policy

Toward a Rational Exuberance forEcosystem Services Markets• Jeffrey D. Kline, Marisa J. Mazzotta, and Trista M. Patterson

Ecosystem services markets have become a popular topic among environmental policymakers andecosystem protection advocates. Their proponents view markets as a promising new way to financeconservation of threatened ecosystems worldwide at a time when the need for additional protectionseems especially critical. Their advocates in forestry promise that such markets will soon offer newfinancial opportunities to forest landowners to augment or even replace income from the sale of timber,thereby increasing financial incentives for landowners to retain land in forests. But what is the realpromise in ecosystem services markets and what can realistically be achieved by their implementation?We provide on overview of how environmental markets work in theory and discuss several issues thatinfluence how effective they con be. We conclude that the promise of ecosystem services markets greatlydepends on the particular circumstances of program implementation, including what services are to betraded and whether they are amenable to trading, the ability to enact and enforce regulation sufficientto induce trading, and how expected program results compare with those likely to arise from otherconservation policy approaches.

Keywords: land-use change, ecosystem protection, open space preservation, forest amenities

Ecosytem services markets lately havebecome a popular topic among envi-ronmental policymakers. Their pro-

ponents view markets as a promising newway to finance conservation of threatenedecosystems worldwide at a time when theneed for additional protection is especiallycritical. Their advocates in forestry promisethat such markets will soon offer new finan-cial opportunities to forest landowners toaugment or even replace income from thesale of timber and other forest commodities,thereby offering financial incentives forlandowners to forego development opportu-nities and retain land in forests. Touting

ecosystem services markets is not limited tonongovernmental environmental advocates.It is now policy of the US Forest Service to,among other objectives, enhance protectionof private lands that arc important comple-ments to national forests in the productionof ecosystem services (e.g., Collins and Larry2007, US Forest Service 2007, p. 8, Collinset al. 2008). But what is the real promise ofecosystem services markets and how muchadditional conservation can realistically beachieved by their implementation? In thisarticle, we provide an overview of how envi-ronmental markets work in theory and dis-cuss several issues that influence how effec-

tive they can be. Our intent is to enrichongoing discourse about ecosystems servicesmarkets by outlining some of the challengesinvolved in their design and implementa-tion.

Much of the current interest in ecosys-tem services markets in the United States hasarisen from concerns about the degradationof ecosystems resulting from the fragmenta-tion and loss offorestland and open space atthe hands of development. Developmentarises from market forces, such as popula-tion and income growth, which increase de-mands for land for residential, commercial,industrial, and infrastructure uses. Increas-ing demands, in turn, increase the value ofland for development relative to less inten-sive uses such as forestry, grazing, and agri-culture. This provides landowners with astrong financial incentive to sell land tor de-velopment. Public polices can influence thedevelopment process by regulating where itcan occur such as with zoning or influencingthe financial decisions oflandowners using avariety of incentives. Common policy ap-proaches for deterring landowners from de-veloping their lands try to increase the finan-cial and other rewards landowners receivefor retaining land in forests and other openspace. These include reducing property taxeson forest, range, and agricultural lands; pro-viding subsidies for conducting conserva-

Received June 27,2008; accepted February 11, 2009.

Jeffrey D. Klint, (jkline@fi.ftd.us) is researchforester, US Forest Service, Pacific Northwest Research Station, 3200 Southwest Jefferson Way, Corvallis, OR 97331.Marisa J Mazzotta (Marisa@mjmazzotta.com) is environmental and natural resource economist, M.j Mazzotta, Ltd., 10 Kickapoo Run, Charleston, Rl 02813.Trista M. Patterson (tmpatterson@fs.ftd.us) is research economist, US Forest Service, Pacific Northwest Research Station, 3200 Southwest Jefferson Way, Corvallis,OR 97331. The authors thank Jamie Barbour, Court Smith, Denis White, and two anonymous reviewers for hdpfol comments.

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tion-oriented management activites, andpurchasing development rights, conserva-tion easements, and land in fee simple (e.g.,Bengston et al. 2004). Current enthusiasmfor ecosystem services markets arises in partfrom an interest in providing still anotherway to fund landowner incentives. Throughmarkets, landowners could be compensatedfor ecosystem services their lands producewith funding coming either from entitiesthat damage ecosystems or directly benefitfrom the ecosystem services that are pro-duced.

