas developmentassistance (see Table 1 below). Landacquisition for protected areas and com-pensation for lost resource-based liveli-hoods are often prohibitively expensive.For example, it has been estimated that$1.3 billion would be required to fullycompensate inhabitants in just nine cen-tral African parks.1 The donation-drivenmodel is often unsustainable, both eco-nomically and environmentally. Sover-eignty is also an issue: About 30 percentof private forest concessions in LatinAmerica and the Caribbean and 23 per-cent in Africa are already foreignowned. At the same time, public respon-sibility for nature protection is shiftingwith processes of devolution and decen-tralization, and new sources of financ-ing for local governments to take onbiodiversity and ecosystem service pro-tection have not been forthcoming.

Moreover, scientific studies increas-ingly indicate that biodiversity cannotbe conserved by a small number of

strictly protected areas.2 Conservationmust be conceived in a landscape orecosystem strategy that links protectedareas within a broader matrix of landuses that are compatible with and sup-port biodiversity conservation in situ.To achieve such outcomes, it will beessential to engage private actors inconservation finance on a large scale.Yet the markets for products from nat-ural areas and forests face at least threeserious challenges: declining commod-ity prices for traditionally importantproducts, such as timber; competitionfrom illegal sources; and poorly func-tioning, overregulated markets. Thus,private forest owners and landownersneed to find new revenue streams tojustify retaining forests on the land-scapes and to manage them well in thecontext of declining commodity pricesand competition in natural forests fromillegal sources of timber.

Rural Development, PovertyReduction, and Biodiversity

The vast majority of biodiversityresources in the world are found inpopulated landscapes, and it can beargued that the biodiversity that under-

Table 1. Estimated financial flows for forest conservation (in millions, U.S. dollars)

Sources of finance SFM SFM PAS PAS(early 1990s) (early 2000) (early 1990s) (early 2000)

Official development assistance $2,000–$2,200 $1,000–$1,200 $700–$770 $350–$420

Public expenditure NA $1,600 NA $598

Philanthropya $85.6 $150 NA NA

Communitiesb $365–$730 $1,300–$2,600 NA NA

Private companies NA NA NA NA

a Underestimates self-financing and in-kind nongovernmental organization contributions.b Self-financing and in-kind contributions from indigenous and other local communities.

NOTE: In 1990, there were an estimated 100 million hectares of community-managed forests worldwide. SFM is “sustainable forest management.” PAS stands for “protected area system.”

SOURCE: A. Molnar, S. J. Scherr, and A. Khare, Current Status and Future Potential of Markets for Ecosystem Services of Tropical Forests:An Overview (Washington, DC: Forest Trends, 2004).

pins ecosystem services critical tohuman health and livelihoods shouldhave high priority in conservationefforts. An estimated 240 million ruralpeople live in the world’s high-canopyforest landscapes. In Latin America,for example, 80 percent of all forestsare located in areas of medium to highhuman population density.3 Populationgrowth in the world’s remaining “trop-ical wilderness areas” is twice theglobal average. More than a billionpeople live in the 25 biodiversity“hotspots” identified by ConservationInternational; in 16 of these hotspots,population growth is higher than theworld average.4 While species richnessis lower in drylands and other ecosys-tems not represented among the “hotspots,” the species that play functionalecosystem roles are all the moreimportant and difficult to replace.

Poor rural communities are especial-ly dependent upon natural biodiversity.Low-income rural people rely heavilyon the direct consumption of wildfoods, medicines, and fuels, especiallyfor meeting micronutrient and proteinneeds, and during “hungry” periods.An estimated 350 million poor peoplerely on forests as safety nets or for sup-plemental income. Farmers earn asmuch as 10 to 25 percent of householdincome from nontimber forest prod-ucts. Bushmeat is the main source ofanimal protein in West Africa. Thepoor often harvest, process, and sellwild plants and animals to buy food.Sixty million poor people depend onherding in semiarid rangelands thatthey share with large mammals andother wildlife. Thirty million low-income people earn their livelihoodsprimarily as fishers, twice the numberof 30 years ago. The depletion of fish-eries has serious impacts on food secu-rity. Wild plants are used in farmingsystems for fodder, fertilizer, packag-ing, fencing, and genetic materials.Farmers rely on soil microorganisms tomaintain soil fertility and structure forcrop production, and they also rely onwild species in natural ecological com-munities for crop pollination and pest

and predator control. Wild relatives ofdomesticated crop species provide thegenetic diversity used in crop improve-ment. The rural poor rely directly onecosystem services for clean and reli-able local water supplies. Ecosystemdegradation results in less water forpeople, crops, and livestock; lowercrop, livestock, and tree yields; andhigher risks of natural disasters.

