Classic Jurisdictional Overreach

A big day for water resources as Corps issues the first 404 permit on Mars.

And the Oscar for Ecosystem Services goes to...

There's a new French documentary out with the compelling English title of Banking Nature, by Sandrine Feydel and Denis Delestrac.  The title in French is a little more clear about the aim at the financialization of nature rather than wetland and habitat banking per se: Nature, the new El Dorado of Finance.  It aired February 2nd on Arte and looks very well done.  Check out the trailer:


However, I'm someone who hated the Oscar-winning documentary Inside Job because of the way the interviewer simply wanted to beat up his interview subjects and score points with an audience who is scared and confused about finance.  As much as I agreed with his points, I think the film was damaging to critics of finance and the editing was pure partisan hackery.  Let's hope this documentary brings critical force to bear in a way that is genuinely educational -- more Life and Debt, less Inside Job.

While we're on the topic of movies about ecosystem services, Best Short Satire goes to a fun little piece on how Biodiversity Offsetting can make your dreams come true...


Biodiversity offsetting, making dreams come true from Global Motion on Vimeo.

Stacking Ecosystem Services

Given my long hiatus from posting, I should probably devote a full post solely to our article on stacking, released last year, which has been 5 years in the making... the co-authors are a diverse group including two social scientists, an urban planner, an academic hydrogeomorphologist, a professor of environmental law, and a stream restoration professional.

On the way to getting this article into print -- after eight rounds of review at three journals -- we faced some unique challenges.  Honestly, the odyssey may well be turned into another article called "Writing about Stacking Ecosystem Services".  We were all called to defend, to each other and to reviewers, some key assumptions we make about how ecosystems operate and how commodities are defined.

There's one tension I want to highlight specifically, and it surfaced repeatedly in the peer-reviews performed by economists.  Twice (at two different journals) we received reviews from economists that were longer than our manuscript.  Something about the way we were treating this topic was deeply disturbing to the axioms of mainstream economics, and it was our characterization of the "ecological problem" with stacking:  If you sell salmon habitat and water quality from the same spot, what if the same functions operate to create those two services?  Doesn't that mean that the two credits aren't fully separable?  This calls into debate some very basic issues in the definition of a commodity.

In short, we believe that ecosystem service credit commodities aren't fully discrete and separable from the functions which create them.  To our friends from economics, this was simply unintelligible:

The second concern was the “Ecological problem: integration of underlying functions.”  I frankly don’t understand this concern.  Ecological systems are complex and interdependent. Ecosystem processes jointly produce multiple ecosystem services.  Management changes leading to changes in ecosystems simultaneously affect the provision of multiple services.  Separately accounting for ecosystem services does not deny the joint and interconnected nature of their provision.  ...  There a close analogy with industrial processes characterized by “joint production” resulting in the production of multiple commodities from an integrated process.  ...  This whole section seems fundamentally misguided and I recommend deleting it entirely.  

The underlying assumption from this reviewer is that the identity and existence of a commodity is defined ONLY by its ability to be consumed and desired, NOT by its production process.  You can't really challenge that and still stay in the same model-world as mainstream economists.  And we learned that the hard way.  

This is something to keep in mind when reading economists writing on ecosystem services: they can't think the relationship between the service commodity and the functions that create it in a way that an ecologist would.  It appears to be an axiomatic conflict.  To say that a commodity called a "salmon habitat credit", once produced, is affected by other kinds of production that happen at the site is like saying that because your car and my car were produced at the same factory, the way I drive my car affects your car.

This is clearly not true with cars.  So why is it true with ecosystem services?  The answer reveals a lot about the limitations of the economic model world with regard to nature.


Of course, this is not to whine about the long process of academic publishing -- that's life in the big city.  And we are very grateful for the long hours spent dealing with our article by many editors and reviewers.  We all learned an awful lot.

But is it really Stacking?

So I've been standing up in front of some very smart people this year -- at a meeting of the Chesapeake Bay Environmental Markets regulators' forum, and again at the ACES conference in Washington DC -- and saying things like "what the ESA/404 banks in California do is NOT stacking, and what the Willamette Partnership does IS stacking."  It takes some gumption to say this in front of people like Deblyn Mead (who manages the ESA banking program) and Chris Hartley (OEM), because environmental markets are literally pretty much what these folks say they are.

In an effort to provide some conceptual clarity to the realm of stacking, myself and 5 other authors put out a paper in Frontiers in Ecology and the Environment last March called "Stacking Ecosystem Services".  Faced with a multitude of definitions of stacking, we broke it down this way:

Ecosystem unbundling: representing an ecosystem as composed of discrete and divisible functions and/or services. Ecosystem unbundling is a prerequisite to both credit stacking and credit bundling.
Credit stacking: selling credits representing two or more spatially overlapping ecosystem services as separate commodities, each compensating for different permitted impacts.
Credit bundling: selling credits representing a collection of conceptually discrete but spatially overlapping ecosystem services as single commodities.
Double dipping: selling the same ecosystem service credit, however defined, multiple times.