From the outset, there is no easy way toknow whether ecosystem services marketswould substitute for or complement existingpolicy approaches to ecosystem protection.Whether markets might be preferable toother approaches-including simply regu-lating actions that cause ecosystem dam-age-depends on how well several practicalchallenges can be addressed when applying atheoretical model of environmental marketsto the real world. Those challenges involveovercoming measurement and monitoringdifficulties associated with evaluating the ef-fects of management actions intended tomitigate ecosystem damage or enhance eco-system health, among others. Questions alsoarise over whether ecosystem services mar-kets might perform better apart from gov-ernment regulation and under the sole con-trol of nongovernmental organizationswhere they can emerge naturally via privateenterprise. Despite current enthusiasm forecosystem services markets, there are feweasy answers to such questions. Acknowl-edging that there are challenges ahead can bea first step in assessing what role ecosystemservices markets might play in an overallstrategy of ecosystem protection.

Ecosystem ServicesEcosystem services are the products of

functioning ecosystems that often are avail-able without direct costs to people who ben-efit from them (e.g., Constanza et al. 1997).Many typologies have been proposed fordescribing ecosystem services (e.g., Daily1997, de Groot et al. 2002, MillenniumEcosystem Assessment 2005, Brown et al.2007); the typology that is used depends onthe purpose it is meant to serve. Interestedreaders will find discussions about the prac-tical implications of different typologiesin Boyd and Banzhaf (2006) and Kline(2006a). Whatever typology is used, ecosys-tem services provide a framework for de-scribing all the attributes of ecosystems that

benefit humans. The desire to describe andevaluate the nonmarket benefits arising fromforest landscapes and incorporate them intopublic and private decision making is notnew and early attempts can be found in thework of economists such as Peterson andRandall (1984), Peterson et al. (1988), andBowes and Krutilla (1989), among others.These works followed even earlier efforts todescribe multiple-use forestry on publiclands as the joint production of beneficialforest outputs, such as timber, forage, water,recreation, and habitat for species of com-mercial or recreational interest (e.g., Greg-oty 1955). However, the shift toward eco-system management in recent decades hasincreased interest among noneconomistsin describing similar and other ecosystembenefits, largel y to ad vocate for ecosystemprotection (e.g., Daily 1997, Collins andLarry 2007). For most natural resource andenvironmental economists, the only real dif-ference between the current notion of eco-system services and their traditional concep-tualization of multiple forest benefits is theemphasis on ecosystems as an organizingstructure of benefits.

Two economic concepts that are im-portant to understanding ecosystem servicesare externalities and public goods. External-ities are the side effects of one person's eco-nomic activity, e.g., timber production, thatinfluence the well-being of somebody else(e.g., Nicholson 1989, P: 718). An exampleof a positive externality is the benefit of wa-ter flowing from private forestland that pro-vides a municipality with a reliable source ofwater of sufficient high quality as to requirelittle in the way of treatment. Conversely, anexample of a negative externality is the po-tential cost imposed on that municipality inthe form of additional water treatment madenecessary by sedimentation resulting fromeventual harvest of private forestland. Be-cause neither the benefit of high quality wa-ter nor the cost of sedimentation arc re-flected in the returns to forest managementreceived by forest landowners, landownershave little financial incentive to consider theexternal benefits and costs in their forestmanagement and harvest decisions. Exter-nalities are produced along with economicactivity, but their positive or negative valuesgenerally are not reflected in prices of endproducts resulting from that activity.

Public goods are things that once pro-duced, benefit everyone and there generallyis no way of excluding nonpaying beneficia-ries (e.g., Nicholson 1989, p. 729). For ex-

ample, forest landowners who produce pub-lic goods, such as scenic views or clean air,generally are unable to exclude anyone fromenjoying these benefits. For this reason,landowners generally are unable to receivecompensation for producing public goodsthrough normal market transactions, be-cause it is difficult to "sell" goods when youare unable to restrict would-be purchasers'access to those goods. A feature of publicgoods is the lack of clearly defined orstrongly exercised property rights for them.For example, no individual or entity ownsclean air. This feature generally acts as a dis-incentive for individuals or private entitiesto act on behalf of public goods, becausethey are unable to gain financially from pro-ducing and selling public goods.

Most ecosystem services have character-istics of both externalities and public goods.The values of ecosystem services producedon private forestland generally are not re-flected in prices of forest commodities andland. Landowners thus have little financialincentive to consider ecosystem services intheir land-use and land-management deci-sions. When forest landowners consider seil-ing land for development, the potential im-pact to water quality, scenic views, wildlifehabitat, or any of the myriad other ecosys-tem services that forestlands provide typi-cally does not enter their financial decision.As a result, more forestland will be devel-oped than is desired from a social perspec-tive. Such market failures arc a root cause ofexcessive forestland and open space loss inthe United States.