Three-quarters of the world’s peopleliving on less than $1 per day are rural.Strategies to meet the United NationsMillennium Development Goals inrural areas—to reduce hunger andpoverty and to conserve biodiversity—must find ways to do so in the samelandscapes. Crop and planted pastureproduction—mostly in low-productiv-ity systems—dominate at least half theworld’s temperate, subtropical, andtropical forest areas; a far larger areais used for grazing livestock.5 Foodinsecurity threatens biodiversity whenit leads to overexploitation of wildplants and animals. Low farm produc-tivity leads to depletion of soil andwater resources and increases thepressure to clear additional land thatserves as wildlife habitat. Some 40percent of cropland in developingcountries is degraded. Of more than17,000 major protected areas, 45 per-cent (accounting for one-fifth of totalprotected areas) are heavily used foragriculture, while many of the rest areislands in a sea of farms, pastures, andproduction forests that are managed inways incompatible for long-termspecies and ecosystem survival.6

Despite this high level of dependenceby the poor on biodiversity, the domi-nant model of conservation seeks to

exclude people from natural habitats.In India, for example, 30 million peo-ple are targeted for resettlement fromprotected areas.7 From the perspectiveof poverty reduction and rural develop-ment, it is thus urgent to identify alter-native conservation systems thatrespect the rights of forest dwellers and owners andaddress conserva-

tion objectives in the 90 percent offorests outside public protected areas.Markets for ecosystem services poten-tially offer a more efficient and lower-cost approach to forest conservation.8

Need for Financial Incentives to Provide Ecosystem Services

There is growing recognition thatregulatory and protected areaapproaches, while critical, are insuffi-cient to adequately conserve biodiver-sity. A fundamental problem is finan-cial, especially for resources that lieoutside protected areas. For these to beconserved, they need to be more valu-able than the alternative uses of theland. And for such resources to be wellmanaged, good stewardship needs tobe more profitable than bad steward-ship. The failure of forest owners andproducers to capture financial benefitsfrom conserving ecosystem benefitsleads to overexploitation of forestresources and undersupply of ecosys-tem services.

This reality is hard for many peopleto accept, because most ecosystem ser-vices are considered “public goods.”The “polluter pays” principle hasargued that the right of the public to

VOLUME 46 NUMBER 6 ENVIRONMENT 35

More than a billion people live in the 25 biodiversity “hotspots” identified by Conservation International; in 16 ofthese hotspots, population growth ishigher than the world average.

these services trumps the private rightsof the landowner or manager. Yet goodmanagement has a cost. While the indi-vidual who manages his or her resourcesto protect biodiversity produces publicbenefits, the costs incurred are private.Under current institutions, those whobenefit from these services have noincentive to compensate suppliers forthese services. In most of the world, for-est ecosystem services are not tradedand have no “price.” Thus, where theopportunity costs of forest land for agri-cultural enterprises, infrastructure, andhuman settlements are higher than the useor income value of timber and nontimberforest products (NTFPs), habitats will becleared and wild species will be allowedto disappear. Because they receive little orno direct benefit from them, resourceowners and producers ignore the real eco-

nomic and non-economic values

of ecosystem services in making deci-sions about land use and management.

Mechanisms are needed by whichresource owners are rewarded for theirrole as stewards in providing biodiversi-ty and ecosystem services. Anticipationof such income flows would enhance thevalue of natural assets and thus encour-age their conservation. Compared toprevious approaches to forest conserva-tion, market-based mechanisms promiseincreased efficiency and effectiveness,at least in some situations. Experiencewith market-based instruments in othersectors has shown that such mecha-nisms, if carefully designed and imple-mented, can achieve environmentalgoals at significantly less cost than con-ventional “command-and-control” ap-

proaches, while creating positive incen-tives for continual innovation andimprovement. Markets for ecosystemservices could potentially contribute torural development and poverty reductionby providing financial benefits from thesale of ecosystem services, improvinghuman capital through associated train-ing and education, and strengtheningsocial capital through investment inlocal cooperative institutions.

New Market Solutions to Conserve Biodiversity

The market for biodiversity protectioncan be characterized as a nascent mar-ket. Many approaches are emerging tofinancially remunerate the owners andmanagers of land and resources for theirgood stewardship of biodiversity (seeTable 2 on page 37). Market mecha-

nisms to pay for other ecosystem ser-vices—watershed services, carbonsequestration or storage, landscapebeauty, and salinity control, for exam-ple—can be designed to conserve biodi-versity as well. However, in general,biodiversity services are the mostdemanding to protect because of theneed to conserve many different ele-ments essential for diverse, interdepen-dent species to thrive. Figure 1 on page38 illustrates potential market solutionsand some of the complexities involved.

Land Markets for High-Biodiversity-Value Habitat

National governments (in the formof public parks and protected areas),NGO conservation organizations (for

example, The Nature Conservancy),and individual conservationists havelong paid for the purchase of high-bio-diversity-value forest habitats. Directacquisition can be expensive, as under-lying land and use values are alsoincluded. Local sovereignty concernsarise when buyers are from outside thecountry—or even the local area—orwhere extending the area of noncom-mercial real estate reduces the local taxbase. New commercial approaches arebeing developed to encourage theestablishment of privately owned con-servation areas, such as conservationcommunities (the purchase of a plot ofland by a group of people mainly forrecreation or conservation purposes),ecotourism-based land protection pro-jects, and ecologically sound realestate projects being organized inChile.9 These build on growing con-sumer demand for housing and vaca-tion in biodiverse environments.

