What is the future of biodiversity credit markets?

For some, biodiversity credits are a vital way to enable corporates to ‘offset’ any damage they might cause to biodiversity through funding the restoration of habitats elsewhere. Advocates insist that even companies that harm one part of an ecosystem could use biodiversity credits to restore or protect habitats in an adjacent area, thereby ensuring that they produce an overall ‘net gain’ in biodiversity.

To others, there could be no more glaring example of ‘nature washing’. How, critics ask, can permanent damage to an ancient and intricate ecosystem be adequately offset? And are we really going to trust providers of biodiversity credits to ensure that protections for restored habitats are maintained in perpetuity?

The debate has intensified after high-profile media reports earlier this year raised questions over the credibility of carbon credit certification schemes.

On the other hand, there is an argument that carbon credits could become significantly more beneficial through being combined with biodiversity credits. After all, a forest teeming with wildlife is clearly preferable to a monocrop plantation that merely absorbs carbon without producing other ecological benefits.

To understand the key trends in how this complex and still nascent market is developing, we spoke with Simon Zadek, executive director of the advocacy group NatureFinance.
He tells us that the future of biodiversity credits remains uncertain – effective governance will be vital, he believes, to ensuring biodiversity credits can be a meaningful part of the solution to combatting nature loss.

What does the market for biodiversity credits look like today?

There are multiple markets, all of which go under the name biodiversity credits. You’ve got philanthropic credits. You’ve got insetting – that’s funding down value chains to increase resource productivity. You’ve got biodiversity-enhanced carbon credits. You’ve got national compliance offset programmes – there are, I think, 30 or 40 around the world.

And then you have the beginnings of a bigger conversation about the use of biodiversity credits as a way to channel funds across borders to countries, largely in the Global South, that need biodiversity-related financing, particularly for what we might call ‘intact landscapes’.

So, what does that all mean? It means, first of all, it’s a mosaic. The biggest volumes are at the national compliance offset level. No-one has really added up the numbers… they are in the billions a year, but not in the tens or hundreds of billions. To put that in context, the [total value of] global voluntary carbon markets was $2 billion last year.

It’s a very fragmented space. Is someone going to pull it together and figure out whether really these are scaled, global markets that can support nature restoration, using private capital? Or is this a side game that people will have forgotten about in three or four years? That’s really the question on the table.

What factors will determine which way this market is going to head?

Factor one is an agreed approach to measuring the state of nature or the state of biodiversity. Factor two is building a high-integrity supply of biodiversity credits, which in our opinion, obviously involves project developers.

But, learning from the voluntary carbon market space, that without doubt requires an enabling policy environment on the supply side. I think we have to stop relying on private developers in private certification schemes, because they simply don’t have the robustness to work effectively at scale.

And then third, not surprisingly, we need credible and significant demand. And what does that mean? If you really ask the tough questions, then you have to conclude that purely voluntary demand will never scale. Let’s stop pretending.

We will need a range of policy incentives – it doesn’t have to be compliance, it can be positive incentives as well, in order to stimulate the demand for biodiversity credits from the market. But there’s no doubt that we need policy incentivised private demand in order to get beyond toy town.

Finally, we need a better way of distributing the economic rewards. We have to embed price arrangements to some extent in the way these markets work. And some of that can be sold through enhanced transparency through trader certification. In other words, by reducing the asymmetries of information and negotiation capability between the buyers and the sellers, you can get a better price deal.

Some of it can be solved by reducing the amount of OTC and increasing the amount of exchange-based trading. And some of it needs to be set through some level of price control. And there’s nothing wrong with having price floors in markets. We’ve been doing it for a thousand years. The idea that that somehow kills markets is just nonsense, historically.

And then for all of that to work, you need these markets to be governed effectively, which is absolutely not the case for voluntary carbon markets.

What kind of governance mechanisms do you think are needed?

The solution is not a global biodiversity regulator. That’s just not going to happen. We are already beginning to build nation-based regulatory arrangements and incentive systems that offer a really important part of the broader governance.

It’s perfectly possible to argue that traders need to be accredited. You have the same in the pharmaceutical industry, you have the same in most of the financial industry, and that makes a lot of difference to the quality of those markets. So why can’t we have the same for these existential markets, the carbon and biodiversity credit
markets?

“You need these markets to be governed effectively, which is absolutely not the case for voluntary carbon markets”

You can have much more transaction-level transparency, which allows for much higher-quality markets and price discovery. And then one can use digital infrastructure to enhance governance. The use of blockchain, the use of tokenisation, all of this, radically improves the quality of markets and allows for stakeholder voices to be attached to credit claims. Once you build a distributed ledger model as an underpinning, which is now perfectly possible – not expensive to do, or conceptually difficult to advance.

The answer to good governance is not a meta regulator way of thinking. There are a number of pieces of governance that will really ensure that these markets can work effectively. And you need several pieces of architecture. The advantage of what I describe is that very little of it requires an international regulator. It requires collaboration internationally. We can build a club model at the international level, supported by the critical actions that are needed at the national level.

What are the main lessons that people working on biodiversity credits need to learn from how carbon credits have developed?

Voluntary demand won’t do it. Private certification won’t do it. Additionality does not allow for all solutions that are needed to be addressed. In particular, as Gabon would say, how do you pay for standing forest, because they’re not at risk and so they’re not consistent with an additionality model. So, you’ve got to be careful on what the criteria of credits really are. That seems really key.

And you have to embed equity considerations in the actual running of the markets, rather than relying on the individual responsible traders. And that was never done in the development of voluntary carbon markets and should be done.

The reason why I [argue for] policy on the demand side, policy on the supply side, equity embedded in the core, higher levels of transparency, use of digital infrastructure, is because those are the lessons that we draw from, frankly, the train wreck that is today’s voluntary carbon markets.

What’s your top-level view on what the market for biodiversity credits will look like 10 years from now?

Option one is that we find mechanisms for conserving and regenerating nature by financing those activities in an effective and equitable way. And the biodiversity credit markets will be part of that ecosystem of financing approaches – it’s not the answer, but it’s a part of the story. Model two is that biodiversity credits and that broader ecosystem fail to materialise at scale.

We have a choice. And the choice is quite clear, which is if biodiversity systems collapse around the world, not only do we have rapidly increasing levels of temperature, but we have huge social unrest and massive increases in refugee movements. And so, the biodiversity credit market is not the difference between those two options, but it is part of the difference.

UK-France initiative seeks to boost offsets

The UK and France announced a Global Roadmap to accelerate development of the biodiversity credits market following a summit in Paris on 22 June.

A UK government statement claimed that the roadmap will “facilitate the sharing of best practice on the governance mechanisms for credit funding, monitoring regimes to ensure biodiversity improvements, and the fair distribution of income to Indigenous peoples and local communities”.

As part of the roadmap, an advisory panel is set to guide working groups on different aspects of the biodiversity credit markets ahead of the COP16 biodiversity conference in Turkey next year.