Conservation MarketsConservation Markets

Mark Ankeny

September 13, 2009

Idaho National Laboratory

Mark Ankeny

September 13, 2009

Idaho National Laboratory

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USDA ANNOUNCES NEW OFFICE OF ECOSYSTEM

SERVICES AND MARKETS

WASHINGTON, Dec. 2008

A National Ecosystem Services Research Partnership

Opportunity for Participation

Environmental Protection Agency

December 2008

Environmental Research and Education Needs:

An Agenda for a New AdministrationDecember 2008

National Council for Science and the Environment Improving the scientific basis for environmental decision making

National Council for Science and the Environment Improving the scientific basis for environmental decision making

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Business for Social Responsibility (BSR) Report:

Business drivers for ecosystem function

1. New ways for businesses to:

Create value. Consider risk mitigation. Differentiate among competitors. Realize new revenue streams through ecosystem services protection. Access capital and new markets. Save on costs.

2. New mindsets on the part of regulators and key stakeholders that prioritize holistic ecosystem approaches over siloed management of air, freshwater, biodiversity, etc.

3. New market valuation techniques as trendsetters incorporate ecosystem services into their research

4. New criteria for project finance and credit, as financiers signal that some environmental assets are priceless

1. New ways for businesses to:

Create value. Consider risk mitigation. Differentiate among competitors. Realize new revenue streams through ecosystem services protection. Access capital and new markets. Save on costs.

2. New mindsets on the part of regulators and key stakeholders that prioritize holistic ecosystem approaches over siloed management of air, freshwater, biodiversity, etc.

3. New market valuation techniques as trendsetters incorporate ecosystem services into their research

4. New criteria for project finance and credit, as financiers signal that some environmental assets are priceless

Measuring Corporate Impact on Ecosystems: A Comprehensive Review of New

Tools: Synthesis Report. Business for Social Responsibility (BSR). December 2008

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New Research, Business and Market Opportunities

New markets

�Certification of ecosystem products

�Fair trade products

�Organic products

�Environmentally-friendly productsExample

In North America and the

Pacific Rim, total sales in

fair trade goods rose 52%

from 2002 to 2003.1

Example

Total value of aggregated

carbon markets globally

was more than US$10

billion in 2005.1

�Water quality trading

�Wetland banking

�Mitigation credit trading

�Threatened species banking

�Innovation in pollution prevention,

capture, treatment and reuse

New businesses

World Business Council for Sustainable Development (WBCSD)

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Optimizing Sustainability is Difficult with

Missing Pieces

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Conservation Markets Require Many Pieces

and are Interdisciplinary

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How Do You Measure Production?

“ A country could cut its forests and

deplete its natural resources and this

would show only as a positive gain to

GDP despite of the loss of capital ”

MEA 2005

“ A country could cut its forests and

deplete its natural resources and this

would show only as a positive gain to

GDP despite of the loss of capital ”

MEA 2005

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Full Cost Accounting

� Full cost accounting, triple bottom line, measuring

well-being and other proposals for accounting

reform often include proposals to measure an

"ecological deficit" or "natural deficit" alongside a

social deficit and financial deficit. It is hard to

measure such a deficit without some agreement on

methods of valuating and auditing at least the

global forms of natural capital (e.g. value of air,

water, soil).

� Full cost accounting, triple bottom line, measuring

well-being and other proposals for accounting

reform often include proposals to measure an

"ecological deficit" or "natural deficit" alongside a

social deficit and financial deficit. It is hard to

measure such a deficit without some agreement on

methods of valuating and auditing at least the

global forms of natural capital (e.g. value of air,

water, soil).

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Economic Valuation of Ecosystem Services

Avoided Cost

services allow society to avoid costs that would have been incurred in the absence of those

services (e.g. waste treatment by wetland habitats avoids health costs)

Replacement Cost

services could be replaced with man-made systems (e.g., restoration of the Catskill Watershed

cost less than the construction of a water purification plant)

Factor Income services provide for the enhancement of incomes (e.g. improved water quality increases the

commercial take of a fishery and improves the income of fisher

Travel Cost service demand may require travel, whose costs can reflect the implied value of the service (e.g.

value of ecotourism experience is sufficient that a visitor is willing to pay to get there)

Hedonic Pricingservice demand may be reflected in the prices people will pay for associated goods (e.g. coastal

housing prices exceed that of inland homes)

Contingent Valuation – service demand may be elicited by posing hypothetical scenarios

that involve some valuation of alternatives (e.g. visitors willing to pay for increased access to

national parks)

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Market Actors and Stacking: One

BMP to Multiple ServicesBest Management

Practices

Market

Functions BuyersSellers

Users/

Buyers

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Key Question:

What’s in it for the farmer or landowner?