Payments for Use or ManagementA lower-cost approach to securing

conservation is to pay only for the bio-diversity services themselves, by pay-ing landowners to manage their assetsso as to achieve biodiversity or speciesconservation. It is likely that thelargest-scale payments for land-use ormanagement agreements belong to oneof two categories. One encompassesgovernment agroenvironmental pay-ments made to farmers in North Amer-ica and Europe for reforesting conser-vation easements. The other categorydescribes management contracts aim-ing to conserve aquatic and terrestrialwildlife habitat. In Switzerland, “eco-logical compensation areas,” whichuse farming systems compatible with biodiversity conservation, haveexpanded to include more than 8 per-cent of total agricultural land. In thetropics, diverse approaches includenationwide public payments in CostaRica for forest conservation and inMexico for forested watershed protec-tion (see the box on page 38).

Conservation agencies are organiz-ing direct payments systems, such as


A lower-cost approach to securing conservation is to pay only for the biodiversity services themselves,by paying landowners to manage theirassets so as to achieve biodiversity orspecies conservation.

conservation concessions being negoti-ated by Conservation International,and forest conservation easementsnegotiated by the Cordão de Mata

(“linked forest”) project with dairyfarmers in Brazil’s Atlantic Forest. Thedairy farmers in the latter examplereceive, in exchange, technical assis-

tance and investment resources to raisecrop and livestock productivity. Somecountries that use land taxes are usingtax policies in innovative ways to


Table 2. Types of payments for biodiversity protection

Type Mechanism

SOURCE: S. J. Scherr, A. White, and A. Khare, Current Status and Future Potential of Markets for Ecosystem Services in TropicalForests: An Overview (Washington, DC: Forest Trends, 2003).

Private land acquisition

Public land acquisition

Bioprospecting rights

Research permits

Hunting, fishing, or gathering permits for wild species

Ecotourism use

Conservation easements

Conservation land lease

Conservation concession

Community concession in public protected areas

Management contracts for habitat or species conservation on private farms, forests, or grazing lands

Tradable wetland mitigation credits

Tradable development rights

Tradable biodiversity credits

Biodiversity-friendly businesses

Biodiversity-friendly products

Purchase by private buyers or nongovernmental organizations explicitlyfor biodiversity conservation

Purchase by government agency explicitly for biodiversity conservation

Rights to collect, test, and use genetic material from a designated area

Right to collect specimens, take measurements in area

Right to hunt, fish, and gather

Rights to enter area, observe wildlife, camp, or hike

Owner paid to use and manage defined piece of land only for conservation purposes; restrictions are usually in perpetuity and transferable upon sale of the land

Owner paid to use and manage defined piece of land for conservationpurposes for defined period of time

Public forest agency is paid to maintain a defined area under conservation uses only; comparable to a forest logging concession

Individuals or communities are allocated use rights to a defined area of forest or grassland in return for commitment to protect the area frompractices that harm biodiversity

Contract that details biodiversity management activities and paymentslinked to the achievement of specified objectives

Credits from wetland conservation or restoration that can be used tooffset obligations of developers to maintain a minimum area of naturalwetlands in a defined region

Rights allocated to develop only a limited total area of natural habitatwithin a defined region

Credits representing areas of biodiversity protection or enhancementthat can be purchased by developers to ensure they meet a minimumstandard of biodiversity protection

Business shares in enterprises that manage for biodiversity conservation

Eco-labeling

Payment for access to species or habitat

Purchase of high-value habitat

Payment for biodiversity-conserving management

Tradable rights under cap-and-trade regulations

Support biodiversity-conserving businesses


encourage the expansion of privateand public protected areas.

Payment for Private Access to Species or Habitat

Private sector demand for biodiver-sity has tended to take the form ofpayments for access to particularspecies or habitats that function as“private goods” but in practice serveto cover some or all of the costs ofproviding broader ecosystem services.Pharmaceutical companies have con-tracted for bioprospecting rights intropical forests. Ecotourism compa-nies have paid forest owners for theright to bring tourists into their landsto observe wildlife, while private indi-viduals are willing to pay forest own-ers for the right to hunt, fish, or gathernontimber forest products.

Tradable Rights and Credits within a Regulatory Framework

Multiactor markets for ecosystemservices have been successfully estab-lished, notably for sulfur dioxide emis-sions, farm nutrient pollutants, andcarbon emissions. These create rights

or obligations within a broad regulato-ry framework and allow those withobligations to “buy” compliance fromother landowners or users. Developingsuch markets for biodiversity is morecomplicated, because specific site con-ditions matter so much. The UnitedStates has operated a wetlands mitiga-tion program since the early 1980s inwhich developers seeking to destroy awetland must offset that by buyingwetland banks conserved or developedelsewhere. A similar approach is usedfor “conservation banking,” describedin the box on page 39.