Dealing with externalities and publicgoods is one of the fundamental rationalesfor government involvement in environ-mental protection. Unregulated commodityand land markets generally will not addressthe issue of whether or not ecosystems areadequately protected and the ecosystem ser-vices they provide adequately secured. Thatis because the costs to the public associatedwith ecosystem decline and the loss of eco-system services generally are not consideredin market transactions for commodities andland. So, if society finds that there is insuffi-cient ecosystem protection and wants to dosomething about it, someone must interveneon behalf of society to protect ecosystemsand the services they provide. Usually, it isgovernments that may take on the responsi-bility of protecting ecosystems by exercisingthe public's communal property rights toecosystem benefits. Governments may doth is directly th rough a system of public-

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owned and managed lands, such as our na-tional forests and grasslands, or indirectlyusing various policies and programs thatprovide incentives to private landowners toprotect ecosystems. Nongovernmental orga-nizations, such as conservation organiza-tions (e.g., The Nature Conservancy) andland trusts, also play a role both in the directpurchase of conservation easements andland and by offering their own incentives toprivate landowners to manage lands to en-hance habitat or pursue other ecological ob-jectives. The idea of ecosystem services-as atypology of the benefits that people receivefrom ecosystems-provides a convenientway to foster intervention on behalf of eco-systems by cleanly defining what is at stakewi th ecosystem decline and correspondingprotection efforts.

Government intervention to protectecosystems traditionally has involved one ora combination of regulation, taxes, subsi-dies, and the protection and management ofland (Table 1). Althoug most people un-derstand how these more common ap-proaches work, the creation of markets forecosystem services with the intent of foster-ing ecosystem protection is more novel. Be-fore we can consider what factors influencethe potential effectiveness of ecosystem ser-vices markets in practice, we must first con-sider how such markets work in theory. Wewill use carbon trading to address climatechange as an example, but the principles aresimilar for other types of ecosystem servicesmarkets.

A Carbon Market ExampleCarbon emissions well exemplify the

problem with externalities and public goods.In an unregulated world, industry, manufac-turers, and power companies, e.g., all carryout production with little consideration ofthe carbon they emit. Some, such as oldcoal-fired power plants, are heavy emittersand some are light emitters that perhapshave invested in newer less polluting tech-nologies or produce things more efficiently(Figure l a). Either way, all producers con-tribute to total atmospheric carbon and the

206 Journal of Forestry • June 2009

resulting negative externality of global cli-mate change. The lack of property rights tothe atmosphere provides producers little in-centive not to, because they need not pay forthe right to emit carbon. Public policies fo-cused on carbon and climate change exercisethe public's communal right to clean air bylimiting or reducing emissions through reg-ulation or some other approach.

With a purely regulatory approach, thegoal is to reduce total emissions by establish-

ing a uniform cap on the emissions that in-dividual producers can emit (Figure l b).However, such caps may be inadequate toreduce aggregate emissions because they dolittle to control entry into the emitting in-dustry. Moreover, the caps might severelyconstrain heavy emitters, while affectinglight emitters little if at all. With pure regu-lation, heavy emitters have two options: (1)they can curtail production to reduce theircarbon emissions below their allowance, or

(2) they can invest in less polluting technol-ogy, enabling them to maintain productionwhile reducing their carbon emissions. Theintent of creating a carbon market is to pro-vide one other compliance option to heavyemitters-the option to purchase additionalemission allowances to maintain productionwithout having to reduce their carbon emis-sions.

A problem with a purely regulatory ap-proach to carbon is that it ignores the com-parative advantages different producers havein both the production of goods, such aselectrical power, and the reduction of car-bon emissions (emissions abatement). Lightemitters may be able to continue their initialproduction level without exceeding theircarbon allowance, while heavy emitters' pro-duction may be significantly constrained.Alternatively, a carbon market would capoverall emissions and allocate emissions al-lowances to producers enabling them toemit a set amount of carbon over a set pe-riod. The initial allocation of emissions al-lowances might be based on an equal distri-bution among emitters, an auction, or someother method. The market also would allowtrading so that light emitters could sell theirunused carbon emissions allowances toheavy emitters who could purchase them inlieu of upgrading their production methodswith newer and cleaner technology. This ad-ditional option of trading can help to lowerthe overall costs of environmental protec-tion by enabling production and emissions

abatement to gravitate to those entities thatproduce or abate most efficiently. It alsocould allow citizens and environmental or-ganizations to purchase emissions allow-ances to hold them unused, effectively low-ering the overall cap.