� Fundamentally, a main driver for

agencies or other buyers is to affect /

improve private land management

decisions

� Mortgages trump stewardship for most

landowners

� Fundamentally, a main driver for

agencies or other buyers is to affect /

improve private land management

decisions

� Mortgages trump stewardship for most

landowners

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Stacking

� Parcels– Subparcels– Decision making level

� Blocks– Individual ecosystem services– Often individual models

� Stacks– Leverage (OPM)– Generic commodity to specific site

� Integration

� Parcels– Subparcels– Decision making level

� Blocks– Individual ecosystem services– Often individual models

� Stacks– Leverage (OPM)– Generic commodity to specific site

� Integration

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� Controlled and monitored fertilizer

application

– 4R’s

� TFI

– DoD, USDA subsidies, WWTPs, power

companies, quality of fishing/fisheries

� Controlled and monitored fertilizer

application

– 4R’s

� TFI

– DoD, USDA subsidies, WWTPs, power

companies, quality of fishing/fisheries

Water Quality Trading

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Flood Risks: A “What’s in it for me?”

answer for suburbanites

� Personalized probabilities and

costs of flooding to homeowner

� Personalized costs of

urbanization and climate

change on flooding probabilities

and on losses

� “This is what it’s going to cost

you!”

� Links to zoning/ecosystem service

approaches to abate flood losses.

� Personalized probabilities and

costs of flooding to homeowner

� Personalized costs of

urbanization and climate

change on flooding probabilities

and on losses

� “This is what it’s going to cost

you!”

� Links to zoning/ecosystem service

approaches to abate flood losses.

LiDAR

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Conservation Market Architecturecommoditization and commodities

User Interface

Trading

Stacks/Analysis

Integration

Models Data

Registry

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Commodity Component: SAS BookRunner

• Multi-commodity support, including Electricity, Natural Gas, GHGs, Crude Oil, Coal and

associated derivative products;

• Comprehensive deal capture within a database environment;

• Physical Spot and Forward Contracts, Transportation, Storage, Futures, Fixed / Float and

Basis Swaps, Vanilla and Exotic Options;

• Mark-to-Market, Value-at-Risk, Earnings-at-Risk, and Credit-Value-at-Risk;

• Industry leading market and credit risk modules;

• Collateral management;

• A gallery of 75 pre-configured reports;

• Automatic market data updates via live feeds;

• Detail and summary reports such as Transaction Activity, Mark-to-Market, Financial

Exposure, Physical Volumetric Exposure, FX Exposure, Settlement Reconciliation, and

Counterparty Credit Risk;

• Reporting and documentation;

• Multi-currency support;

• Settlement billing;

• Confirmation letters.

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Dashboards/

Business

Intelligence

18 Physical Emissions in the system

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Input Screen

20Varying the quantity for different time buckets via the “Quantity Override” mechanism.

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Emissions by Month

22Price curves in the system.

23Commodity setup. GHG is the main commodity and each type of GHG is a “Sub-type.”

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Evaluate Land Management Options

Continuous Row Crops

Precision Farming

Native Vegetation

No Till

Select Management Practices: X

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Select Options, Look Up Agency

Nutrient Loading Model Results

Continuous Row Crops

Precision Farming

Native Vegetation

No Till

Select Management Practices:

X

X

X

X

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Agency Model Results and

Estimated Market Value

Management Practice – RUSLE2 Model

Phosphate lbs/yr Estimated Market

Practice Reduction Value

Row crops 0 $ 0

Bike path-phosphate reduction 35 $105

Bike path-easement 0 $ 50

No Till 20 $ 60

X

X

Sell Save & Sell Later

X

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LegendLegend

Stacking & Market Structure

Projects/Buyers

Boise WWTP

Fisheries & Wildlife

Warm Springs Land Trust

Projects/Buyers

Boise WWTP

Fisheries & Wildlife

Warm Springs Land Trust

Mgt. Practices Of InterestMgt. Practices Of Interest Parcels/Sellers

5, 44, 34, 82, 76

44, 82

19, 34, 76

Parcels/Sellers

5, 44, 34, 82, 76

44, 82

19, 34, 76

Easement

Vegetation

No-Till

Precision Farming

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Warm Springs Land Trust Bicycle Path

Derivatives Screen

82

5 44

Estimated Market Value: $6,220 Records: 3

Parcel Phosphate Reduction Carbon Sequestration Wetland Mitigation

19 $200 0 0

34 $800 $100 $1500

76 $1000 $120 $2500

76

19

34

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Warm Springs Land Trust Bicycle Path

Order Status Screen

82

5 44

76

19

34

Conditional Bid Outstanding

Total: $10,000

Parcel Bid Status Modify Bid

19 $1000 accepted Closed

34 $4000 rejected

76 $5000 accepted Closed

$5000

X

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Regulatory Oversight

Parcel: 82

Owner: Farmer Dave

Compliant: No

BMPs Purchased Contracted Phosphate Reduction

No Till 100 lbs

Comments:

Moldboard plowing observed

Verification Report Send NOV

Edit

Parcel: 76

Owner: John Doe

Compliant: Yes

BMPs Purchased Contracted Phosphate Reduction

Bike Path 50 lbs

Plant Grass 60 lbs

Comments:

Edit

X

X

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Backup Slides

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Conservation Market Architecture

User Interface

Trading

Stacks/Analysis

Integration

Models Data

Registry