Could private funding actually benefit nature? Henry Leveson-Gower proposes a cooperative approach.

Since the 80s environmental economists have been putting monetary values on nature so they get “counted”. Now they see the potential to convert numbers in spreadsheets into real hard cash as so-called nature-based solutions gain increasing interest from big money.  But as ever theory is one thing and practice is another.

I got my first job as an environmental economist in the Australian government in 1993.  Having studied ethics as well as economics, I was already a critic of the attempts to shoehorn nature into the narrow values framework of neo-classical economics. Over the following decade, I became well versed in all the practical and methodological problems in those attempts. 

For instance, values given in surveys can vary by an order of magnitude depending on the framing of questions. So if you ask people about how much compensation they need to accept a loss of natural environment, the answer will be bigger than the one you would get on asking how much they were willing to pay to keep it. More mundanely, people suggest they value nature more to researchers wearing suits to those in jeans.

However, the pragmatic argument made by many environmentalists is understandable: maybe monetising nature would move our cause up the agenda given that money seemed to talk so loudly.  (That puts aside the bigger issue as to whether we should be challenging rather than exploiting this economic dominance).

Maybe monetising nature would move our cause up the agenda given that money seemed to talk so loudly.

But this pragmatic approach too has its failings. Valuation techniques only generated theoretical dollars, not real ones. Economists have, over the past 30 years, advocated turning these valuations into taxes, to “internalise externalities”, but that project has largely failed[1].  And theoretical money turns out to be just theoretical.

I had direct experience of how treasuries didn’t take such valuations seriously if it didn’t suit their purposes.  After all, their main role is to manage the real economy, not a theoretical one.  And given the methodological issues with valuations, they could always find reasons to ignore them.

For financiers and businesses, unless values in spreadsheets had real impacts on their bottom line, they would always lack traction. Also numbers produced by experts with complex models mystified more than empowered the wider environmental movement. 

But now we are talking about the potential for real hard cash to be paid to conserve and restore nature.  The main driver is the word “net”, as in “net zero” – it gives governments and companies a get-out clause: rather than reducing their own emissions they can pay someone else to reduce emissions or, more usually, to suck carbon out of the atmosphere into nature, by planting trees.

There are huge potential problems with this approach. They include the possibility that this so-called carbon sequestration is neither reliable nor additional which Kathleen McAfee has previously written about in The Mint – see  The trillion tree delusion.

So is there a way of funding reliable, systemic and permanent nature recovery from beneficiaries that are forced or need to pay?  Maybe the answer can be found by bringing a 21st century twist to a 19th century social innovation: cooperatives.

In the UK, how we fund nature recovery is a current practical policy question. Post-Brexit, the UK government is developing mechanisms to use public money to fund public environmental benefits to be delivered by farmers and other land managers. These mechanisms will gradually replace previous subsidies for farmers based on the area of land they farm, which for most farmers turned losses into some profit.  And this is not small potatoes with funding of about £1.9bn a year committed currently.

But the UK government, as ever, doesn’t want to be the only funder and it is encouraging land managers to seek other funding sources for so-called ecosystem services, which go well beyond carbon sequestration (see box – Potential funders of ecosystem services).

Potential funders of ecosystem Services
  • Water companies can fund land management that reduces water pollution if it goes beyond legal compliance, with £960m allocated to 550 schemes from 2020-2025 approved by the water industry regulator, Ofwat.
  • Flood Re, the UK government’s flood risk re-insurance vehicle, and communities, who are small enough to be unlikely to qualify for Environment Agency flood risk reduction funding, are in some cases willing to fund land management to reduce flood risk.
  • Developers are required by the Environment Act 2021 to ensure there is at least a 10% net biodiversity gain from a development which can be delivered by funding biodiversity improvement outside the development area.
  • Many companies have legal requirements under carbon trading schemes or have made voluntary commitments to achieve net zero, which means they are interested in funding carbon sequestration.

The possibility here is that strategic changes in land management could provide benefits for multiple beneficiaries. For instance renaturalisation of river floodplains can tick most boxes (see box – Rivers get natural).

Rivers get natural
This involves recreating natural river flood plains with meanders and related vegetation. This slows the river flow and allows ecosystems to develop that clean the water, provide new habitats and prevent pollution entering rivers. This helps improve water quality and reduce flood risk in certain areas as well as provide nature corridors, improve water conditions for flora leading to greater drought resilience, and capture carbon dioxide from the air to help tackle climate change.

Revenue streams from these multiple beneficiaries could then be combined, or “stacked” in a manner that provides a substantial increase in funding for a holistic approach to land management.  Economic and environmental objectives could actually coincide. 