A variant of this approach is beingdesigned for conserving forest biodi-versity in Brazil by permitting flexibleenforcement of that country’s “50 per-cent rule,” which requires landholdersin Amazon forest areas to maintainhalf of their land in forest. This rule isalso applied in other regions in Brazil,where lesser proportional areas are setaside for forest use. Careful designa-tion of comparable sites is required.

Another approach, biodiversitycredits, is under development in Aus-tralia. In this system, legislation cre-

Figure 1. New market solutions to conserve biodiversity

NOTE: OTC (“over-the-counter”) trading involves direct negotiation with buyers and sellers rather than an official stock market.

SOURCE: D. Brand, “Emerging Markets for Forest Services and Implications for Rural Development, Forest Industry, and Govern-ment,” presentation to the Katoomba Group Meeting, “Developing Markets for Ecosystem Services,” Vancouver, October 2000.

• Biodiversity• Carbon sequestration• Water regulation• Soil fertility

Must be defined in a way that

creates a product or service of value

to a buyer

• Insurance• Standards• Legal rights• Pools or registers• Financial projections

Must give marketconfidence in

ownership, risk, and financial values

• Enviro-bonds• Equity structures• Trading

– OTC– Exchanges– Derivatives

Retail markets

Must have efficientmechanisms to linkbuyers and sellers

• Individuals• Business• Integrated products• Marketing• Communications

Must understand the psuchology of

the potential buyer:motivation and risk

perceptions

+

Products and services

Risk mitigation,legal rights,

reliability

Transfer of ownership

and finance

The market

A NEW FUND TO FINANCE FOREST

ECOSYSTEM SERVICES The Mexican government recentlyannounced the creation of a new fund topay indigenous and other communities forthe forest ecosystem services produced bytheir land.1 Indigenous and other communi-ties own approximately 80 percent of allforests in Mexico—totaling some 44 mil-lion hectares—as collectively held, privateland. The Mexican Forestry Fund has beenunder design since 2002, guided by a con-sultative group with government, non-governmental organization, and industryrepresentatives. The purpose of the US$20million fund is to promote the conservationand sustainable management of naturalforests, leverage additional financing, con-tribute to the competitiveness of the forestsector, and catalyze the development ofmechanisms to finance forest ecosystemservices. Operational manuals are beingprepared, and priority conservation siteshave already been identified. The fund pro-poses to pay $40 per hectare (ha) per yearto owners of deciduous forests in criticalmountain areas and $30 per ha per year toother forest types.

1. Comisión Nacional Forestal (CONAFOR),presentation given at the Mexican Forestry Expo,Guadalajara, Mexico, 8 August 2003.

ates new property rights for privatelandholders who conserve biodiversityvalues on their land. These landholderscan then sell resulting “credits” to acommon pool. The law also createsobligations for land developers andothers to purchase those credits. Theapproach requires that the “value” ofthe biodiversity unit can be translatedinto a dollar value.

Biodiversity-Conserving BusinessesConservation values are beginning

to inform consumer and investor deci-sions. Eco-labeling schemes are beingdeveloped that advertise or certify thatproducts were produced in ways con-sistent with biodiversity conservation.The global trade in certified organicagriculture was worth $21 billionworldwide in 2000.10 Internationalorganic standards are expanding tolandscape-scale biodiversity impacts.The Rainforest Alliance and the Sus-tainable Agriculture Network certifycoffee, bananas, oranges, and otherproducts grown in and around high-biodiversity-value areas. The Sustain-able Agriculture Initiative is a coalitionof multinational commercial food pro-ducers (Nestle, Dannon, Unilever, andothers) who are seeking to ensure thatall of the products they purchase alongthe supply chain come from producerswho are protecting biodiversity. In2002, more than 100 million hectaresof forest were certified (a fourfoldincrease over 1996), although only 8percent of the total certified area is indeveloping countries, and most of thatis in temperate forests.

Current Market Demand

Available information suggests thatbiodiversity protection services arepresently the largest market for ecosys-tem services. A team from McKinsey &Company, the World Resources Insti-tute, and The Nature Conservancy esti-mated the annual international financefor the conservation market (conserva-tion defined as protecting land from

development) at $2 billion, with the for-est component a large share of that.11

Buyers are predominantly developmentbanks and foundations in the UnitedStates and Europe.

A study by the International Institutefor Environment and Development(IIED) of 72 cases of markets for forestbiodiversity protection services in 33countries found that the main buyers ofbiodiversity services (in declining orderof prevalence) were private corpora-tions, international NGOs and researchinstitutes, donors, governments, and pri-vate individuals.12 Communities, publicagencies, and private individuals pre-dominate as sellers. Most of these casestook place in Latin America and in Asiaand the Pacific. Only four cases werefound in Europe and Russia and one wasfound in the United States.

