New USDA Guide Highlights Ecosystem Credit Trading Opportunities and Challenges

Posted on Tuesday, December 6th, 2011 by Jeanne Merrill

The USDA’s Natural Resource Conservation Service recently released a new guide, The Natural Resources Credit Trading Reference.  The reference is intended for NRCS staff, policymakers, and others interested in the potential of the marketplace to incentivize conservation and ecosystem services from agriculture.

The guide attempts to tackle the critiques of those who remain skeptical that developing a marketplace of buyers and sellers of ecosystem services will achieve greater environmental stewardship in agriculture, compared to traditional conservation programs and command and control regulation, and outlines how such markets might best be developed.

Whether you’re a convert to the powers of the marketplace to bring about greater stewardship of the environment or wary of Chicago commodity traders getting into the business of trading water, carbon and other environmental goods, as someone concerned with sustainable agriculture, it is useful to understand the pros and cons of environmental credit trading.  It’s the current policy idea du jour.

How to achieve greater environmental stewardship?

For decades economists have noted the problems of externalities leading to environmental pollution. Since the benefits of clean air, water, and healthy soil aren’t factored into the price of most goods we buy there is no incentive, economists argue, for the producers of those goods – food, shoes, cars, you name it – to conduct their business in a way that protects the environment and minimizes pollution.

To make sure our rivers don’t burn as they once famously did in Ohio and our air doesn’t choke us, in the 1970s Congress passed landmark legislation – the Clean Water, Safe Drinking Water, and Clean Air Acts  – that regulated companies to prevent pollution and safeguard our environment.  And those laws are largely credited with significant improvements in our environment – the rivers don’t burn anymore and air quality has improved in many areas.  But we still have environmental pollution, and we’re now aware of more complex environmental problems like climate change.

How can we better address the environmental pollution problems in our communities and tackle the complexities of issues like climate change?  Some argue that if we can put a price on the benefits of ecosystem services like clean water and air and reduced greenhouse gas emissions then we can use the power of the market to achieve more cost-effective and more nimble solutions to our environmental problems.

Can we put a price on it?

The new USDA guide focuses on environmental credit trading schemes, which are set up as an exchange where a regulated entity, say a power plant, pays the producer of ecosystems services (clean air, water, biodiversity, etc.), such as a farmer, to meet greater environmental stewardship goals and achieve the standard set forth in the regulation.

The authors outline essential features for developing an effective market for ecosystem services.  Key features include an agreement on the commodity that is being traded, which in the arena of biological ecosystem services can get complex fast.  The authors note , for example, the commodity is in the form of carbon sequestration – the ability to store atmospheric carbon, a greenhouse gas, in soils and woody biomass  –  what happens if a change in agricultural practice or a forest fire releases the carbon?  Who is responsible for the loss of carbon?  Is the commodity price discounted to account for the potential of carbon loss? By how much?

Another essential feature of effective markets, they argue, is a price for the commodity must be established and be transparent. But little attention in the guide discusses how to set prices.   How much is clean air worth?  And if the clean air provided by a farm is intended to offset the air pollution from a factory is that clean air commodity traded at a one-to-one  value (i.e. is the clean air benefit from the farm equal to the loss of clean air from the factory?) or not?  If not, what’s the difference?

Ecosystem models have become more sophisticated in recent years, and the authors argue the models can be used effectively to estimate the amount of ecosystem benefit from agricultural activities to help inform the development of the market.  But a model is only as good as its data. If we depend upon models to estimate the ecosystem service provided by agriculture, we’ll need regional and in some cases local data (soil, climate, etc.) to calibrate them.

Moreover, a model may be able to account for how a change in agricultural practice can achieve a reduction in water contamination, but it may miss how that change affects air quality, wildlife habitat or GHG emissions.  And what if one activity is good for improving water quality, but it hurts biodiversity?  How do we determine these trade-offs?

Can the marketplace help transform agriculture?

In a November article in Science, a group of researchers recently highlighted the promise and peril of paying for ecosystem services.  They argue that few existing ecosystem payment programs pay for ecosystem services that address multiple benefits.

They note: “Incentives for biofuels production that promote conversion of tropical forests to tilled fields may reduce carbon storage and habitat that supports biodiversity.  Incentives for habitat protection that create corridors between protected areas may increase disease risks by increasing contact between wild and domesticated animals. Where ecosystem services are jointly produced, paying for only one service can be as damaging as paying for none.”

A central tenant of sustainable agriculture is the importance of taking a whole farm systems approach.  That is, to create a more sustainable, biological farming system we must take an integrated approach to managing the soil, pests, habitat, etc. of the farm.

The new USDA reference outlines important considerations to developing effective market-based mechanisms to achieve greater environmental stewardship in agriculture.  It is worth a read.  But it is this central tenant of sustainable agriculture that they do not adequately address:  Can the buyers and sellers of ecosystem services avoid the unintended consequences of rewarding the improvement of one aspect of our environment without degrading others?

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