US Moving Ahead With Ecosystem Markets Despite Cap-and-Trade Setbacks

The US Senate has put climate-change legislation on the back-burner, while the courts have hobbled the Environmental Protection Agency’s plan to take its acid-rain reduction scheme nationwide.   That hasn’t stopped the Obama Administration from moving ahead with its plan to coordinate payment schemes for biodiversity and water.

2 August 2010 | It has been a schizophrenic couple of months for environmental markets.   The acid rain market, considered the founding father of all cap-and-trade markets and credited with slashing sulfur dioxide emissions in the United States, received a body blow in a recent EPA decision to curtail these markets’ use. And the long-anticipated U.S. mandatory cap-and trade carbon market was shelved by Senate leaders.  

Yet, thanks to key support from the Obama Administration, environmental markets that promote good stewardship of water and wildlife have a chance of delivering on their potential.

In June, the United States Department of Agriculture released its Strategic Plan for ecosystem markets, the first large-scale, panoramic effort to develop multiple environmental markets that promote ecosystem services.  

Written as the nation works to pull itself out of the worst recession since the Great Depression, the Plan embraces environmental markets as a key method to undergird farmers struggling to survive in an unsteady and rapidly evolving global marketplace.   It projects more than doubling the annual revenue these markets generate from $1.9 billion currently to $4 billion within the next five years.  

Since the plan is written and overseen by the USDA, some see it as a system written by farmers for farmers that could leave the environment as a forgotten step child. But others embrace the plan as an innovative way to address economic and environmental issues that have eluded the nation in the past.

“Markets properly designed can produce real environmental improvements and real revenue for farmers,” said Mark Nechodom from his Washington, DC office where he works as deputy director of the Office of Environmental Markets (OEM) under the USDA. The OEM was launched by the Bush administration and has been embraced by the Obama administration.

From Piecemeal to Partnerships

Because environmental regulations and enforcement efforts continue to fall short of their goal of protecting air, land, water and biodiversity, nations and communities have responded by creating marketplace solutions.     Through these markets, those who harm air, water, plants and animals have the opportunity to more than compensate by purchasing credits from businesses that restore, preserve and protect the environment.  

Environmental markets have sprung up piecemeal throughout the world during the past two decades.   Europeans, through the Kyoto Protocol, embrace a carbon cap-and-trade market as a primary means to reduce greenhouse gas emissions.   The United States created an acid-rain trading program – now threatened – that is credited for slashing sulfur-dioxide emissions by more than half.   Various nations and states have begun implementing water quality, water conservation and biodiversity markets.  

The USDA’s Strategic Plan consolidates these piecemeal efforts by creating partnerships with landowners to leverage investments, drive these markets and, if successful, achieve tangible environmental improvements.

Good News for Environmental Investors

The Plan, according to supporters as well as detractors, is good for both farmers and environmental-market investors.  

“What Obama is doing is feeding our business,” said Michael Van Patten from his New York City Soho loft where he works as founder of Mission Markets and Mission Markets Earth facilitating investments in environmental markets.

The Plan pledges financial, technical and planning support to create what it calls an “all-lands approach” to bring public and private owners together across landscapes and ecosystems.   It will connect and equip farmers with market information that enables them to earn revenue from ecosystem markets. And it announces the USDA’s intention to help develop tools and materials that will quantify the value of ecosystem services and monitor and assess their effectiveness.

Carbon markets alone – for now voluntary instead of compulsory as a result of the Senate’s actions – could offer huge boosts in income for farmers, ranchers and forest landowners’ income. The Plan details the large role it expects landowners to play in achieving the Administration pledge to reduce US greenhouse gas emissions 17 percent by 2020.   Plants naturally absorb and store climate-warming carbon dioxide, turn it into sugars and release oxygen into the atmosphere. Landowners, according to the Plan, will be able to bolster their incomes through conservation tillage and by improving energy and fertilizer efficiency, growing perennial grasses, planting trees on marginal farmland, minimizing deforestation and building methane digesters that process carbon-releasing cow dung.  

But Will it Work?