Three-quarters of the cases in theIIED study were international markets,and the rest were distributed amongregional, national, and local buyers.International actors—as well as manyon the national level—who demandbiodiversity protection services tend tofocus on the most biodiverse habitats(in terms of species richness) or thoseperceived to be under the greatestthreat globally (for example, placeslike the Amazon, where there are ahigh number of endemic species andwhere habitat area has greatlydeclined). Most of the private corpora-tions were interested in eco-labelingschemes for crops or timber, invest-ment in biodiversity-friendly compa-nies, horticultural companies con-cerned with ecosystem services, orpharmaceutical bioprospecting. Suchprivate payments are usually site-specific. Local actors more commonlyfocus on protecting species or habitatsof particular economic, subsistence, orcultural value.

Projected Growth in Market Demand

The fastest-growing component offuture market demand for biodiversity

services is likely to be in eco-labelingof crop, livestock, timber, and fishproducts for export and for urban con-sumers. In 1999, the value of theorganic foods market was US$14.2 bil-lion. Its value is growing at 20–30 per-cent a year in the industrialized world,


CONSERVATIONBANKING

IN THE UNITED STATESAmendments to the United StatesEndangered Species Act in 1982 provid-ed for an “incidental take” of enlistedspecies, if “a landowner provides a long-term commitment to species conserva-tion through development of a HabitatConservation Plan (HCP).” Theseamendments have opened the door to a series of market-based transactions,described as conservation banking,which permits land containing a naturalresource (such as wetlands, forests,rivers, or watersheds) that is conservedand maintained for specified enlistedspecies to be used to offset impactsoccurring elsewhere to the same naturalresource.1 A private landowner mayrequest an “incidental take” permit andmitigate it by purchasing “species cred-its” from preestablished conservationbanks. Credits are administered accord-ing to individuals, breeding pairs, acres,nesting sites, and family units. Conserva-tion banking has maximized the value ofunderutilized commercial real estate andgiven private landowners incentive toconserve habitat.

California was the first state to autho-rize the use of conservation banking andhas established 50 conservation bankssince 1995. Other states, including Alaba-ma, Colorado, and Indiana, have fol-lowed suit. In April 2002, the IndianaDepartment of Transportation, the Feder-al Highway Association Indiana Division,and four local government agencies final-ized an HCP for the endangered Indianabat as part of the improvement of trans-portation facilities around IndianapolisInternational Airport. These highwayimprovements will occur in an area ofknown Indiana bat habitat that is predict-ed to experience nearly $1.5 billion ineconomic development during the nextten years. Under the HCP, approximately3,600 acres will be protected, including373 acres of existing bat habitat.

1. A. Davis, “Conservation Banking,” presenta-tion to the Katoomba Group-Lucarno Workshop,Lucarno, Switzerland, November 2003.


as the international organic movementis strengthening standards for biodiver-sity conservation.13 Pressures continueto increase on major international trad-ing and food processing companies tosource from suppliers who are notdegrading ecosystem services. Donorand international NGO conservationwill continue to expand as NGOs beginto establish entire research depart-

ments aimed atdeveloping new

market-based instruments. Voluntarybiodiversity offsets are also a promisingsource of future demand, as many largecompanies are seeking ways to maintaintheir “license to operate” in environmen-tally sensitive areas, and offsets are ofincreasing interest to them.

The costs of and political resistanceto land acquisition are rising. Con-struction of biological corridors in andaround production areas is an increas-ingly important conservation objective.At the same time, however, many ofthe most important sites for biodiversi-ty conservation are in more denselypopulated areas with high opportunitycosts for land. Thus we are likely to seea major shift from land acquisition tovarious types of direct payments foreasements, land leases, and manage-ment contracts.

A rough back-of-the-envelope esti-mate suggests that the current value ofinternational, national, and local directpayments and trading markets forecosystem services from tropicalforests alone could be worth severalhundred million dollars per year,while the value of certified forest andtropical tree crop products may reachas much as a billion dollars. While thisis a large and significant amount, it

represents a small fraction of the valueof conventional tropical timber andother forest product markets. Forexample, by comparison, the totalvalue of tropical timber exports is $8billion (including only logs, sawn-wood, veneer, and plywood), which isa small fraction of the total exportsand domestic timber, pulpwood, andfuelwood markets in tropical coun-tries. NTFP markets are far largerstill.14 The total value of international

trade for NTFPs is $7.5 billion–$9 billion per year, with another $108 billion in processed medicines andmedicinal plants.15 Domestic marketsfor NTFPs are many times larger (for example, domestic consumptionaccounted for 94 percent of the glo-bal output of fresh tropical fruits1995–2000.16 Nonetheless, these roughfigures are quite interesting when com-pared with the scale of public and donorforest conservation finance summarizedin Table 1.

Scaling Up Payments for Biodiversity: Next Steps

Markets for ecosystem services aresteadily growing and can be expectedto grow even more rapidly in the nextdecade. Yet they predominate as pilotprojects. What will it take to transformthese markets to impact ecosystemconservation on the global scale? Thefour most strategic and catalytic areasfor policy and action are to

• structure emerging markets to sup-port community-driven conservation;

• mobilize and organize buyers forecosystem services;

• connect global and national action

on climate change to biodiversity con-servation; and

• invest in the policy frameworks andinstitutions required for functioningecosystem service payment systems.

