Sustainable Prosperity Takes a Closer Look at Environmental Markets

One of Sustainable Prosperity’s recent research projects was to identify the environmental markets in Canada and estimate their value. We defined these markets as the exchange of an ecosystem good or service between a buyer and a seller. Tradable ecosystem goods and services include greenhouse gas or water pollutant credits, or the promise to carry out measures that should improve water quality, or the conservation of a particular ecosystem or wildlife habitat.

While there are some environmental markets that readily spring to mind, like the carbon trading programs established in Alberta and pending in Quebec, many other programs are not as large or widely-publicized. SP’s research uncovered 57 programs, with at least CAD $462 million in payments each year [ 1 ], and this is likely to be a low estimate. These markets take in only a small fraction of the overall value that ecosystems provide us with every year – indeed, since we rely on ecosystem goods and services for everything from potable water to food to microchip components, the value of ecosystem goods and services can be thought of as infinite. The Credit River watershed in the Mississauga-Toronto area is estimated to provide waste treatment, climate regulation, and water supply services worth $371 million annually. Similarly, the Black River watershed around Lake Simcoe provides $435 million in ecosystem goods and services annually. Some new tools, like the upcoming Putting Natural Capital on the Map application, can illustrate visually just how much we get from ecosystems.

Linking markets is a work in progress

Many of the markets that we found were quite small – based in local watersheds or only functioning within a certain province or county. Sometimes this is the best choice: if a policy’s goal is to improve the quality of water in Watershed A, it does not make much sense to allow offset credits in Watershed B. Similarly, if there is a very limited range of habitat suitable for a particular bird species, then contracts to increase some other type of habitat will not help to achieve conservation targets for that bird. From an economic theory standpoint, this can mean that markets are small and fragmented, and do not exploit many of the gains from trade that might be available in a system where trading is allowed and transaction costs are low. In the coming years, much work will be required in order to link markets together and to consolidate market infrastructure to decrease the cost of running the market. For instance, due to the complexity of water laws, the transaction costs of getting an inter-provincial water quality trading program set up could be high – but inter-provincial work might yield better results for an inter-provincial watershed. Currently, programs to improve water quality are often administered by individual provinces and counties, targeting local agricultural producers. This might make sense from the perspective of political and administrative ease, but water and other ecosystem goods and services do not respect political boundaries.

Regulation can incentivize investment

The private sector and public sector both have a role to play in increasing the availability of capital for ecosystem goods and services markets. The public sector’s main role is to establish the regulatory framework in which the market will operate. This can include legislating targets, establishing market registries, and ensuring compliance. A highly certain and transparent regulatory framework and market infrastructure will increase investor confidence and drive investment. In certain environmental markets, there is a great deal of voluntary spending and government payments for particular management actions, but the certainty of compliance-driven markets are much more attractive to the private sector, and thus have the potential to achieve greater scale and better environmental outcomes.

Markets run on information, and need to be designed accordingly

More work also needs to be done to develop metrics showing the comparability between credits and the effects of various conservation actions: how do we know what effect on water quality there will be from increasing a buffer strip’s width? How many trees do we need to plant in order to sequester a tonne of carbon by a given date, or to create habitat likely to support a given population of an endangered fish? The answers to such questions can vary substantially from place to place. Some markets take these geographical differences in value into account already. For instance, agricultural Alternative Land Use Services payment levels vary across the country, depending on the capacity of the land to sequester carbon and support biodiversity – but even there, the translation of natural capital value into dollars-and-cents payments is necessarily approximate. A better understanding of these quantification issues will likely create not only a larger market, as credit purchasers will be able to trust that their expenditures are effective, but also improved certainty that environmental outcomes will be achieved. Ideally, payments will be linked to outcomes rather than simply to outputs (that is, to activities assumed to have a given outcome). Some of this work is already underway, but there is a need for much more!

The road ahead

Environmental markets in Canada are still in their infancy. Determining where they fit into our environmental policy, even as compared to other market-based instruments like carbon taxes, will be subject to ongoing debate and analysis. Sustainable Prosperity’s report is just one step towards better understanding options we have in promoting the preservation of environmental values, and in turn support the long-term wellbeing and prosperity of Canadians.

Related Materials:

Environmental Markets 2012 Report Environmental Markets Press Release