Today’s guest post is from Steve Zwick, who edits Ecosystem Marketplace, an online news service that reports on market-based solutions to environmental problems.  Based on the premise that the cost of production should include the cost of environmental degradation, EM is published by non-governmental organization Forest Trends and funded by a diverse array of NGOs, governmental agencies, and private companies.

A native of Chicago, Steve began contributing to EM in 2006, after more than a decade writing about sustainable business for publications such as Time and Fortune.  He also produces radio features for Germany’s Deutsche Welle Radio and National Public Radio in the United States. Steve’s background combines journalism, business and the environment—he studied journalism at Northwestern, worked as a runner at the Chicago Board of Trade, became a futures trader and then got involved in local environmental campaigns, which led to his writing career. Steve sent me this thoughtful post from Hanoi, where he was watching Ivory Coast play Brazil in the World Cup and preparing for the 17th Katoomba meeting this week, as he’ll explain:

BP’s Deepwater Horizon debacle reminds us once again that our economy depends on our ecology and that one man’s cheap solution is often another’s cost.  It’s as true in the United States as it is here in Vietnam, where subsistence farmers often must choose between feeding their families and preserving nature.

But the apparent conflict between commerce and nature is a false one, because in the long run everything we buy, sell, eat, and produce is derived from nature.  If we destroy nature, we destroy our own livelihoods.

Mangroves, for example, provide shelter for vulnerable fish and breeding ground for shrimp.  They also shield the coast from slow erosion and sudden storms; they extract impurities from water and pull carbon dioxide from the atmosphere, depositing it in the ocean floor – thus helping to reduce the greenhouse effect and slow climate change.

All of these are ecosystem services, delivered to us by nature, free of charge.  And because they’re free of charge, they are taken for granted – and destroyed to make things we can put a price on.

Over the last four decades, however, we’ve seen scores of efforts to measure the economic value of services provided by wetlands, forests, and other living ecosystems – as well as habitat supporting endangered species – and then attempts to entice those who either benefit from these services or contribute to their destruction to instead pay for their upkeep.

That’s what payments for ecosystem services (PES) are all about. Some of the more exciting emerging PES schemes involve water.  Indeed, water quality trading (WQT) schemes are proliferating in streams, rivers, and lakes across the world. WQT is a pillar of the Obama administration’s new scheme to clean up the Chesapeake Bay.

Ecosystem services will take center stage this week when the government of Vietnam and environmental NGO Forest Trends host the prestigious Katoomba Conference in Hanoi.  This two-day workshop brings together financiers, policymakers, environmentalists and small-scale farmers to explore financing schemes that replace the economic incentive to destroy mangroves with an economic incentive to preserve them.  These schemes begin by recognizing that mangroves aren’t just pretty places for nature lovers – they are part of a critical ecosystem that feeds the local economy.

It takes place on Wednesday and Thursday, and you can follow it at Katoomba Live where a host of resources and video (both pre-recorded video blogs and near-live feeds from the conference itself) are being posted.  You can also engage with the event via Ecosystem Marketplace, Twitter or on the Facebook and LinkedIn groups that have been established.

Apples and Air

Living ecosystems provide tangible benefits to people who receive them – just like apples and oranges do.  Unlike apples and oranges, however, the benefits of ecosystem services are spread diffusely among different people, leaving little incentive for any individual to pay for them.

You can buy an apple, in other words, and or an orange – but you can’t buy the clean air you generate by saving a mangrove tree.  What’s more, if you grow an apple or an orange in a way that dumps insecticides into water, you spread that cost among scores of people who might not even be aware of it.

Pollution is called an “externality”  because its cost is not borne by the polluter but by society at large.  Society – in the form of government – has responded by passing laws against pollution and the wanton destruction of nature.

Such laws work well in many cases, but they can be overly restrictive.  They also create little incentive to find new and innovative solutions, and are often expensive to supervise.

PES schemes offer a new tool that is designed to encourage larger-scale and longer-term preservation of living ecosystems by incorporating the economic value of nature’s services into our economy.  Rather than simply banning certain practices, PES schemes aim to calculate the cost of environmental degradation and incorporate it into the cost of production.  This way, someone who runs a clean apple orchard that doesn’t muddy nearby streams will pay less for his externalities than someone whose orchard dumps pesticides and other chemicals into local water.

Who Should Pay?

In a straight PES scheme, you begin by figuring out who should pay, who should receive, and how the payments are measured.  Mangrove guardians, for example, might be able to earn a commission from fishers if they can prove that their activities increase the number of healthy fish in surrounding waters.  They could also earn commissions from tour boat operators, because mangroves often support the coral reefs that attract tourists and divers.  Easiest of all: they can collect carbon payments from companies that want to reduce their “carbon footprints” by paying to help capture a percentage of their industrial emissions in trees.

The ecosystem services of a mangrove forest can, therefore, be broken into specific “products”: namely, the protection of species (which are a sign of an overall environmental resiliency), the shielding of coastal areas, the filtration of water, and the sequestration of carbon, among others.

In this example, the carbon payments would come from a cap-and-trade scheme such as the ones outlined in the Kyoto Protocol’s “flexibility mechanisms”.  Climate-change negotiators are now working on a successor to the Kyoto Protocol, and current proposals make it possible for factories to offset their industrial emissions by preserving or restoring a patch of rainforest, thus capturing carbon in trees.