Supporting Community-DrivenConservation

The benefits of investments inecosystem services will be maximizedover the long term if markets rewardlocal participation and utilize localknowledge. In community forests andagroforestry landscapes, communitieshave already established sophisticatedconservation strategies. Studies ofindigenous timber enterprises docu-ment conservation investments on theorder of $2 per hectare per year apartfrom other management activities andinvestments of community time andlabor; this is equal to the average avail-able budget per hectare for protectedareas worldwide. Conservation poli-cies must recognize the role that localpeople are playing in the conservationof forest ecosystems worldwide andsupport them (either with cash or in-kind support) to continue to be goodenvironmental stewards.

To enable conservation-orientedmanagement to remain or become eco-nomically viable, it is important thatecosystem service payments and mar-kets are designed so that they strategi-cally channel financial payments torural communities. Such payments canbe used to develop and invest in newproduction systems that increase pro-ductivity and rural incomes, andenhance biodiversity at a landscapescale—an approach referred to as“ecoagriculture.”17 Ecosystem servicepayments to poor rural communitiesthat are providing stewardship servicesof national or international value canhelp to meet multiple MillenniumDevelopment Goals. For any sem-blance of a sustainable future to berealized, it is crucial that our long-termvision includes biodiversity and natur-al ecosystems as part of the “naturalinfrastructure” of a healthy economyand society.

The fastest-growing component of futuremarket demand for biodiversity servicesis likely to be in eco-labeling of crop,livestock, timber, and fish products forexport and for urban consumers.

Mobilizing and Organizing Buyers for Ecosystem Services

Turning beneficiaries into buyers isthe driving force of ecosystem servicemarkets. Because beneficiaries areoften hesitant to pay for goods previ-ously considered free, “willingness topay” for ecosystem services must beorganized on a greater scale. The pri-vate sector must be called upon toengage in responsible corporatebehavior in conserving biodiversity.For example, Insight Investment, amajor financial firm, has developed abiodiversity policy that uses conserva-tion as a screen for investment. Volun-tary payments by consumers, retailfirms, and other actors can be encour-aged through social advertising. Thisapproach is growing rapidly now foreco-labeling programs (labeling ofsome personal care products andfoods) and voluntary carbon emissionoffset programs involving investmentin reforestation. Stockholder pressureis beginning to influence some firmsto avoid investments and activitiesthat harm biodiversity, and this is evolving to positive action. Civilsociety campaigns can also mobilizewillingness to pay for biodiversityoffsets and payments to local partnersfor conservation.

Connecting Climate Action with Biodiversity Conservation

Far more aggressive action mustand will be taken to mitigate andadapt to climate change. Land use andland-use change currently contributemore than 20 percent of carbon emis-sions and other greenhouse gases.Action to reduce these emissions mustbe a central part of our response, andit is critical that action to sequestercarbon through improved land usesaccompanies strategies to reduceindustrial emissions. There is thus anunprecedented opportunity at thistime to structure our responses to cli-mate change so that actions related toland use are also designed to protectand restore biodiversity. Moreover,such actions can be designed in ways

that enhance and protect livelihoods,especially for those most vulnerableto the impacts of climate change.Indeed, it is imperative that they do so(see the box on this page).

As a result of the deliberations atthe Conference of the Parties of theUnited Nations Framework Conven-tion on Climate Change last year, pay-ments for forest carbon through theClean Development Mechanism(CDM) of the Kyoto Protocol can beused to finance forest restoration andregeneration projects that conservebiodiversity while providing an alter-native income source for local peo-ple.18 But the scale of forest carbonunder CDM is very small—too smallto have a major impact on climate,biodiversity, or livelihoods. It is criti-cal that we aim for a much larger pro-gram in the second commitment peri-od, and it is crucial that nationsaffiliated with the Organisation forEconomic Co-operation and Develop-ment (OECD) create initiatives to uti-lize carbon markets for biodiversityconservation in their own internaltrading programs. It is imperative todevelop a new principle of interna-tional agreements on climate responseand carbon trading, one that builds asystem that encourages overlap of themajor international environmentalagreements and the MillenniumDevelopment Goals. This could mobi-lize demand by creating an interna-tional framework for investing ingood ecosystem service markets. It isalso important that emerging privatevoluntary markets for carbon (that is,with actors who do not have a regula-tory obligation) are encouraged topursue such biodiversity goals aswell. The Climate, Community andBiodiversity Alliance, for example, isseeking to develop guidelines andindicators for private investments incarbon projects that will achieve thesemultiple goals. The Forest ClimateAlliance of The Katoomba Group isseeking to mobilize the internationalrural development community toadvocate for such approaches.19

Investing in Policy Frameworks andInstitutions for Biodiversity Markets

Ecosystem service markets are gen-uinely new—and biodiversity marketsare the newest and most challenging.Every market requires basic rules andinstitutions in order to function, andthis is equally true of biodiversitymarkets. The biodiversity conserva-tion community needs to act quicklyand strategically to ensure that asthese markets develop, they are effec-tive, equitable, and operational and areused sensibly to complement otherconservation approaches.

