Some Myths and Misunderstandings in Biodiversity Credit Markets

Black-footed Ferret hunting a prairie dog. Credit: Kimberly Fraser / USFWS

Biodiversity credit markets are new and unfamiliar to most of us, and misconceptions abound. Because carbon credit markets have attracted so much attention - good, bad, and ugly, there is a (mostly) false impression that carbon markets are, or should be the single model for a biodiversity market, and that couldn’t be farther from the truth. I spoke recently as part of an excellent series on biodiversity credits hosted by the Environmental Leadership Training Initiative, and below I’ve adapted my comments from that event to address some of the myths and doubts often posed by both advocates and skeptics.

1. Myth: biodiversity markets are entirely novel and untested, and can be seen as an extension of carbon markets. 

We can’t stress enough that markets that transact biodiversity outcomes have been around for decades. The habitat-based markets like the U.S. wetland mitigation and conservation (i.e. endangered species) banking markets are huge - $3.5 Billion in market size, are built off of legislation from the 1970s, and have developed over the last 25 years. And strangely, these markets are not particularly well-known even in the U.S. given their size and their effectiveness, but they are operationally biodiversity credit markets in all but name. One obvious distinction is that these are regulatory, rather than voluntary markets, but they are a blunt and definitive answer to many of the doubts about the operation of markets based on biodiversity - they work! They do make use of the mitigation hierarchy, so they're avoiding impacts and reducing their impacts, and where the impact is residual, that's where credits are used to offset. They do ensure additionality and permanence, and they really do encourage the avoidance of impact. They are effective in steering funding into habitat restoration and preservation. Needless to say, this is not some exotic, wild, crazy idea - we do know how to do this. And while we should look to the carbon markets for wisdom and some caution, this kind of regulatory biodiversity market already exists in the U.S., in Colombia, and in England with Biodiversity Net Gain, and interest is growing in other parts of the world as well. 

2. Myth: Measurement of biological systems is too complex to be reduced to a useful approach in an environmental market.

For anybody who's studied ecology, you know that ecological systems are infinitely complex - what aspects of an ecosystem can possibly capture a holistic assessment of the system, especially when offsetting uplift in one place for impact in another? The old yarn "All models are wrong, but some are useful" (G. Box) applies here. And it's important to think of it in terms of usefulness. What is good enough for the market to work and create positive outcomes? And how can we design the system - especially for offsets - to acknowledge and accommodate the imperfection in measurement? We know there are many workable ways to measure change in natural systems. Ecologists are likely to disagree on what's best and what indicators are really capturing the ecosystem best. Are understory plants a really good indicator? Are insects a good indicator? Migratory birds? What about soil fungi, for example? The fact that there isn't complete consensus doesn't mean that this isn't a workable system. Just as in carbon markets (and so many other realms of policy and markets!), there may be significant imprecision and discussion about new and better ways to measure carbon, in above ground carbon, below ground carbon, and so on. That doesn't prevent them from operating even if those markets and biodiversity markets alike will keep learning and refining what they're doing. That's part of the process. While ecological complexity is very much real, the goal is to have measurements that are good enough to ensure integrity and positive outcomes, and that is absolutely feasible now. Workable measurement systems already exist and are only going to get better.

3. Frequently misunderstood: The “F” word - Fungibility, or treating two ecological units as the same in a transaction or in a compensatory offset - Can one piece of habitat be considered equivalent to another? 

This is a big source of confusion as there are a few different ideas mixed up in what we might call fungibility, and depending on your position, you might think that it should be absolutely necessary or absolutely forbidden. Part of the confusion stems from this being such a singular difference between carbon markets and biodiversity markets. Carbon, in principle, can be one single global market. It's one atmosphere, and an avoided or removed ton of carbon makes the same contribution everywhere on Earth. It's just not so with biodiversity

There are sometimes arguments for (or against) globalized (including secondary) trading of credits that would require biodiversity to be fungible like a commodity - like a barrel of oil, for example. The argument goes that in order to be able to financialize things properly with scaled up private sector investment crossing borders, we would need to make everything tradeable, but that’s entirely off the mark. If the idea of trading a chimpanzee for a jaguar (or chimpanzee habitat for jaguar habitat) sounds crazy, it’s because it is, and and that's not what biodiversity credit markets aim to do. 

