The Matrix: Mapping Ecosystem Service Markets

17 June 2008 | Over the past decade, more and more businesses have come to recognize that man’s economy depends on the earth’s ecology, and that ecosystem services – from waste treatment and pollination to genetic resources – generate tangible benefits to industry.

Furthermore, because these benefits have gone unquantified, they have also gone unpaid for – and the ecosystems that provide them are in decline.

This has sparked a diverse array of efforts around the globe to value and pay for ecosystem services.

Many of these Payments for Ecosystem Services (PES) efforts – like the booming carbon markets – already channel billions of dollars into projects designed to keep the planet’s ecosystem infrastructure alive.

Others, however, are less developed.

Even in carbon – by far the most successful ecosystem market to date – the concepts are emerging, changing rapidly, and dispersed across geography and institutions.

All of which makes it difficult to get a clear sense of the big picture of these markets: What are the major markets for ecosystem services? How big are they? Who’s involved? Where are they heading?

Mapping the Markets

To map this PES landscape, the Ecosystem Marketplace researched the main PES schemes and each of their sub-categories (mandatory or “compliance” offsets for carbon forestry, voluntary offsets for carbon forestry, government-mediated watershed protection, and mandatory or “compliance” offsets for biodiversity, among others) and their key characteristics (size, environmental impact, community impact, market participants and shapers, and emerging trends).

To collect the information on such a broad spectrum of topics, we pulled together a team of authorities on PES, each of whom performed interviews, literature searches, and web searches to collect information for a specific category of market.

The result of this effort is a large spreadsheet showing all of the markets and their defining characteristics side by side. This poster-sized chart is a powerful tool for viewing and thinking about PES markets. We’ve dubbed it “the Matrix”.

To create a more reader-friendly format for accessing this information online, we’ve split the Matrix into ‘market profiles’ that are essentially executive summaries or narratives for each market.

Commodity Types

There are different ways of categorizing markets for ecosystem services. If you’re viewing them as ecological commodities, they follow the popular grouping of: carbon, water, biodiversity, and bundled services.

Carbon markets generally reward the stewardship of an ecosystem’s atmospheric regulation services – specifically, the absorption of carbon dioxide from the atmosphere.

Water markets provide payments for nature’s hydrological services – primarily the filtering of water through wetlands.

Biodiversity markets create an incentive to pay for the management and preservation biological processes as well as habitat and species.

Bundled payments secure all or a combination of carbon, water, and biodiversity services. Bundled payments also include those in which the ecosystem service payment is built into the price of the product, such as certified timber or certified produce.

Payment Types

If, on the other hand, you are viewing them as payment types, they fall into three categories: voluntary, compliance, or government-meditated.

Compliance markets are driven by regulation and enforcement, similar to other pollutant trading markets.

Voluntary markets are driven by ethical and/or business-case motives. In many cases, the threat of future regulation also drives these markets.

And government-mediated markets are publicly-administered programs that use public funds to pay private landowners for the stewardship of ecosystem services on their property.

Lay of the Land

The Matrix shows that while most PES markets are growing at approximately 10 to 20 percent a year, the carbon markets are skyrocketing at 200 to 700 percent a year.

While this is no surprise to most followers of environmental markets, carbon’s surge is a dramatic entrance for an environmental commodity onto the world markets, and perhaps indicative of the power of markets for ecosystem services.

Promises and Pitfalls

The participants and experts we surveyed said they believe existing markets have the potential to serve the environment – but may not be living up to their potential. This underscores that these payment systems are instruments that by themselves aren’t a solution.

PES, in other words, is not a single tool, but an entire tool box with different instruments for different circumstances.

To achieve the sustainable management of ecosystem services, PES schemes must be designed and implemented carefully, intelligently, and adaptively.

Spreading (and Tailoring) the Wealth

A recurring theme is the potential benefit for PES schemes in developing countries, as well as the necessity to tailor them to the specific circumstances of the region.

Many of the national compliance markets in developed countries require sophisticated regulation and enforcement to drive effective markets, such as species mitigation credits and water quality trading.

Developing countries, however, host a good number of PES schemes that are structured differently. The largest of these are the government-mediated programs in South Africa, Brazil, and China. China’s watershed protection program alone is estimated to generate $4 billion a year in payments.

Social Equity

Perhaps the most important example of how these markets must be crafted and managed carefully is the issue of social equity.

The majority of ecosystem services are produced in rural and natural areas where local communities depend closely on ecosystem goods and services and are the environmental stewards. It is clear from our research that an important aspect across all of these markets will be to ensure that the communities and small scale producers are able to actively participate and benefit from ecosystem service markets.

This will mean developing instruments to provide support, such as aggregation services to communities, shaping regulation to engage local small-scale providers, and clarifying tenure and user rights associated with these new opportunities.

There may be a large wave of investment opportunity in rural areas that are providers of these services. To make sure it is distributed fairly, organizations and overseas development aid groups that care about the equity dimension will have to provide a focused effort.

This is an important section of the Matrix and is reflected in the work of Forest Trends and the Ecosystem Marketplace.

Staying Oriented

A quick glance over the Matrix and through the pages of the market profiles will show that, indeed, there are a good number of initiatives attempting to value and pay for the services our green infrastructure provides. And with a closer look, informative patterns emerge in how PES are being applied in different circumstances.

We developed the Matrix to help members of the Katoomba Group and others working in this field to visualize and track the shifting global trends and nuances in PES – basically, to get oriented in the PES landscape.

Building a Database

To further this aim, we are developing an online database of the Matrix. This will provide convenient and current access to basic PES information provided in the Matrix. It will also allow for collaboration and data contribution, enabling the PES Matrix to be a living document under broad and continual update.

The Matrix products – chart, narrative, and online database – will aid in the evaluation and comparison of the different shapes and sizes of PES systems around the globe, creating a better understanding of what is being done, as well as where, by whom, and with what effect. We hope this will help refine existing PES systems and spur new and creative solutions.

Nathaniel Carroll is Biodiversity Market Adviser to the Ecosystem Marketplace and Forest Trends. He can be reached at [email protected].

Michael Jenkins is Publisher of the Ecosystem Marketplace and founding President of Forest Trends.

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