Policymakers and public agenciesplay a vital role in creating the legaland legislative frameworks necessaryfor market tools to operate effectively.This includes establishing regulatoryrules, systems of rights over ecosystemservices, and mechanisms to enforcecontracts and settle ownership disputes.Ecosystem service markets pose pro-


PROTECTING BRAZIL’SATLANTIC FOREST:

THE GUARAQUEÇABACLIMATE ACTION

PROJECTDue to excessive deforestation, theAtlantic Forest of Brazil has beenreduced to less than 10 percent of itsoriginal size. The Guaraqueçaba ClimateAction Project has sought to regenerateand restore natural forest and pasture-land.1 Companies such as American Elec-tric Power Corporation, General Motors,and Chevron-Texaco have investedUS$18.4 million to buy carbon emissionoffset credits from the approximately 8.4million metric tons of carbon dioxide thatthe project is expected to sequester dur-ing its lifespan. The project has initiatedsustainable development activities bothwithin and outside the project boundary,including ecotourism, organic agriculture,medicinal plant production, and a com-munity craft network. The project hasmade significant contributions towardenhancing biodiversity in the area, creat-ing economic opportunities for local peo-ple (such as jobs), restoring the localwatershed, and substantially mitigatingclimate change.

1. The Nature Conservancy (TNC), ClimateAction: The Atlantic Forest in Brazil (Arlington,VA: TNC, 1999).


found equity implications, as new rulesmay fundamentally change the distrib-ution of rights and responsibilities foressential ecosystem services. Forestproducers and civil society will need totake a proactive role to ensure that rulessupport the public interest and createdevelopment opportunities.

New institutions will also be neededto provide the business servicesrequired in ecosystem service markets.For example, in order for beneficiariesof biodiversity services to becomewilling to pay for them, better methodsof measuring and assessing biodiversi-ty in working landscapes must bedeveloped, as well as the institutionalcapacity to do so. New institutionsmust be created to encourage transac-tions and reduce transaction costs.Such institutions could include“bundling” biodiversity services pro-vided by large numbers of local pro-ducers, as well as investment vehiclesthat have a diverse portfolio of projectsto manage risks. Registers must beestablished and maintained, to recordpayments and trades. For example, TheKatoomba Group is developing a Web-based “Marketplace” to slash the infor-mation and transaction costs for buy-ers, sellers, and intermediaries inecosystem service markets.20

Conclusion

Conservation of biodiversity and of theservices biodiversity provides to humansand to the ecological health of the planetrequires financing on a scale many timeslarger than is feasible from public andphilanthropic sources. It is essential tofind new mechanisms by which resourceowners and managers can realize the eco-nomic values created by good steward-ship of biodiversity. Moreover, privateconsumers, producers, and investors canfinancially reward that stewardship. Newmarkets and payment systems, strategi-cally shaped to deliver critical public ben-efits, are showing tremendous potential tomove biodiversity conservation objectivesto greater scale and significance.

Michael Jenkins is the founding president of ForestTrends, a nonprofit organization based in Washing-ton, D.C., and created in 1999. Its mission is tomaintain and restore forest ecosystems by promot-ing incentives that diversify trade in the forest sec-tor, moving beyond exclusive focus on lumber andfiber to a broader range of products and services.Previously he worked as a senior forestry advisor tothe World Bank (1998), as associate director for theGlobal Security and Sustainability Program of theMacArthur Foundation (1988–1998), as an agro-forester in Haiti with the U.S. Agency for Interna-tional Development (1983–1986), and as technicaladvisor with Appropriate Technology International(1981–1982). He has also worked in forestry pro-jects in Brazil and the Dominican Republic and wasa Peace Corps volunteer in Paraguay. He speaksSpanish, French, Portuguese, Creole, and Guaraní,and can be contacted by telephone at (202) 298-3000 or via e-mail at [email protected] J. Scherr is an agricultural and natural resourceeconomist who specializes in the economics andpolicy of land and forest management in tropicaldeveloping countries. She is presently director of theEcosystem Services program at Forest Trends, andalso director of Ecoagriculture Partners, the secre-tariat of which is based at Forest Trends. She previ-ously worked as principal researcher at the Interna-tional Center for Research in Agroforestry, inNairobi, Kenya, as (senior) research fellow at theInternational Food Policy Research Institute inWashington, D.C., and as adjunct professor at theAgricultural and Resource Economics Departmentof the University of Maryland, College Park. Hercurrent work focuses on policies to reduce povertyand restore ecosystems through markets for sustain-ably grown products and environmental services andon policies to promote ecoagriculture—the jointproduction of food and environmental services inagricultural landscapes. She also serves as a memberof the Board of the World Agroforestry Centre, andas a member of the United Nations Millennium Pro-ject Task Force on Hunger. Scherr can be reached bytelephone at (202) 298-3000 or via e-mail [email protected]. Mira Inbar is programassociate with Forest Trends. She works in theEcosystem Services program, supporting efforts toestablish frameworks and instruments for emergingtransactions in environmental services worldwide.Before joining Forest Trends, she worked with com-munities in the Urubamba River Valley of Peru to initiate a forest conservation plan. She hasworked with the National Fishery Department inWestern Samoa, the Marie Selby Botanical Gardens,and Environmental Defense. Inbar may be reachedby telephone at (202) 298-3000 or via e-mail at [email protected]. This article is © TheAspen Institute and is published with permission.