Whether heavy emitters opt to buy ad-ditional emissions allowances depends on(1) the benefit of not reducing their ownemissions-how much money they earnfrom continuing production, (2) the cost ofpurchasing emissions abatement technol-ogy, and (3) the price of emissions allow-ances (or carbon credits) in the carbon mar-ket. Whether light emitters opt to sell theirextra emissions allowances depends on thesame things, but they also might considerexpanding their production. If one emitter iswilling to buy additional emissions allow-ances at a price at which another emitter iswilling to sell allowances, then trading oc-curs, allowing the heavy emitter to continuesome level of higher emissions relative to thelight emitter (Figure 1c). In the larger mar-ket, there might be numerous buyers andsellers of em issions allowances, pl us brokerswho facilitate trades (Figure 2). Over time,the regulatory agency would ratchet downthe overall cap on emissions to gradually re-duce total carbon emissions to the atmo-sphere.

In general, environmental markets dothree things. They force a cap on environ-mental damage. They penalize the mostdamaging actors by making them purchase

damage allowances and they reward lessdamaging actors who require fewer damageallowances. In this way, markets force actorsto include in their financial and manage-ment decisions the costs of any environmen-tal damage caused by their actions, provid-ing a financial incentive to reduce damagingactivities. Our example involves carbon, butthe idea would be the same with ecosystemservices markets. With a water quality mar-ket, e.g., a regulatory agency would cap ef-fluent emissions and enable polluters totrade effluent allowances. With a wildlifehabitat market, a regulatory agency wouldcap habitat degradation and enable thosewho cause degradation to trade the right todegrade habitat. The general idea is to capdamage and trade the right to commit dam-age. The Environmental Protection Agen-cy's (EPA) Acid Rain Program that estab-lished the trading of emissions allowancesfor sulfur dioxide (SO2) and nitrogen oxides(NOx) is perhaps the most publicized exam-ple of a cap and trade program in the UnitedStates. The Program is widely viewed as asuccess by virtue of the significant emissionreductions that have occurred, the signifi-cant cost savings over a purely regulatory ap-proach, and the generally smooth function-ing of the market (see, e.g., Burtraw et al.2006, p. 5.21-5.27).

Including Offsets. A potential add-onto environmental markets is the offset. Withoffsets, other entities are empowered to in-crease the supply of damage allowances in amarket by performing activities that offsetdamage committed by others. In the carbonmarket example, the overall cap on carbonemissions defines the total supply of emis-sions allowances in the market (Figure 3a).If the market were to include an offset com-ponent, it essentially would allow anothersource of emission allowances in the mar-ket by permitting other entities to sell emis-sions allowances based on their activitiesthat offset the additional carbon emittedunder those additional allowances (Figure3b). [I] Landowners, e.g., might be giventhe right to sell emissions allowances basedon forest management activities (that theyotherwise would not undertake) that in-crease carbon storage on their lands abovesome predetermined baseline. As before, thelong-term goal of the regulatory agencywould be to ratchet down the emissions capover time to reduce total carbon emissions tothe atmosphere.

One can imagine ways in which offsetsmight work in other types of ecosystem ser-

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vices markets. Wetlands banking, e.g.,which almost solely is an offset program, setsa lower bound on the area of wetlands thatmust be maintained within a given region(e.g., EPA 2008). Developers who wish todevelop wetlands must purchase the right todo so by financing the creation of wetlandssomewhere else. In another example, onemight imagine requiring developers to offsetthe loss of critical habitat for an endangeredspecies by financing the creation or enhance-ment of habitat somewhere else. This is sim-ilar to remediation actions that sometimesare required of responsible parties after oilspills (e.g., National Oceanic and Atmo-

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spheric Administration 2007). In the con-text of ecosystem protection, the generalidea behind offsets is to enable entities toincrease the supply of damage allowances inthe market based on their land-managementactivities that mitigate damage. In this way,offsets provide additional financing for eco-system protection and enhancement, but atthe expense of additional damage incurredby the increased supply of damage allow-ances in the market. For offsets to be fullyeffective, they must be fully interchangeable(or fungible) with the particular ecosystemservice they are meant to replace. This con-dition is easier to meet with some ecosystem

services than with others. For example, it islikely easier to ensure the one-for-one offsetof a molecule of CO2 emission than it is toensure the one-for-one offset of a lost acre offully functioning wetland.

