'Public coffers are empty. This makes it all the more important to mobilise private capital for nature conservation.'

Do market-based instruments actually bring in that much money for nature conservation?

New Economy of Nature: Financing Environmental Protection – REDD

Empty public coffers and insufficient public funds for nature conservation are often cited as an argument for the introduction of market-based instruments. Supporters of such instruments claim that the shortage of public funding can be overcome by mobilising private capital for nature conservation. Examples of this approach are the financing of forest conservation via the sale of carbon credits generated from REDD+ projects and the restoration of drained peatlands through programmes such as the ‘MoorFutures’ scheme.

The financing of nature conservation via carbon and biodiversity credits legitimises degradation of the natural environment elsewhere

In view of drastic public funding cuts for nature conservation agencies in many countries, including in Germany, the argument that private capital is needed initially seems plausible. Closer inspection, however, reveals a number of problems. One source of such funding is the sale of carbon credits. This is the case with the ‘MoorFutures’ scheme in Germany. The credit sales do indeed raise funds for the restoration of peatlands – and restoration of peatlands reduces the release of greenhouse gas emissions. But among the buyers of these carbon credits are electricity companies that use the credits to market their electricity generated from fossil fuel burning as ‘climate neutral’. The money for nature conservation mobilised in this way thus legitimises continued emission of greenhouse gases. No extra emissions are saved as a result and nature elsewhere continues to be destroyed for fossil fuel extraction.

Much of the capital that is mobilised is not used for nature conservation

In addition, the prices calculated for carbon credits by these schemes in no way capture the actual costs involved in setting up market-based instruments. Creating instruments such as emissions trading requires extensive regulatory measures, starting with the specification of limits. It is also necessary to develop methods for measuring and accounting of units that environmental agencies will accept as equivalent and sufficient for compensation. Finally, implementation of offset projects must be monitored.

Market-based instruments such as the trade in compensation credits also carry very high transaction costs. Whereas the trade in physical goods involves tangible products, a carbon credit represents the outcome of a foregone activity that would have released greenhouse gas emissions (emissions that, because of the project, have not been released). In order for the carbon credit to fulfil the promise of compensation, regular monitoring is necessary to ensure the activity remains foregone and thus the projected planned emissions at the offset project site remain saved; emission credits that have not been externally verified by specialist auditing companies are hard to sell. This means that project operators incur high costs – especially for verification of counterfactual carbon calculations that remain based on counterfactual emission scenarios and thus ultimately their climate benefit is unverifiable, regardless of the stamp of an auditing company. Small projects are often unable to meet the costs of such auditing and certification assessments without public subsidies or grants from third parties, among others because the costs are incurred before emission certificates can be sold.

High costs for auditing and certification also means that a significant proportion of the funds raised via carbon offset instruments does in the end not go towards nature conservation. An example of this is the financing of forest conservation through the sale of carbon credits. These so-called REDD+ projects were promoted by conservation groups and the World Bank with the claim they would mobilise billions of euros from the private sector for forest conservation. The high hopes have not been realised. Instead, considerable amounts of public funding is being put into setting up the REDD+ mechanism and de-risking private sector investments in such projects.

The public sector is putting large sums of money into subsidising the establishment of market mechanisms

Thus, another point of criticism is that large amounts of public money are channelled into the development and expansion of market-based instruments such as REDD+. Recent studies estimate that around 90 per cent of REDD+ financing comes from public funds. Instead of mobilising private-sector capital for nature conservation, the public sector is subsidising sales-enhancing measures by some of the most controversial corporations in the world. A REDD+ project in Kenya illustrates this point: with the support of the World Bank's private sector arm, the International Finance Corporation (IFC), the project sells carbon credits to BHP Billiton – the mining company operating the mine where in 2015, the biggest environmental disaster in Brazil’s mining history occured. Another example: between 2012 and 2017, the German development bank KfW paid the Brazilian state of Acre 25 million euros for REDD+ activities. However, up to 30 per cent of the money did not go towards activities on the ground but into creation of the institutional structures for implementing the market-based ‘system for promoting ecosystem services’ in Acre.

Nature conservation does not fail (only) because of lack of money

There is another aspect in which the call for funding nature conservation through market-based instruments falls short. Nature conservation does not fail (only) because of lack of money; more often, destruction of nature is rooted in political and economic interests and priorities against nature conservation. The example of deforestation in the Brazilian Amazon is instructive. The rate of deforestation between 2004 and 2009 fell drastically, and entirely without the use of market-based conservation instruments. Between 2004 and 2009, the use of conventional regulation and enforcement of environmental legislation (of the Brazilian Forest Code in particular) reduced annual deforestation by more than 70 per cent – from 27,000 km² to 7,500 km² annually. In financial terms, too, the measures were a success: the fines imposed by the Brazilian Institute of the Environment and Renewable Natural Resources (IBAMA) rose by 790 per cent between 2003 and 2007 – from 153 million reais to 1.4 billion reais (approx. 500 million euros at the time).

In the state of Pará the environmental authorities and the justice system took action against 20 large landowners and 11 owners of abattoirs for their involvement in illegal logging. The abattoirs had accepted cattle from ‘fazendas’ (large farms) where forests had been destroyed illegally to create cattle pastures. As a result of the campaign, fines for illegal logging totalling two billion reais (around 700 million euros) were imposed. Large landowners increasingly saw their profits threatened and from 2011, political backing for rigorous implementation of the Forest Code dwindled as a result of their lobbying. Since 2012, a revised Forest Code has focused more strongly on market-based approaches, funding of the environmental agencies tasked with enforcement of the Forest Code has been drastically cut – and deforestation is increasing again.

This article is part of our dossier "New Economy of Nature".