NOTES

1. M. Cernea and K. Schmidt-Soltau, 2003. “Biodi-versity Conservation versus Population Resettlement,Risks to Nature and Risks to People,” paper presentedat CIFOR (Center for International Forestry Research)Rural Livelihoods, Forests and Biodiversity Confer-ence, Bonn, Germany, 19–23 May 2003.

2. See S. Wood, K. Sebastian, and S. J. Scherr, PilotAnalysis of Global Ecosystems: Agroecosystems(Washington, DC: International Food Policy ResearchInstitute and the World Resources Institute, 2000), 64;and E. W. Sanderson et al., “The Human Footprint andthe Last of the Wild,” Bioscience 52, no. 10 (2002):891–904.

3. K. Chomitz, Forest Cover and Population Densi-ty in Latin America, research notes to the World Bank(Washington, DC: World Bank, 2003).

4. R. P. Cincotta and R. Engelman, Nature’s Place:Human Population and the Future of Biological Diver-sity (Washington, DC: Population Action International,2000).

5. Wood, Sebastian, and Scherr, note 2 above.

6. J. McNeely and S. J. Scherr, Ecoagriculture:Strategies to Feed the World and Conserve Wild Biodi-versity (Washington, DC: Island Press, 2003).

7. A. Khare et al., Joint Forest Management: PolicyPractice and Prospects (London: International Insti-tute for Environment and Development, 2000).

8. S. J. Scherr, A. White, and D. Kaimowitz, A NewAgenda for Forest Conservation and Poverty Reduc-tion: Making Markets Work for Low-Income Commu-nities (Washington, DC: Forest Trends, CIFOR, andIUCN-The World Conservation Union, 2004).

9. E. Corcuera, C. Sepulveda, and G. Geisse, “Con-serving Land Privately: Spontaneous Markets for LandConservation in Chile,” in S. Pagiola et al., eds., Sell-ing Forest Environmental Services: Market-BasedMechanisms for Conservation and Development (Lon-don: Earthscan Publications, 2002).

10. J. W. Clay, Community-Based Natural ResourceManagement within the New Global Economy: Chal-lenges and Opportunities, a report prepared by theFord Foundation (Washington, DC: World WildlifeFund, 2002).

11. M. Arnold and M. Jenkins, “The Business Devel-opment Facility: A Strategy to Move Sustainable For-est Management and Conservation to Scale,” proposalto the International Finance Corporation (IFC) Envi-ronmental Opportunity Facility from Forest Trends,Washington, DC, 2003.

12. N. Landell-Mills, and I. Porras. 2002. Marketsfor Forest Environmental Services: Silver Bullet orFool’s Gold? Markets for Forest Environmental Ser-vices and the Poor, Emerging Issues (London: Inter-national Institute for Environment and Development,2002).

13. International Federation of Organic AgricultureMovements (IFOAM), “Cultivating Communities,”14th IFOAM Organic World Congress, Victoria, BC,21–28 August 2002.

14. S. J. Scherr, A. White, and A. Khare, Current Sta-tus and Future Potential of Markets for Ecosystem Ser-vices of Tropical Forests: A Report for the Internation-al Tropical Timber Organization (Washington, DC:Forest Trends, 2003).

15. M. Simula, Trade and Environment Issues in For-est Protection, Environment Division working paper(Washington, DC: Inter-American Development Bank,1999).

16. Food and Agricultural Organization of the UnitedNations (FAO), FAOSTAT database for 2000, accessi-ble via http://www.fao.org.

17. For more information on ecoagriculture, see theEcoagriculture Partners’ Web site at http://www.ecoagriculturepartners.org.

18. S. J. Scherr and M. Inbar, Clean DevelopmentMechanism Forestry for Poverty Reduction and Biodi-versity Conservation: Making the CDM Work for RuralCommunities (Washington, DC: Forest Trends, 2003).

19. For more information on this project, seeh t t p : / /www.ka toombagroup .o rg /Ka toomba /forestcarbon.

20. The Katoomba Group is a unique network ofexperts in forestry and finance companies, environ-mental policy and research organizations, governmen-tal agencies and influential private, community, andnonprofit groups. It is dedicated to advancing marketsfor some of the ecosystem services provided by forests,such as watershed protection, biodiversity habitat, andcarbon storage. For more information on the Katoom-ba Group, see http://www.katoombagroup.org. ForestTrends serves as the secretariat for the group. Moreinformation on Forest Trends can be found athttp://www.forest-trends.org.

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