Some Key Points. First and foremostwith cap and trade, it is regulation-thecap-that reduces ecosystem damage, notthe resulting trading. Trading reduces thecost of the regulation to entities that commitecosystem damage by giving them anotherway to comply besides curtailing productionor investing in new technology. Markets pe-nalize those entities that commit more dam-age and reward those that do less. In thisway, markets encourage environmentallybeneficial innovation among actors by giv-ing actors an incentive to circumvent theneed for purchasing damage allowances.Not all entities that commit ecosystem dam-age will be able to afford damage allowanc-es-some will curtail production and somewill go out of business. Although society as awhole may benefit from the greater ecosys-tem protection markets may offer, there canbe individuals who lose. Lastly, ecosystemservices markets with offsets offer a potentialincome source to landowners who own for-est and other open space lands and who areable to increase their output of ecosystemservices to offset ecosystem damage. That iswhy ecosystem services markets are of suchinterest to private forest landowners and tothose who desire to provide greater incen-tives to those landowners to maintain landin forests.

From Theoretical to Real WorldFrom a theoretical perspective, markets

can result in the same level of ecosystem pro-tection offered by regulating or taxing eco-logically damaging activities or subsidizingmitigation (see, e.g., Hartwick and Olewiler1986, p. 406-420). However, the effective-ness of markets relative to other approachesdepends on several factors (Table 2). Thefirst is whether we as a society are able todefine and enforce an appropriate level ofregulation (caps) based on how much eco-system damage we agree is acceptable. Effec-tive ecosystem services markets depend on awell-defined goal of overall performance.Second, regulatory agencies must be ableto physically measure and monitor per-formance, including the extent, timing, andeffect of ecosystem damage and offset activ-ities. Although not easy, both carbon emis-sions and carbon offsers can be more readilymeasured than, say, changes in habitat for

particular species. Measurement and moni-toring will be especially difficult when theproduction responses of some ecosystem ser-vices to management are nonlinear or whereindividual services interact with one anotheror are interdependent such that potentialoutcomes are uncertain in aggregate. Focus-ing market efforts on multiple services-what some practitioners refer to as "bun-dling"-likely could help to account forinteractions and interdependencies associ-ated with the joint production of several in-dividual services, but bundling would notnecessarily simplify the measurement task.

A third factor involves considering thegeographic distribution of damage. If irnple-menting a water quality market, e.g., how dowe address the possibility that effluent allow-ances may gravitate to just a tight cluster ofpoint sources that concentrate water qualitydamage in one location? Fourth, there arepotential secondary effects arising from eco-system services market forces. Does enhanc-ing an ecosystem service in one location ad-versely affect another service, possibly inanother location and to the detriment ofsomeone else? Fifth, when incorporatingoffsets into ecosystem services markets thereare issues of additionality, permanence, andleakage. Additionality pertains to whetheroffset actions would have occurred anywaywithout payment. Permanence pertains tohow long offset benefits will last. Leakagepertains to whether offset activities imple-mented in one location simply shift damageelsewhere.

Finally, there is the issue of transactioncosts-the costs of organizing and conduct-ing trades and monitoring the activities ofindividual participants to ensure that theecosystem damage that each participantcauses remains within the legal limits de-fined by their damage allowances held. Thepotential effectiveness of ecosystem servicesmarkets declines as these costs approach thevalue of potential gains in ecosystem servicesexpected to result from trades. Transaction

costs generally are one of the most signifi-cant factors determining whether ecosystemservices markets would be better than otherapproaches to environmental protection.The recent growth of forest certificationprograms, which involve some costs (e.g.,monitoring costs) similar to those necessarywith ecosystem services markets, suggeststhat transaction costs sometimes can beovercome. Conceivably, focusing market ef-forts on bundles of ecosystem services ratherthan a single service also could reduce perunit transactions costs by spreading thosecosts across a broader array of benefits. How-ever, the fairly limited trading extent ofemerging ecosystem services markets to datesuggests that much work remains as far asreducing transaction costs are concerned.Deciding what environmental protectionapproaches ultimately are most feasible toimplement and cost-effective at protectingecosystems depends on how well all of theseissues can be resolved in given situationsand the extent to which different policy ap-proaches provide real incentives to land-owners to retain land in forest and otheropen space.