Now, that helps a bit.  There's a real difference between conceiving of an ecosystem as a set of functions or services, which is done all the time in settings like REDD+ and systems ecology, and actually taking the further step of transacting those services individually.

We believe that stacking requires the spatial superposition of more than one transactible credit type. This rules out what I call a "Schrödinger's Credit" situation, where a piece of land can potentially be transacted as many different credit types, but once that transaction has occurred, no further transactions on that space are possible.  Like Schrödinger's famous Cat, prior to the transaction the credit exists in many possible states, and true nature of the credit is not observable until the transaction is made.  This would describe the approach to crediting at FWS' habitat banks that sell credits for multiple habitat types, and combined ESA/404 banks.

By this logic, what Willamette Partnership does is stacking.  On a given piece of land, multiple credit types are simultaneously transactible: salmon habitat, water quality, wetlands.  When one salmon credit is transacted, the other credit types are still available.

However.  TWP measures their credits using system developed by Parametrix, Inc. called "Ecometrix".  One can argue (as we do in our paper) that the functions which support the existence of the salmon credit are also involved in supporting the water quality and wetlands credits -- and so transacting one credit should affect the number of credits of other types that remain to be sold.  [footnote: for at least two economists reviewing our paper, this was such an outlandish claim as to disqualify the paper from publication.]  And Ecometrix can accommodate this interrelationship: If "salmon habitat" is 70% related to "water quality", then the sale of one salmon habitat credit can reduce the number of water quality credits still available by 70% of a credit.  This is still a stacked market, just one that recognizes the interconnection between the stacked credit types.

The reason Willamette Partnership's market is not stacked, I was told, is that the interrelationship between all credit types is set at 100%.  That is, the sale of one salmon credit requires the full removal of a similar proportion of wetland and water quality credits from the ledger. So this could instead be considered a form of credit bundling -- where the sale of one salmon habitat credit also "comes with" one of each of the other credit types.  In fact, the opposite of stacking.

 

I get this argument, and I agree to a certain extent.  Except that the structure of the market is still that of a stacked market, where multiple single credit types are transactable and certain assumptions are made about the relationship between them.  Whether the assumption is that they are 0% related or 100% related doesn't change the structure of the market.  It doesn't make much sense to say that a market where the relationship is set at 99% is stacking, and where it is set at 100% it is something else entirely, for which we need a different name.

For me, a bundled ecosystem service credit market has a structure in which there is a single ecosystem service credit commodity, say "salmon habitat", whose relationships with other services on the site are recognized, relevant, and may even affect the number of credits available.  But they are not defined as separate commodities.  Imagine a sound mixing board with a single fader.  The number of credits available can increase or decrease, and the status of other services is not accounted for in credits.

A stacked ecosystem service credit market, on the other hand, is more like a multi-channel mixing board where the faders are connected with servos.  When one is decreased, the others can change as well.  Move the salmon credit fader down a notch, and the servos connecting it to the other faders move them down as well.  10%, 70%, 100% -- it doesn't matter, it's still the structure of a stacked market.

We make assumptions about what the appropriate relationship between salmon credits and water quality is, just like a sound tech will decide what the proper relationship between guitar and keyboard volume is.

Outcomes are a different question, and I think it can reasonably be said that the Willamette Partnership's system produces outcomes very much like a bundled credit market.  But that doesn't make it a bundled credit market.  By the same token, a 100-channel sound board can be made to produce a sound identical to a single-channel system.  But that shouldn't hide the fact that it is in fact something much more interesting and complicated.




UPDATE: Response from a reader who should know, presenting the counterargument and a different analogy.  Soundboard Faders or Chemical Compounds? Discuss!

"I believe that the WP credits/market is bundled (“credits representing a collection of conceptually discrete but spatially overlapping ecosystem services as single commodities”)- so long as the market rules or underlying science does not allow for unbundling. Their credits can offset either WQ or fish habitat impacts, but not both unless they are part of the same mitigation action (WQ and fish habitat), and only then if approved by the appropriate regulatory agencies.

I feel that the analogy of bundled credits as chemical compounds (individual elements do not retain their individual properties and cannot be separated by physical means) as opposed to a mixture (where individual components retain their own properties and can be separated).

For example, a riparian buffer improves water quality and fish habitat, in a bundled scenario the permitee would be allowed to purchase the credit either as a WQ credit or a habitat credit, or as a credit that includes both WQ and habitat BUT, due to the nature of the credit would be unable to separate it into a WQ credit and a fish credit for use in different mitigation actions.

Conversely, consider a riparian buffer where wood duck nesting boxes have been installed, the nesting boxes provide spatially overlapping ecosystem services which could be sold as separate commodities (with approval of the regulatory agencies and market administrator), wherein the activities that generate the WQ/fish habitat credits and wood duck credits function independently.

From a pragmatic standpoint, drawing the distinction between stacked and bundled credits is an effort to reduce uncertainty surrounding the rules governing market transactions, and the real value is – as you suggest - acknowledging that there is “something more interesting and complicated” in acknowledging that there is value in the linked ecosystem services provided by the conservation actions."