2 May 2010 | In the classic US television comedy The Beverly Hillbillies, a poor mountaineer named Jed Clampett strikes oil on his land and must adapt to a new life of luxury. Audiences chuckled and cheered, and no one questioned for a moment Jed’s right to cash in on his largesse. After all, it was his land and his luck.
So why can’t someone who restores a wetland in hopes of earning ecosystem credits also cash in as a nutrient bank that absorbs pollutants or as a carbon bank that absorbs excess CO2?
That will be a hot topic at this week’s National Mitigation & Ecosystem Banking Conference in Austin, Texas, as ecosystem markets race from infancy to adolescence.
Some say the best way to create incentives to restore the most environmentally valuable properties is to let landowners sell restoration credits garnered from a single location into multiple ecosystem markets. Others say that would be an old-fashioned double-dip that benefits the landowner without generating any additional good for the environment.
Environmental scientists say it’s a moot argument – because even if it works in theory, no one knows how to implement it, at least in the current regulatory framework.
Why Can’t We All Just Agree?
This emerging strategy for selling ecosystem services goes by many names, including stacking, bundling, coupling or integrating market-based ecosystem restoration credits. And just as several names exist to describe it, various on-the-ground interpretations also exist. While simple scenarios have been well received, scientific support for more complex forms of this multi-named phenomenon has not evolved nearly as fast as market enthusiasm, say many scientists, regulators and environmental bankers.
Some interpretations spark enthusiasm from scientists, regulators and investors. Some spark wariness. And others spark outright fear. Conversations with some of the leading environmental market scientists, regulators, and investors involved in designing these integrated markets underline the high stakes, potential and evolving science involved.
Mosaic Good; Stacking Bad?
No one disputes that one piece of property can be restored to deliver several ecosystem benefits. And no one disputes that the property can be subdivided so that separate portions of that property can be sold into separate ecosystem service markets. That’s even part of the law. The key to this mosaic approach is that each property portion is sold only one time into one ecosystem service market.
The problem comes when you want to take the same patch of land on that property, say it’s filtering water like a wetland, protecting endangered species http://www.ecosystemmarketplace.com/pages/dynamic/article.page.php?page_id=5617§ion=home like a nature preserve and sequestering carbon like a forest, and then try to sell this single patch of land for credits in multiple environmental restoration markets
Can’t Stop a Tidal Wave
“The market is heading this way, and the last thing we can do is plug out ears and not have the conversation,” says Dr. Morgan Robertson, who worked with the US EPA to develop the 2008 wetland compensation rule.
But he worries that stacking could do to environmental markets what credit default swaps did to derivatives (not to mention the economy at large), triggering an eventual collapse when trades turn out to have little relation to their underlying values.
“That’s not metaphorical,” he warned. “That’s a parallel.”
Asking the Tough Questions
In this brave new world of ecosystem economics, common words such as stacking, bundling, functions and double-dipping take on new meanings whose nuances could trigger major environmental, economic and regulatory differences. Yet while many throw these words around, few ask the tough questions surrounding them, says Palmer Hough, a regulator and point man with the EPA wetland program.
“I’m watching the rhetoric nervously from the sidelines,” he said from his DC office. “The hot air balloon gets hotter and hotter and it’s going to pop.”
Breaking down the rhetoric requires understanding what people are talking about and the science behind it.
The Past as Prologue
In the early days of ecosystem banking, traders in ecosystem services would restore a single site for a single market. Wetland bankers, for example, restored wetlands and sold their restoration credits to developers required to compensate for destroying wetlands elsewhere. Nutrient traders restored upland buffers to absorb and compensate for nutrients – phosphorus and nitrogen – that developers caused to pour into waterways. Carbon traders planted carbon-absorbing trees to trade as compensation for industry exhaust.
Integrating or stacking services, unlike this single-site-for-a-single-market approach, makes it possible for landowners to divide their property, then restore and sell credits according to what portion generates the greatest environmental and economic value.
Environmentalists who support stacking point out that it could encourage investors to restore more ecologically valuable parcels, such as coral reefs and rain forests. Since a finite amount of land remains available for restoration, stacking “could provide the economic spur to preserve and better use land,” says Sara Vickerman, director of Defenders of Wildlife in Oregon and board member of the Willamette Partnership that is building a first-of-its kind multiple-credit accounting system.
But the concern voiced by many is that selling multiple ecological functions from a single restored property could shortchange the environment, allowing what is referred to as “double dipping,” or using a single restored asset to compensate for multiple damages on multiple assets.
Although double dipping in the short term could seem like striking oil, many bankers worry that it could trigger the beginning of the end of their business.
“The backlash will be certain and swift,” says Doug Lashley, president of the ecological asset management company GreenVest in Annapolis, Maryland. “Those who have or seek to profit from advancing the thought that they should receive species, carbon, nutrient, buffer and wetland credits from the same acre of land – this is what it will come to – will undermine our whole industry as we will lose scientific and regulatory support for what we have accomplished the last 15 years.”
The mosaic approach has also been called “acreage stacking”, although you could argue it’s not stacking at all, since different values are coming from adjacent pieces of land on one property.
Here, again, a mitigation banker restores and sells separate portions of his property to meet separate environmental requirements, being careful to sell each portion only once. For example, he could sell the portion restored as lowlands as wetland credits, the portion restored as uplands as nutrient buffers and the separate portion of replanted forest as carbon credits.
