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The Three Steps

Marketing environmental services requires products or commodities that can be sold in the market. As such, there needs to be discrete products, with specific owners, who are authorized to sell them. There also needs to be a place where they can be sold and potential purchasers.

Converting the environment – intricate, intangible, immovable and generally freely available – into such a commodity is like trying to push a square peg through a round hole. Yet governments and IFIs insist on forging ahead.

This process involves three steps:
•  commodification
•  privatization
•  commercialization

Commodification
Converting the environment – intricate, intangible, immovable and generally freely available – into such a commodity is like trying to push a square peg through a round hole. Yet governments and IFIs insist on forging ahead.

In relation to biodiversity, these three steps raise numerous moral and technical dilemmas – and it should be emphasized that these dilemmas are not just theoretical.

For example, Paraguay has adopted a law on payments for ‘environmental services’ (PES) and is now faced with the highly complicated question of developing an adequate regulatory system to implement the general principles of this law. As a first step, the Secretariat of the Environment in Paraguay was charged with the rather daunting task of putting an appropriate market value on all the ‘environmental services’ provided by Paraguayan ecosystems.

The creation of rights to emit greenhouse gases is another, slightly more indirect way of commodifying the environment. Although no-one is allocated ‘ownership’ of the atmosphere, a tradable product is still created, in the form of permits to pollute. Those companies who incur the highest costs for decreasing their emissions are expected to buy permits from more efficient companies, who thus turn a profit. However, these permits must of necessity be somewhat scarce, or they have little or no value.

Privatization
Privatization has been used extensively by governments to allocate rights to environmental ‘commodities’, transferring what were previously publicly held environmental goods – such as water, forests or the pollution-absorbing capacity of the environment – into private hands.

International financial institutions, such as the World Bank and the International Monetary Fund have been highly instrumental in insisting that developing countries follow this doctrine, which emanates from the North.

Privatization of the environment leads to profound equity-related questions. Who – if anyone – should have rights to the atmosphere? And who does or should own biodiversity? The government? The owner of the land where the biodiversity is found? The communities that manage or live on that land? Or Indigenous communities that managed the land sustainably until they were displaced? This question of rights is one of the most intractable problems relating to the use of market-mechanisms for environmental purposes.

In the case of the EU’s Greenhouse Gas Emissions Trading Scheme (ETS) Phase I, for example, tradable emissions allowances were simply handed out to a range of European companies – in fact, the polluters. This created a US$44 billion-a-year European carbon market. It also generated “record profits for RWE AG and other utilities.” Yet the ETS failed to meet expectations in terms of reducing greenhouse gas emissions and the EU fell behind schedule in terms of meeting its Kyoto target of an 8% reduction in CO2 by 2012.

Public-private partnerships, in areas such as water, carbon market, and biodiversity conservation through the establishment of protected areas, also feature prominently in governments’ and IFIs’ efforts to leverage private sector finance (although the private sector may, of course, see such schemes as an excellent way of leveraging public sector finance).

This allows the private sector to participate in decision-making processes relating to environmental problems and situations that were previously dealt with exclusively in the public sphere.

Please refer to Life as Commerce: international financial institutions, payments for environmental services and carbon finance for further details.

Commercialization
The last, indispensable step in setting up a market in ‘environmental services’ is that of creating a market and generating demand. So far, however, it seems that it is more or less impossible to attract commercial buyers without strong environmental regulation driving demand. The ‘markets’ have been dominated by public and/or philanthropic institutions that have ‘bought’ environmental assets for public benefit purposes.

For example, of the 287 examples of ‘environmental services markets’ that the International Institute for Environment and Development analyzed in 2002, hardly any could be considered to be purely commercial (the exception being a few ecotourism projects with dubious impacts on biodiversity). Most were rather conventional schemes that supported community-based biodiversity conservation initiatives, which were suddenly re-baptized as ‘payments for environmental services’ schemes, seemingly in order to make them more acceptable.

The World Bank is a notable champion of the use of public funds to support projects that have been reclassified as ’payments for environmental services’ (PES) schemes and which it can therefore showcase as examples of market-based approaches to conservation.

This might look innocent, but in a polarized and highly political debate – as in the current climate change negotiations around Reducing Emissions from Deforestation in Developing countries (REDD), for example – it is far from so, as these projects have subsequently been used as arguments to support the use of commercial carbon financing for ‘reduced deforestation’ projects.

A classic case of using Payments for Environmental Services (PES) to showcase the inclusion of environmental projects in carbon markets was the very generous grant the World Bank gave to the Kenyan Green Belt Movement through its BioCarbon Fund. Carbon sequestered through tree planting projects generated carbon credits that could then be sold on the international carbon market.

However, at a presentation of the project at UNFCCC COP-12, a Green Belt Movement representative stated that his organization would “never” have been able to find carbon finance on the commercial market themselves as the procedures are too complicated. There is also a question as to whether the project would have been financially viable without Bank funding. The Bank’s own web pages simply state, “Other sources of financing are being determined.” No financial figures seem to be available.

Moreover, most existing PES schemes are accompanied by strict regulations and most ’success stories’ are only really successful because of effective public governance.

A famous example in this respect is the Costa Rican PES scheme, which set up a system to pay for the environmental services provided by forests, including the conservation of biodiversity, water basins and water resources, aesthetic values and carbon sequestration.

However, when attempting to sell this scheme on the international carbon market, the Costa Rican government tended not to mention the fact that the scheme was actually accompanied by a nation-wide deforestation ban when it was introduced. So while there is general consensus about the fact that the overall policy was successful in terms of halting deforestation in Costa Rica, it is hard to tell whether this success was due to the deforestation ban or the far more expensive PES system.

It is also important to note that the Costa Rican PES system was not a success economically. Costa Rica found that protecting a ton of carbon cost around US$27, while market prices varied between US$4-16 per ton at the time of introduction. The only reason the entire system stayed afloat was because most of the resources were generated by a national petrol tax, matched on a regular basis by official development aid. In the Costa Rican case, the carbon market has proven to be a highly unstable and unreliable source of finance.

Implementing the same system in a larger country could be extremely expensive: at one REDD negotiating session, for example, Joao Capobianco, Brazilian Vice-Minister for the Environment calculated that it would cost Brazil roughly US$5 billion a year to apply the same system to the most threatened 30% of the Amazon forests.

Please refer to Life as Commerce: international financial institutions, payments for environmental services and carbon finance for further details.