Mitigation Banking and WQT

Cap-and-trade can also be applied to wetlands, biodiversity, and water – where it’s called “mitigation banking” and “water quality trading” (WQT).

Pioneered in the United States, mitigation banking draws its strength from two laws: the Clean Water Act (CWA) and the Endangered Species Act (ESA), each of which contains provisions that, in a nutshell, say that anyone who damages the habitat of an endangered species or dredges or fills certain kinds of wetland has to make sure he does so in a way that results in no net loss of habitat or wetland.

The law makes it clear that companies have to first look for ways to prevent damage to the environment.  If, however, they can prove that their project is worthwhile and that some environmental damage is unavoidable, they can proceed – provided they restore wetland and/or habitat of equal or greater environmental value than what’s destroyed.

This has led to the proactive restoration of degraded wetland and habitat across the United States as so-called “mitigation bankers” restore marginal farmland to its natural state in the hopes of selling credits to people building roads and houses nearby.  In some cases, it’s resulted in healthier habitat than existed before the construction took place, and the model could be tweaked for use across Asia.

Likewise, WQT schemes work by determining how much pollution a body of water can handle, and then letting farms and factories trade among themselves to encourage the most efficient way to reduce runoff into lakes, rivers, and streams.

A Tool in the Belt

None of these schemes is a panacea, and many are still in the early phases of development, but each has the potential to become a valuable tool in the effort to build a sustainable economy for tomorrow.

Their implementation, however, requires a re-thinking of the role of government, the role of the private sector, and the role of civil society.  Just as we need to abandon the idea that commerce and environmentalism are in opposition to each other, we also need to recognize that all sectors of society have common goals.

A sustainable economy is one that incorporates all of society’s goals and values – in part by recognizing the full costs of production.

Most companies take for granted the fact that they are utterly dependent on a healthy planet. Nature provides not just the air we breathe and the water we drink, but an array of products and services to business—from the paper on which memos are printed to the sequestration of carbon in forests to the wild fish people eat for lunch.

The jargon-y name for these benefits is ecosystem services. Now a group of forward-thinking companies and nonprofits are asking:

What are ecosystem services worth?

How can companies protect them?

Should business pay for the services?

“Ecosystems and eco-system services do matter to the bottom line,”says Craig Hanson, director of the people & ecosystems program at the World Resources Institute, a Washington-based environmental think tank. “Nearly every business, to some degree, depend on ecosystems for its own profitability.”

These questions took on some urgency back in 2005 when the Millennial Ecosystem Assessment—a global audit of the world’s forests, wetlands and oceans—found that about 60% of the world’s ecosystems are degraded. Since then, WRI and the World Business Council on Sustainable Development, a group of about 200 international companies, have been developing a methodology to help businesses bettter understand the value of nature’s services. They call it an Ecosystem Services Review (ESR), and today the groups held a workshop at WRI to teach corporate executives how to use the ESR.

Now, this topic can get pretty wonky pretty quickly, but rest assured that it has practical implications. Jonathan Lash, the president of WRI, said that power plants (coal and nuclear) in seven countries have been forced to shut down in recent years because of a shortage of water needed to cool their operations. Imagine if they’d found a way to value, and protect that water years earlier. Hotels and tour companies in Australia, recognizing the importance, of the Great Barrier Reef to their business, have banded together to lobby for more environmental protection, according to Hanson. And a paper and packaging company called Mondi, which is based in South Africa, road-tested the ESR and decided after to invest money to remove invasive species from some of its lands because those plants were sucking up too much water. Earlier, Unilever joined with other companies and nonprofits to form the Marine Stewardship Council to protect fisheries after cod stocks declined precipitously in the western North Atlantic.

Put simply,  degradation or pollution can threaten an otherwise healthy business.

“There are a lot of companies with ecosystem-related risks that they don’t know about,”says James Griffiths, manager director of the World Business Council for Sustainable Development.

The value of ecosystems is even being recognized by courts. In 2008, the Union Pacific Railroad Co. agreed to pay $102 million fine to the U.S. Forest Service after its workers helped spark a huge California wildfire.  As The Los Angeles Times reported [PDF]:

U.S. District Judge Frank C. Damrell Jr. said Union Pacific was not only responsible for the cost of firefighting and lost timber, but also damage to young growth, soil, wildlife, habitat, recreational uses and views.

Ecosystem services also come into play in the discussions around REDD (Reducing Emissions from Deforestation and Forest Degradation in Development Countries), a UN-initiated program in which richers countries pay poorer ones to protect forests because trees are an effective way to sequester carbon dioxide.

The list of ecosystem services is long. It includes food such as wild fish, fiber such as timber, biomass fuel, frest water, genetic resources, natural medicines, air quality regulation (when lakes serve as a sink for pollutants), climate regulation, water purification (when wetlands remove harmful pollutants),  pest regulation (when predators consumer pests), pollination, recreation, and ethical and spiritual sustenance.

The ESR methodology doesn’t attempt to place a value on these business benefits. Instead, it highlights the risks and opportunities that they present to companies. Companies that worked with WRI and the world business council to test out the methodology include Akzo Nobel, a Dutch-based chemical and coatings company; BC Hydro, a Canadian power company; Mondi, the paper company based in South Africa; Rio Tinto, the London-based mining giant; and Syngenta, an a global agribusiness headquartered in Switzerland.

You can read a lot more about this topic in a report called The Corporate Ecosystem Services Review.

Photo credit: commons.wikimedia.org