At first glance, the mosaic approach appears inevitably fair. But what if the uplands had to be restored to maintain water in the wetlands, and the mitigation banker already received wetland mitigation credits for this restoration?
Although the property law that allowed the Beverly Hillbillies to farm and sell oil from the same plot of land would permit this, many consider selling the same restored areas for both wetland and nutrient credits as double dipping that shortchanges the environment. This occurred in a recent North Carolina case under review.
Another emerging form of integrating markets encourages investors to restore their land in a manner that meets multiple environmental goals, but with investors reserving the right to later choose which type of mitigation credit they want to sell, depending on whichever pays the most. The state of California encourages this type of restoration for certain environmental markets.
California-based Wildlands, Inc., for example, restores wetlands and vernal pools that protect species of endangered and threatened shrimp. They sell credits in the restored land for either wetland mitigation or conservation banking. The Bay Bank that serves landowners in the Chesapeake Bay takes a similar approach. It aggregates credits, and then sells them into whichever market pays the best rate.
This form of integrating markets has been well-received for several reasons. From a financial standpoint, it offers “a diversified portfolio of ecosystem-service-generating assets – an environmental mutual fund, if you will,” says Jay Truty, an attorney who consults for the Bay Bank, Willamette Parnership and the Office of Ecosystem Services. From a practical standpoint, it spurs restoration by creating economies of scale. And from an environmental standpoint, it can avoid double-dipping.
Can Ecosystem Values be Unbundled?
Stacking gets into trouble, however, when it applies a newer, less-tested concept called “unbundling.” This concept recognizes that various ecosystem services and markets often serve similar interwoven functions. Wetlands and restored wetland mitigation banks, for example, filter pollutants as do nutrient banks. They provide habitat to endangered species. And their trees absorb carbon.
If these various ecosystem functions could be unbundled, they could be sold as units of function –rather than units of acreage – in the ecosystem markets that need those most. A function rather than acreage-based approach, moreover, could also theoretically offer the advantage of rating restored parcels with A’s, B’s, C’s and D’s instead of the pass-fail method currently used.
Show Me the Science
Fair as this may sound in theory, this functions-based approach comes with multiple pitfalls.
The concept of stacking functions instead of acreage sounds scientific because it’s based on the premise that when something is taken apart and put back together again, it consistently yields the same result — just as two parts hydrogen and one part oxygen always yieldwater. A predominant number of scientists and regulators interviewed, however, agree that there is not yet a science for stacking environmental functions.
“Separating functions makes little scientific sense,” says University of North Carolina Director of Watershed Sciences Dr. Martin Doyle.
Ecologist Jessica Fox agrees.
“Is it possible,” she asks rhetorically, “to account for carbon credits for redwood trees separately from the biodiversity credits for the animals that live in those trees? Can we separately define the improvement in water quality downstream of the forest from the forest itself?”
The foundation of credit stacking, she concludes, “lies in the accurate unbundling of inherently intertwined ecosystem functions.”
Fox recently wrote a chapter on credit stacking for the Conservation and Biodiversity Handbook and is working with Robertson, Roy Gardner, the director of Stetson University of Law’s Institute of Biodiversity Law and Policy and the World Resource Institute to complete a national survey analyzing the state of stacking.
Ecologist Stephen R. Carpenter, who worked on the United Nations Millennium Ecosystem Assessment, added that functional analyses are currently so primitive that states often measure functions against data borrowed from other states that have little bearing on their own geographic circumstances.
Meanwhile, state and federal regulations pose an additional challenge. The problem, says John Finistore, of the World Resources Institute, is that “ecomarkets were not developed with a holistic framework.”
Unbundling can only avoid double dipping and meet the requirement of “additionality,” or adding environmental benefit, if functions from the environmental assets destroyed are unbundled in the same way that functions are unbundled from the asset restored as compensation. For example, for wetland banks to avoid double dipping, the destroyed – along with the restored -- wetland’s assets would have to be unbundled and accounted for. But existing regulations that undergird ecosystem markets often do not allow this.
Ricardo Bayon, partner and co-founder of EKO Asset Management Partners, an environmental asset investment firm, points out that “if we read the Clean Water Act carefully (that regulates wetland mitigation), we see that we are mitigating for all functions and values of a particular destroyed wetland.” The destroyed wetlands’ functions, then, cannot be unbundled according to current regulations. So if only the restored wetlands’ environmental attributes are unbundled, it appears impossible to prevent double dipping. Moving into the carbon market, he added, the number one requirement for credit sales is that they provide additionality, or carbon absorption that would not have otherwise occurred. But if a wetland was already restored for wetland restoration credits, it does not meet the additionality requirement.
Pushing the Scientific Envelope
To move the conversation and science forward, the Oregon-based Willamette Partnership is using the scientific method. They are piloting a project that unbundles and stacks credits to test the hypothesis that function-based stacking can be accurately accomplished and yield better environmental and market results, says Vickerman.
Begun at the behest of the Oregon Department of Transportation, the project measures 16 separate ecosystem services to provide more precise calculations of the impact of highway projects requiring mitigation. To avoid double dipping, the two-year pilot examines ecosystem services on the credit as well as debit side, the services of land destroyed and land restored as compensation.
“The science is thorny and it’s very easy to get lost in the weeds,” Vickerman acknowledges. “But if we want to get markets more ecologically significant and valuable for landowners we need to push the envelope.”
Alice Kenny is a prize-winning science writer and a regular contributor to Ecosystem Marketplace. She may be reached at firstname.lastname@example.org.