This contrasts with a scenario where funding for carbon sequestration dominates and promotes the planting of fast-growing trees in specific areas. This may undermine other environmental objectives such as improving biodiversity while ignoring others such as water quality. It could also ignore the overall carbon impact on land management beyond the plantations.

Rivers and landscapes usually spread over a number of properties. So a collective commitment or “bundling” is required over the long term to renaturalise substantial areas of flood plain as well as to manage whole landscapes as ecosystems.

Clearly getting all these different organisations and people together around the common cause of landscape regeneration is a major challenge. And there are many groups on the ground in the UK successfully meeting that challenge such as the Rivers Trust and its related organisations. 

Once you have a group of these different stakeholders with common cause and plans for action, the next challenge is to formalise these agreements.  And so far no effective model to do this has been implemented.

Most economic actors start from the perspective that contracts are the only legal mechanism for agreements.  They don’t even consider any other legal framework.  Furthermore environmental economists look to create standardised contractual rights so they can be traded in secondary markets.  This for them is necessary to drive competition and efficiency. Governments also find this standardisation convenient for regulation: for instance you can then ‘count’ how much biodiversity developers are funding as offsets.

Most economic actors start from the perspective that contracts are the only legal mechanism for agreements.

This starting point has created a substantial literature (for example, this from Forest Trends) on all the limitations of using contracts alone to deliver ecosystem services (see Box – The limitations of contracts).

The limitations of contracts
  • Double dipping: someone sells the same services twice.
  • Non-additionality: an ecosystem service improvement is sold that would have happened anyway.
  • Incomplete regulatory coverage: where ecosystem services are sold, while other ecosystem elements, which are not regulated, are degraded.
  • Uncertainty: contracts have to be absolutely specific to be legally effective. However relationships between land management and ecological outcomes are complex and often ill-understood. So agreements up front to particular land management practices may turn out to be sub-optimal at best, while renegotiating contracts can be challenging.
  • Administrative complexity: many different, potentially inconsistent contracts will be required.

Advocates of such contractual market-based approaches, such as the Financing UK Nature Recovery initiative, then propose to address these issues with extensive regulatory systems. This is ironic given their belief in the power of markets over regulation.  A leading ecosystem market practitioner in the US commented: “To build ecosystem markets, we’ve tended to break holistic nature into incomplete but measurable chunks of nature – and then we wonder why it’s difficult to bundle those chunks into something holistic. Maybe ….we should be creating more holistic instruments.”

And such instruments are clearly available outside standard economic thinking: cooperative law is designed precisely to underpin collaboration between multiple parties. But whether from ignorance or prejudice, such a solution goes unmentioned in the literature.

Cooperatives originated as either consumer or producer cooperatives. More recently the idea and application of so-called multi-stakeholder cooperatives involving a diverse range of individuals and stakeholders have emerged.  These cooperatives can provide a framework to underpin agreements between multiple stakeholders that can adapt and change over time. Agreements can range from those about values and processes to ones on specific actions and their funding.

Effectively, governance processes in a cooperative replace contracts. This provides the transparency, adaptability and simplicity to avoid all the problems generated by using contracts. 

This holistic approach does not break ecosystems services down into measurable chunks that can be traded on secondary markets. However this has never been seen as a problem for other service markets; imagine a trade in consultancy knowledge-units.

The holistic approach is already tried and tested in the UK in the management of digital networks. They have involved the public and private sectors, including big corporations (see box – Digital gets cooperative).

Digital gets cooperative
Digital network in Tameside and Manchester managed by a cooperative

 

Digital asset contributors and network users are all members of a cooperative with governance rules agreed by members.  Hence all agreements on such matters as network development, usage rates, access rules are agreed by the cooperative in line with the governance rules.

Members of the cooperative

This reduces the need for multiple contracts, ensures agreements can be adapted as needed while providing transparency and fair access.

Members also lend to the cooperative to fund network development.

Legal systems themselves are never a panacea because they can always be undermined and gamed.  They don’t solve problems of understanding and measuring ecosystems.  However cooperative law would at least seem to support a collaborative, holistic approach to funding land management in a way that contracts don’t.

Legal systems themselves are never a panacea because they can always be undermined and gamed.  They don’t solve problems of understanding and measuring ecosystems.

As the proof of the pudding is in the eating, I am looking to work with land management stakeholders to see if it is practical to swallow the funding of land management holistically.

[1] A major exception to this would be the use of valuation in the US in court cases involving environmental damage as part of the assessment of resulting fines, but this has not been taken up beyond US borders. A more minor exception was the use in the UK of valuation to initially set landfill taxes in the 90s.

Henry Leveson-Gower

Henry is the founder and CEO of Promoting Economic Pluralism as well as editor of The Mint Magazine. He has been a practising economist contributing to environmental policy for 25 …

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