Regulation, taxes, and subsidies cansuffer from similar challenges as markets-most notably secondary effects and leak-age- but they may make up for those short-comings by the greater ease with which theycan be modified in response to new informa-tion. With regulation, taxes or subsidies, if aregulatory agency sees a need to increase thelevel of ecosystem protection, the adminis-tering agency needs only to tighten the reg-ulation, increase the tax level, or increase thesubsidy. With markets, regulatory agencieswould need to reduce the supply of damageallowances in the market, which can be moretime-consuming and costly. Taxes also haveadditional advantages over markets in theirgreater certainty regarding the resulting eco-nomic impacts of associated regulations andtax revenue generated (e.g., Raymond andShively 2008). Purchasing land and conser-vation easements can be a slow and costlyundertaking that, at best, results in a spottypatchwork of protected land. However, thepermanence of such protection might betterwithstand changing political climates thatotherwise might lead to changes in regula-tion, tax, subsidy, and market programs. Insome cases, such as with the EPA's Acid RainProgram, a particular set of circumstancesalign to make a market approach seem effec-tive (e.g., Burtraw et al. 2006, p. 21-27).However, market approaches will not work

in every situation for every environmentalissue that society desires to address. Whichapproach makes sense can only be deter-mined by observing the successes and fail-ures of real-world applications and adjustingpolicies accordingly (Coase 1960, p. 22).

Some Philosophical Issues. In addi-tion to the practical challenges of marketsare some philosophical issues that also mustbe considered, particularly with regard tooffsets. One has to do with how we allocaterights and responsibilities to those who com-mit or are harmed by ecosystem damage.With all the talk in forestry about compen-sating forest landowners for the ecosystemservices they produce-to induce them toforego selling land for development andthereby fragmenting ecosystems-we mustnot forget that under an alternative alloca-tion of rights and responsibilities societymight penalize landowners when they com-mit ecosystem damage that reduces sociallyvalued ecosystem services. Society shouldnot assume that rights always fall exclusivelyto landowners. Defining property rights inthe United States has always involved a bal-ancing of the rights of landowners with therights of society.

Second, is whether by advocating pol-icy approaches that compensate landownersfor the good things they do, we build a pre-cedent that erodes our ability to regulate badbehavior in the future. This involves the is-sue of forest stewardship- what it is that weexpect of landowners with regard to ecosys-tem protection. Arguably, for most practi-tioners, forestry has always involved somenotion of good land stewardship. A policyquestion then would be how much to rely onpaying landowners for their good steward-ship versus fostering good stewardshipthrough nonmonetary means. The third is-sue involves treating nature as a commodity.With ecosystem services markets we aretreating nature as just another thing to bebought and sold. There are many peoplewho object to that approach, people whowould prefer that we address ecosystem pro-tection in other ways (see, e.g., Mazzotta andKline 1995).

Voluntary MarketsThe final issue we will address is the

idea of so-called "voluntary markets." As weunderstand them in the context of how theterm is used by their advocates, voluntarymarkets involve situations in which some-one is willing to pay for ecosystem pro-tection when they do not have to. Other

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observers have called such programs "bene-ficiary-pays markets" (e.g., Pearce 2004) be-cause there is no overarching regulation thatforces anyone to reduce or offset ecosystemdamage. Rather, people pay for such activi-ties of their own volition, presumably be-cause they themselves perceive a benefitfrom doing so. An example is the ChicagoClimate Exchange to whom you can send adonation to offset your own carbon foot-print and they will see to it that appropriateactivities (e.g.,treeplanting) are undertaken(Collins et al. 2008). Forest certificationprograms are a somewhat related example,by enabling consumers to voluntarily paymore for wood products thar are producedin compliance with certain environmentalor socially responsible standards. Programsthat depend on voluntary contributions arevalid ways to finance ecosystem protection.Nonprofit conservation groups such as TheNature Conservancy, after all, have long fi-nanced the purchase and management ofconservation easements and land using thevoluntary contributions of members. How-ever, we caution that if environmental advo-cates truly believe that the current level ofecosystem protection in the United States isinsufficient, then voluntary markets, at best,are only part of a remedy and, at worst, are aserious distraction from addressing a moredifficult task at hand.