But fungibility is important and essential in some contexts, specifically for ecological compensation. Damage to an ecosystem should be compensated by investment in that same ecosystem, and only at a local and ecologically equivalent scale determined by ecologists. This is already how we do regulatory habitat banking, and it works.

White-lined sphinx moth on Seedskadee National Wildlife Refuge, Photo: Tom Koerner/USFWS

And how about market creation and attracting investment? Should there be a single universal unit for this to work? There's been a great deal of discussion about this but it seems rather unnecessary, and probably impractical, especially at this early stage of innovation and learning. Every methodology is built from distinct indicators, and every ecosystem is distinct, even within the same ecosystem type. A good (but partial) analogy here might be currencies, where most countries have their own, and despite Mexico using the peso and Indonesia using the rupiah both economies can function and attract investment. It’s perfectly fine if we have distinct markets for say, Columbia River salmon credits and Kirtland’s warbler credits, where both represent high quality ecological uplift but they sell for very different prices and aren’t inter-tradeable. While voluntary markets need to become more established for large scale investment to grow, we know that having many distinct local markets doesn’t dissuade savvy international investors, who have plowed hundreds of millions of dollars into US regulatory habitat banking (as in #1 above). 

4. Confusion (and debate) abounds: Offsets or credits? What do we really mean? 

This is partly a terminology question, but also a question of effectiveness masquerading as an ethical question. In some contexts, the words offset and credit are considered to be quite distinct, but it’s complicated. Operationally, the projects on the ground might be indistinguishable, and voluntary credits should be held to the same high standards of regulatory credits. An offset however, must be formally regulated. You need to have a regulator deeming what is sufficiently high quality (e.g. ecologically equivalent) and therefore what claims a buyer of a credit might make about their investment. 

Beyond the definitions, this is tied up into philosophical arguments about whether or not you can actually put a price on biodiversity, and when you do put a price on biodiversity, does that simply facilitate the destruction of it? I’ve addressed this in detail here, but the short answer is that we know how to make compensatory offset systems work, and they can both drive investment and reduce impacts in the first place. If our options are to disconnect credits from impact, or to tie them at the hip to impact with a compensatory system, the latter is a much better idea because it makes it costly to destroy biodiversity. The idea that credits should be unrelated to impact  is wrongheaded and shifts the conservation agenda back to the status quo, which is too often that corporate nature investment is purely PR-focused philanthropy. We need a structure that imposes a cost on creating impact in the first place while we drive funding into productive uses. 

Fortunately, it’s becoming more likely that “voluntary” credits transacted outside of a formal regulatory system will be nonetheless predominantly used to compensate ecological impact, even if informally. This has long been the case under different terms, where corporates facing criticism over impacts in certain ecosystems have made philanthropic donations in those same places to (that’s right…) offset their impacts. 

The difference now, though this “disclosure offsetting,” is that more corporates are making efforts to carefully assess and disclose their biodiversity impacts, and if they take the process seriously, their investments will be scaled to the impact they cause, rather than just symbolically related. Just as they have with climate, disclosure means companies are more likely to acknowledge their biodiversity footprint and work to address it. They can avoid some impacts and reduce others, and there will be residual impacts, inevitably. What should they do about those residual impacts? You guessed it - voluntary biodiversity markets can provide the ecologically equivalent credits to compensate for those impacts, even in lieu of regulation. And rather than make efforts to avoid that, we should embrace it! Evidence-based, third-party-verified, high integrity units of biodiversity uplift are the tool to drive investment in restoration and preservation while putting a price tag on ecological damage all at once. The path forward isn't about whether biodiversity markets can work - we know they can - but about how to implement them with the highest ecological integrity and financial effectiveness.