I have been work­ing on the devel­op­ment of var­i­ous market-bvased solu­tions to envi­ron­men­tal prob­lems for some 10 years now, includ­ing some detailed work on bio­di­ver­sity off­sets — espe­cially the sup­ply of off­set sites. While the poten­tial ben­e­fits of such approaches seem to me to be sub­stan­tial, the lack of rig­or­ous eco­nomic analy­sis and/or devel­op­ment of the busi­ness case seems to me to be a major omis­sion in the debate. A few years ago I wrote this, and would be inter­ested in any com­ments read­ers may have.

Devel­op­ing Busi­nesses for Bet­ter Envi­ron­men­tal Stew­ard­ship
Over the past few decades envi­ron­men­tal­ists have pro­duced a great wealth of evi­dence of a grow­ing range of envi­ron­men­tal prob­lems. As a con­se­quence, they have often advo­cated a moral case to encour­aged peo­ple to behave dif­fer­ently; appealed to their “bet­ter nature”. We have heard calls to respect the inher­ent val­ues in nature and to improve inter­gen­er­a­tional equity; to “save the planet”. Despite this, vir­tu­ally all the grow­ing body of indi­ca­tors show con­tin­ued dete­ri­o­ra­tion of the nat­ural envi­ron­ment. It is increas­ingly obvi­ous that this strat­egy is inad­e­quate on its own.
Although many in the envi­ron­men­tal­ist com­mu­nity remain sus­pi­cious, more recently it has been increas­ingly recog­nised that a busi­ness case for more envi­ron­men­tally sus­tain­able behav­iour, can also be made; that by appeal­ing to people’s self-interest rather than to their sense of moral­ity and/or the com­mon good, a range of envi­ron­men­tal prob­lems can be suc­cess­fully addressed. From this, three addi­tional approaches are being devel­oped: the val­u­a­tion of ecosys­tem ser­vices to the econ­omy and for indi­vid­ual busi­nesses; the devel­op­ment and inte­gra­tion of nat­ural cap­i­tal account­ing to enable bet­ter resource and envi­ron­men­tal risk man­age­ment; and the devel­op­ment of novel mar­kets for the deliv­ery of spe­cific envi­ron­men­tal out­comes.

The mar­kets within which the pri­vate sec­tor oper­ates lead to par­tic­u­lar out­comes because of the struc­ture of com­mer­cial incen­tives and dis­in­cen­tives. In most mar­kets there has been no incen­tive to con­sider the effects of com­mer­cial activ­i­ties on the nat­ural envi­ron­ment, and often there has been a dis­in­cen­tive to do so, in that doing so indi­vid­u­ally would raise costs and depress com­pet­i­tive­ness. As a result busi­nesses exter­nalise envi­ron­men­tal costs; they dis­re­gard them. Mod­i­fy­ing these incen­tives and dis­in­cen­tives, so that the envi­ron­men­tal con­se­quences of com­mer­cial activ­i­ties are inter­nal­ized and brought into the com­mer­cial decision-making process, can cre­ate novel envi­ron­men­tal mar­kets. The cre­ation of car­bon mar­kets is a sim­ple case in point.
Presently, it seems to me that two issues need urgent atten­tion to progress the devel­op­ment of the market-based approach, and of novel envi­ron­men­tal mar­kets in par­tic­u­lar.
First more work needs to be under­taken on the the­o­ret­i­cal under­pin­nings of the var­i­ous novel envi­ron­ment mar­kets and other market-based tech­niques to under­stand bet­ter which work for what sorts of envi­ron­men­tal issues, and under what cir­cum­stances. Trad­ing, off­sets, caps and floors, auc­tions, pay­ment for ser­vices, and oth­ers all have strengths and weak­nesses that need to be bet­ter under­stood from both envi­ron­men­tal and busi­ness per­spec­tives. I sus­pect that we would find that there is a very wide range of envi­ron­men­tal issues to which market-based tech­niques could make an impor­tant con­tri­bu­tion. There will also be many sig­nif­i­cant issues for which they would be inap­pro­pri­ate, and we need to have a clear idea of which are which and why.
Sec­ond, to date much of the work done on the link­ages and cross­walks between ecol­ogy and eco­nom­ics, between the nat­ural world and the world of busi­ness, has been led by the envi­ron­men­tal­ist com­mu­nity, with increas­ing sup­port from the legal and large cor­po­rate com­mu­ni­ties. As a con­se­quence, this work tends to empha­sise the poten­tial envi­ron­men­tal ben­e­fits and/or threats of market-based approaches; the strengths and weak­nesses from an envi­ron­men­tal­ists per­spec­tive.
While the envi­ron­men­tal con­se­quences are crit­i­cally impor­tant, if the wider busi­ness com­mu­nity is to engage more fully with this debate, it seems to me that it would be help­ful if detailed exam­ples and case stud­ies were used to iden­tify the spe­cific ben­e­fits for busi­nesses; to artic­u­late the many and var­ied pos­i­tive oppor­tu­ni­ties for busi­nesses of deliv­er­ing improved envi­ron­men­tal out­comes. Most busi­nesses are inter­ested in explor­ing oppor­tu­ni­ties to improve their finan­cial per­for­mance, and pro­pos­als that can be artic­u­lated in such terms will find a wider and more recep­tive audi­ence. To do this, more firm-level case stud­ies that show the detailed cal­cu­la­tions of costs and ben­e­fits for the busi­ness that will deliver the envi­ron­men­tal out­comes need to be made avail­able. While large com­pa­nies have the capac­ity to ded­i­cate per­son­nel to engage in this debate, most firms remain unclear about the “bot­tom­line” ben­e­fits for them of under­tak­ing their activ­i­ties in a way that would ben­e­fit bio­di­ver­sity and ecosys­tem ser­vices. This is all the more the case in the cur­rent dif­fi­cult eco­nomic cli­mate. In short, there is an urgent need for these issues and pro­posed tech­niques to be exam­ined from the firm-level per­spec­tive of the busi­nesses that will make them hap­pen — oth­er­wise they are less likely to hap­pen at all.

I am cer­tainly not advo­cat­ing some sort of unreg­u­lated free-for-all, and more work needs to be done to ensure that the tech­niques employed are fit for pur­pose, but if we can har­ness the power of mil­lions of pri­vate decision-makers we might get more done, more effec­tively, more effi­ciently, cheaper, and with more enthu­si­asm than pro­grammes and schemes that are pub­licly financed and admin­is­tered. It seems to me that it is a prize worth seri­ous con­sid­er­a­tion and exploration.