Voluntary markets are akin to the typesof private arrangements envisioned by Coase(1960) that would be negotiated between in-dividuals who create or are affected by exter-nalities (Coase won the 1991 Nobel Prize inEconomics for this work). With clearly de-fined property rights regarding, say, pollu-tion, two individuals through private bar-gaining would arrive at a mutually agreed onlevel of pollution. If property rights initiallygave polluters the right to pollute, then anindividual adversely affected by pollutionwould willingly compensate a polluter forreducing their polluting activity to the pointwhere the marginal external cost of pollu-tion to the affected individual just equaledthe marginal benefit of polluting to the pol-luter. Conversely, if property rights initiallygave nonpolluting individuals the right tolive free of pollution, then a polluter wouldwillingly compensate an individual ad-versely affected by pollution in return fortheir accepting an increase in pollution tothe point where the marginal external bene-fit of pollution to the polluter just equaledthe marginal external cost of pollution to theaffected individual. In a carbon offset exam-

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pie, individuals who "benefit" from reduc-ing their carbon footprint might use theChicago Climate Exchange as an intermedi-ary with which to compensate forest land-owners for planting more trees. In an ecosys-tem protection example, individuals who"benefit" from ecosystem protection mightuse The Nature Conservancy as an inter-mediary with which to purchase conserva-tion easements or land from landownerswho otherwise would sell their land for de-velopment.

Advocates praise the seemingly newsource of conservation funding offered byvoluntary markets while noting that it arisescompletely apart from government inter-vention. However, there is a potential prob-lem, one fully acknowledged by Coase(1960). Whether or not individuals will vol-untarily negotiate such private arrangementsgreatly depends on whether the net gainsfrom trading are sufficiently high for bothindividuals to overcome the costs of negoti-ating, i.e., transaction costs. Successful ne-gotiations will be more likely when the ben-efits of such arrangements are more certain,measurable, and enforceable-some of thesame factors that influence the feasibilityand effectiveness of environmental marketsgenerally. Voluntary negotiations also willbe more likely when there are just a few ac-tors involved in creating a harmful external-ity or seeking redress for an externality, asopposed to many. However, private bar-gaining will be decidedly less likely when theexternality at issue is more "public" in natureand when there are a large number of actorseither affected by the externality or respon-sible for its production, again, largely be-cause of prohibitive transaction costs (e.g.,Hartwick and Olewiler 1986, p. 408). Thislast condition is more characteristic of situ-ations with most ecosystem services. At theextreme is carbon and climate change, aproblem so big, with so many actors, andwith conceivable impacts so uncertain intheir exact spatial configuration and timingthat people have significant difficulty grasp-ing how it might affect them personally. Ifthere is any promise to voluntary markets, itis that many traditional and emerging non-governmental organizations are stepping upto play the role of intermediary, which couldbe one step toward lowering transactioncosts involved in private ecosystem protec-tion arrangements.

However, there is still one other prob-lem with voluntary markets, and it involvesthe public goods nature of ecosystem protec-

tion. Unlike a true regulatory-based ecosys-tem service market, voluntary markets as wedefine them are not based on an initial reck-oning of how much ecosystem damage we asa society are willing to accept, as well as theimplementation of an overarching system ofregulation designed to get us there. Rather,voluntary markets are based on the whimsand good wishes of select individuals whodesire to do good by contributing to the en-vironment. The primary problem then isthat in voluntary markets "shoplifters" arenot prosecuted (Figure 4). You have somepeople willing to finance ecosystem protec-tion, but you have others who are still will-ing to receive their ecosystem services forfree. In economic jargon they are free riders.In this way voluntary markets fail to correctfor the market failures inherent in the exter-nality and public goods nature of ecosystemservices that are at the root of the problem ofinsufficient ecosystem protection in the firstplace. Rather than being a new innovation,we see voluntary markets as a retooling oftraditional environmental philanthropy thathas long directed voluntary contributionstoward environmental protection activitiessuch as the purchase of conservation ease-ments and land and lobbying on behalf ofthe environment.

All of this does not mean that voluntarymarkets are without merit; only that we feelthat current enthusiasm for them could bemore guarded. Some questions we might askabout voluntary markets are What is the ex-tent of free riding domestically, but also in-ternationally if an issue is of global concern?To what extent are voluntary markets solv-ing the problem of insufficient ecosystemprotection over and above what other ap-proaches are doing? Are additionality, per-manence, and leakage adequately addressed?Do charitable contributions to emergingvoluntary markets represent new conserva-tion money or do they simply draw from theexisting population of contributors whohave long financed environmental philan-thropy? That is, are we getting more ecosys-tem protection or are contributors simplyspending limited conservation dollars on adifferent set of activities?

