The basics of ecosystem services markets

• An ecosystem services market is an organizational structure for buying and selling units of environmental benefit, known as credits.
• Credits are created through the conservation or high-quality restoration of naturally functioning ecosystems. Credits measure such things as cooled river water for salmon and steelhead, wetlands that purify water and mitigate flooding, forests that absorb carbon dioxide, and habitat that supports wildlife and pollinating insects.
• An ecosystem services market connects people willing to pay for actions that improve and protect the ecosystem with people who can take those actions.
• Buyers of credits typically are regulated entities—cities or businesses that are required to offset the environmental impact of their activities because they can’t eliminate all of their impacts. Buyers also can be foundations or other organizations that participate in the market on an unregulated basis as a way to achieve greater environmental return for their investment.
• Sellers typically are farmers, foresters, and other land managers who own ecologically valuable land and can choose to conserve or restore it.

Example: Using cheaper, more effective natural processes to cool the water

The Clean Water Act (CWA) requires a utility that discharges clean but warm wastewater to the river to keep the temperature of its discharge down, even though its service population is growing.

Instead of installing expensive refrigeration equipment, the utility buys temperature reduction credits through the ecosystem services marketplace. The credits are sold by farmers upstream, who create them by restoring wetlands, reconnecting floodplains, or planting streamside vegetation. Through contracts, sellers guarantee that they will maintain their improvements for decades.

The native vegetation and improved hydrology cool the water naturally, which aids struggling salmon and other cold-water species. This satisfies the purpose of the CWA. More broadly, natural processes are restored that provide a multitude of ecosystem services: erosion control, flood control, runoff filtration, carbon sequestration, and expansion of habitat for native fish and wildlife.

The utility has saved its ratepayers money because, in this case, relying on natural processes was cheaper than installing technological fixes. Farmers are paid for managing their land for its ecological value and the ecosystem services it can provide, rather than for commodity production. 

Market infrastructure and integrity

An ecosystem marketplace needs protocols and a trusted and transparent infrastructure to measure, register, and verify credits; bring together buyers and sellers; facilitate credit purchases; and record transactions.

In addition, projects that produce credits must be monitored over time, to ensure that the credits continue to provide the ecosystem services for which they were purchased. For example, a wetland restoration credit loses its value if the wetland is filled in after the credit is sold. Thus, unlike in a commodities market, the relationship between buyers and sellers continues after the transaction is completed, and a certain amount of management, monitoring, and reporting is required to confirm the validity and quality of credits over time. This helps maintain the integrity of the market.

Funding the market infrastructure

The infrastructure of an ecosystem services market typically is funded through fees paid by some combination of buyers, sellers, or brokers (brokers design and market sales). Fees can be on a subscription or per-transaction basis.