The Role of Federal Policy in Establishing Ecosystem Service Markets

Wayburn_final_PD edt.doc 7/30/2010 4:43:58 PM THE ROLE OF FEDERAL POLICY IN ESTABLISHING ECOSYSTEM SERVICE MARKETS LAURIE A. WAYBURN* ANTON A. CHIONO** ABSTRACT The public good nature of ecosystem services has historically frustrated their inclusion within a traditional free-market framework. The inherent attributes of public goods—joint consumption and the inability to exclude users—vitiate incentives for their efficient provision and production through conventional markets. Government intervention typically has been necessary to correct this market failure with respect to other traditional public goods, such as law enforcement, national defense, and transportation infrastructure. Correspondingly, government intervention will be requisite in correcting market failures to supply ecosystem service public goods, such as climate regulation. The mechanisms by which government can correct these market failures are contingent upon the nature of the public good itself, and range from command-and-control approaches to market incentives. Where private good attributes are present, such as excludability and non-joint consumption, quasi-market incentives may be employed in concert with command-and-control strategies to supply a public good. Climate regulation ecosystem services, especially those provided by forests, are unique in that carbon can act as a proxy of the services provided. Because carbon exhibits many private good attributes, market approaches can be employed to provide climate regulation services. However, while voluntary markets for ecosystem services * President and co-founder of The Pacific Forest Trust. I appreciate this opportunity to discuss the essential role that government should play in developing new markets that promote both public trust interests and the generation of private capital based on ecosystem services. My participation in this effort was made possible by support from the Thornton Foundation. ** Policy Analyst, The Pacific Forest Trust. 385 Wayburn_final_PD edt.doc 386 7/30/2010 4:43:58 PM DUKE ENVIRONMENTAL LAW & POLICY FORUM [Vol. 20:385 currently exist in the United States, these are unlikely to produce an efficient level of the ecosystem service due to insufficient demand and the persistence of free-ridership problems. Government regulation will be necessary to complement these market approaches, establishing compliance markets that induce demand for ecosystem service proxies, set standards, and foreclose on free-ridership. Many ecosystem services are difficult or costly to measure directly, thus the government also must establish rigorous standards and guidelines to ensure the veracity of the proxies used. Using traditional public goods as a template, federal policy can help create private interests in commonly owned ecosystem services, fostering a vigorous, profitable exchange of goods and services while providing for the restoration and maintenance of the ecosystems that provide these services. In the United States, natural systems currently offset roughly onefifth of total carbon emissions, largely via forest sequestration. Maintaining and increasing this percentage is essential for the United States to meet its climate and energy goals. Thus, the federal role in this ecosystem service market must address both the direct goods traded from any individual ownership (tons of emissions reductions sequestered on a specific parcel of land) and the larger ecosystem (forests and other natural lands) that provide context and stability for the function of that parcel. The federal government must establish policies mandating that: 1. The underlying regulatory structure of the markets established via “cap and trade” legislation includes forest and other land sequestration as part of that system; 2. The “rules of the game” for the offset and trading market recognize that biological carbon regulatory compliance units, or RCUs (as opposed to voluntary offsets), are integrally dependent upon the ecosystem that provides them; and 3. There is investment in securing the natural infrastructure of land that provides the basic “factory” producing these ecosystem services to the market. I. INTRODUCTION To establish ecosystem markets, the government must develop systems to reconcile the often opposing forces of markets and the public trust. Ecosystem markets are distinguished by the fact they provide private goods, such as carbon emission reductions, that are premised on sustaining public goods, such as the climate regulation Wayburn_final_PD edt.doc Summer 2010] 7/30/2010 4:43:58 PM FEDERAL POLICY IN ECOSYSTEM SERVICE MARKETS 387 services provided by forest ecosystems. While largely voluntary in the United States to date, ecosystem service markets are unlikely to fully achieve the goals of either the market or the public good without federal structuring and standards. Federal policy can help create private property interests in commonly owned ecosystem services, fostering a vigorous, profitable exchange of goods and services while providing for the restoration and maintenance of the ecosystems that provide these services. The advantages of using markets in combination with regulatory approaches to achieve public policy goals have emerged more clearly in the last two decades. Voluntary ecosystem service markets must evolve and adapt to a quasi-regulatory approach if the goals of both public policy and the market are to be fully realized. The federal role in this quasi-regulatory approach includes many of the same essential functions and partnering as other private-sector economies, such as law enforcement, transportation, education and energy. It also includes the establishment of standards to maintain the systems that provide these goods and services. Where ecosystem services arise on private lands, federal partnerships with the private-sector are key to the success of ecosystem markets. Government investment must be made in the development of the production capacity of these goods and services. Standards and guidelines regarding the services to be provided must be defined by the government to both reduce market risk and ensure consumer safety, but also to ensure that these take into account the viability of the ecosystem from which these services spring, not just the private service or good itself. Of the various ecosystem services for which private market mechanisms are likely to prove effective, those relating to global climate stabilization hold considerable promise. In the United States, natural systems currently offset nearly one-fifth of total national 1 emissions, largely via forest sequestration. Maintaining and increasing this percentage is essential if the U.S. is to meet its climate goals. Tons of carbon emissions reductions can be used as a convenient proxy measurement for targets in achieving climate stabilization. Thus, the federal role in this ecosystem services market must address both the direct goods traded from individual (...truncated)