There is a value to the earnest consider-ation of new ways to protect ecosystems.However, policymakers and environmentaladvocates should not be lulled into a falsesense of optimism by current enthusiasm formarkets and especially voluntary marketsthat we feel has permeated numerous con-ferences and workshops in recent years. In

addition, they should not overlook the suc-cess of more traditional approaches to ceo-system protection now seemingly viewed asinadequate. What may be needed is a strate-gic application of different approaches cho-sen alone or in combinations as particularcircumstances and potential complementa-ritics among approaches warrant.

Protecting Open SpaceOf broader concern in the quest for

ecosystem protection is whether ecosystemservices markets or any policy prescription,for that matter, can offer sufficient incentiveto landowners to retain land in forest andopen space when development may presentthem with tempting financial opportunities.Federal, state, county, and municipal gov-ernments and nongovernmental organiza-tions have for years provided funding forpurchasing development rights, conserva-tion easements, and land in fee simple. Allstates grant landowners who own forests andother open space lands some measure ofpreferential tax assessment for property taxpurposes. Many states, counties, and munic-ipalities also attempt to regulate land use anddevelopment via zoning and other planningmechanisms. Can policymakers and protec-tion advocates have any hope that yet an-other policy approach added to the conser-

vation toolbox will finally win the battle ofecosystem protection in the United States?

A stark truth is that ecosystem protec-tion efforts often face an uphill battle be-cause some development of open space landsis inevitable, resulting as it does from marketforces in response to an ever increasing pop-ulation and rising incomes, among otherfactors. People have to live somewhere, afterall, and they also crave the material rewardsthat their greater income affords. Interest-ingly, however, over time, the market forcesthat favor development often can be offsetby accompanying shifts in public percep-tions and preferences regarding the value ofopen space lands, because increasingly urbanand wealthier people tend to favor greaterprotection. However, whether these dynam-ics result in meaningful ecosystem protec-tion opportunities depends a bit on timing.

Hidden beneath concerns that too littleecosystem protection is taking place lies adilemma: people in the United States tendto be willing to address open space loss onlywhen they see open space becoming suffi-ciently scarce (e.g., Kline 2006b). A second-ary factor is peoples' willingness to affordgreater protection, which tends to be corre-lated with their personal incomes (Kline2006b). As a result, people may be unwilling

to do something about ecosystem protectionuntil the situation becomes sufficientlydire-until the perceived benefits of protec-tion outweigh the perceived costs in the col-lective mind of the public. There can be sit-uations in which intact ecosystems still existbut people are unwilling to invest in protec-tion, and situations in which people are will-ing to invest in protection but it comes toolate-ecosystems of concern are too fargone. This dilemma may not be somethingthat ecosystem services markets can remedy.Finding effective ways to provide sufficientincentives to landowners to retain land inforest and other open space in the face ofgrowing development pressures is only partof the challenge. Ecosystem protection alsodepends on fostering public support neces-sary to enact and fund ecosystem protectionefforts. Building that public support will notcome from implementing new policy ap-proaches such as ecosystem services markets.Rather, it may require a carefully framed ed-ucational campaign designed to sway thepublic to the greater importance of main-taining ecosystems. This may be the greatestvalue of those ecosystem services typolo-gies-that they provide a descriptive frame-work of ecosystem benefits with which tofoster social discourse about the need for andvalue of ecosystem protection.

Ecosystem services markets certainlyare one approach among several to includein an arsenal of approaches to ecosystemprotection; but perhaps the real battle-atleast in the United States-is making a moreconvincing argument to the public thatgreater ecosystem protection is necessary,beneficial, and affordable. Marketlike pro-grams to enhance the provision of ecosystemservices and foster ecosystem protection de-serve the current level of interest they enjoy.However, they also warrant our close scru-tiny so that we might gauge their promiseand likely effectiveness relative to othertime-tested approaches that are more famil-iar. In this way, current enthusiasm for eco-system services markets might be fittedwithin a pragmatic overall strategy of ecosys-tem protection and open space conservationthat is not blind to the fact that easy reme-dies to the decline of ecosystems and openspace are rare if not altogether nonexistent.

Endnotes[11 Figure 3b modeled after "Generalized carbon

credit marker" figure in Williams and Aller(2000).

Journal of Forestry • June 2009 211

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