Can markets protect biodiversity? an evaluation of different financial mechanisms

New varieties of financial mechanisms may potentially play a greater role in the future mix of instruments used to increase financing for conservation, and potentially create more appropriate incentives. This report discusses the strengths and weaknesses of increased use of market-based mechanisms in protecting biodiversity and its associated services.

Findings include that:

• paying for eco-system services (PES) procurement auctions are considered an alternative or supplement to ordinary fixed-price or bilaterally negotiated PES schemes
• the auctions can help the regulator achieve environmental objectives at lower costs and ensure a higher degree of additionality, though PES auctions are still in their infancy internationally
• nevertheless, they have a higher risk of failure than a fixed-price scheme
• trading biodiversity offsetting (compensating biodiversity reduction at one place by increasing it at another) and tradable development rights can in principle achieve the cap/objective at a lower cost
• 'habitat banking’ is another instrument that opens up the scope for finding trades with even greater differences in opportunity cost
• subsidy reform is an old mechanism but still an important component of any mix of instruments to increase potential financing for conservation and create more appropriate incentives.
  

Furthermore, the report highlights ecological fiscal transfers as a new instrument that provides incentives for local governments to support and maintain nature conservation areas.

Conclusions of the report include: 

• establishing relevant markets necessitates government actions
• there are many obstacles to a successful use of markets for biodiversity.