Natural Capital Concepts in Practice: Experience in the US (and farther South) Brian C. Murray Director for Economic Analysis, Nicholas Institute for Environmental Policy Solutions Research 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 Nature as a capital stockEcosystem services (flows) Source: Millennium Ecosystem Assessment The economic value of the natural capital Derives 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 P W S 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 Market Marginal cost of ES provision Price Quantity exchanged Q: What drives private demand for an ecosystem service? Pure self interest Altruism 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 marine ecosystems Forest carbon offsets in California compliance markets - entities can meet up to 8% of compliance obligations w/offsets 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 type2020 market projection (in 2006) Actual market in 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