The Strategic Plan’s goal of promoting environmental markets faces significant hurdles.   Its release inadvertently coincided with events that emphasize market uncertainties and frighten investors.   Wall Street stock market prices plunged this month, spurring fears of a double-dip recession.   And environmental-market credibility took a big hit from actions this month by the Senate and the US Environmental Protection Agency.   The Senate decided to shelve debate and, thus, delay creation of a carbon market. And the EPA, responding to a court order, announced new federal pollution rules that will require energy plants to reduce their own emissions instead of relying on environmental market trades to do so.  

Meanwhile, assigning the USDA as the prime mover of ecosystem markets spurred doubts even among hard-core market supporters. Many say the USDA’s Strategic Plan focuses on supporting farmers – the job the USDA was created to fill – rather than on ensuring that environmental markets achieve their goal of restoring ecosystems.   For example, a farmer might cash in on ecosystem markets by restoring a wetland.   But his restored wetland might not achieve the environmental goal of protecting a threatened bird’s habitat or improving water quality.

“When one reads between the lines,” said Terry Anderson, a pioneer in free market environmentalism and executive director of the Montana-based Property and Environmental Research Center, (PERC), “one finds an ecosystem whitewashing of traditional agriculture subsidies.”

Answering the Skeptics

Although the USDA’s plans face significant hurdles, many environmentalists, government officials and environmental-market investors view the Strategic Plan as a gateway that could effectively resolve economic and environmental concerns that have eluded them for decades.   The key, they say, lies in establishing markets with consistent ground rules and reliable oversight.

“It is refreshing that the USDA has the interest in looking across media including water, habitat, air and biodiversity,” said Annie Petsonk, counsel for Environmental Defense that focuses on developing economic incentives to promote environmental protection. Numerous studies confirm that well-regulated environmental markets achieve environmental goals, she said, adding that “the USDA faces the challenge of making sure what they do is done with integrity.”

Adam Davis, partner in Ecosystem Investment Partners and president of the environmental investment firm Solano Partners as well as cofounder of Ecosystem Marketplace, agrees.  

“It is a tremendous advance for the government to explicitly recognize the value of environmental markets to achieve public policy objectives.”

Environmental markets already provide capital to develop better metrics for measuring environmental achievements such as improved water and air quality.   The problem, Davis said, is that farmers and other landowners have been unaware of these markets and their potential to bolster their incomes.

The government addressed this disconnect by assigning the USDA – with its long-standing relationship with farmers – with the job of promoting environmental markets.   Meanwhile, environmental enforcement agencies including the Environmental Protection Agency, the Army Corps of Engineers, the Bureau of Land Management and the U.S. Fish and Wildlife Service will continue to play the critically important role of ensuring compliance and accountability.

Marching Forward

The Plan can be viewed as the culmination of a series of steps to establish environmental markets. The last USDA Strategic Plan released in 2005 included elements that promoted market mechanisms to achieve environmental goals. The 2007 Farm Bill furthered this goal by serving as the single largest source of environmental spending by the federal government. Then last year OEM began to develop uniform guidelines to promote ecosystem markets.   And this past May, the government announced its Strategy for Protecting and Restoring the Chesapeake Bay Watershed, a strategy that supports environmental markets in their multiple forms – nutrient, sediment, habitat, carbon and wetlands trading – as the primary tool for environmental restoration of the Chesapeake Bay, the US’s largest and most polluted watershed that spans 64,000 miles and six states.  

Drum Roll for Environmental Markets

As Wall Street falters and farmers stumble, businessmen and government officials have pinpointed environmental markets as an innovative way to bolster the economy and the environment. Clearly, the environmental markets involving carbon and acid rain markets took big hits this month.   Yet, thanks to key support from the Obama Administration, markets that promote the preservation of water, land, air and wildlife have made significant strides.   The Strategic Plan released this month by the USDA culminates its crescending drum roll of support for these markets as a force to solve challenging environmental and economic conundrums.    

If successful, they will shore up the economy, the environment and the lives of struggling farmers.  

“We’re at the very beginning,” said Nechodom of OEM, “of a new chapter here.”

Alice Kenny is a prize-winning science writer and a regular contributor to Ecosystem Marketplace. She may be reached at [email protected].

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