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Greens take a cue from financiers

Environmental ‘derivatives’ encourage creative, proactive conservation.

By Moises Velasquez-ManoffStaff writer of The Christian Science Monitor / March 18, 2009

Giving individual commercial fishermen in the Gulf of Mexico a share of the overall yearly catch of this fish cut the bycatch (fish caught but discarded) dramatically, while making the fishery more profitable.

David McLain/Getty image/FILE

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In 1990, Congress amended the Clean Air Act to address the problem of acid rain. Allowable emissions for sulfur dioxide (SO2) and nitrogen oxides (NOx), two major components of acid rain, were capped. Emitters then traded a shrinking number of permits – the right to emit these pollutants – on a market. Supply and demand dictated the price.

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By 2002, SO2 emissions from power plants had dropped by 41 percent compared with 1980. NOx emissions fell by one-third com­pared with 1990. Overall, emissions were reduced much more quickly and cheaply than doomsayers had forecast. A 2003 study by the Office of Management and Budget found that the program had produced more measurable benefits to human health than any other major federal regulatory program of the previous decade. Benefits surpassed costs by more than 40 to 1.

Today, the cap-and-trade program is widely cited as proof that the efficiency and creativity of a free market can be harnessed to protect the environment. Its success seems to indicate that environmental regulation need not squelch economic growth. Many now anticipate a similar approach to – and success with – the much larger-scale problem of carbon emissions.

Some also urge that more market tools be applied to conservation. The environmental problems facing humanity are so large that traditional approaches no longer suffice, they say. Market-based tools that incentivize conservation before situations become dire must be developed and applied.

One such tool from the financial world: derivatives. Derivative-like products could help manage the risks and costs of habitat degradation and species extinction, for example, by providing insurance of sorts should an at-risk critter experience further decline. An approach like the cap-and-trade program that curbed acid rain might also lessen bycatch in fisheries. But most important, say proponents, putting a price on “green infrastructure” – the natural world – makes businesses include clean air, clean water, carbon sequestration, and biodiversity in their operating costs.

Driving this trend, say experts, is a growing awareness that natural resources are not infinite. The significance of the now-ubiquitous images of melting ice caps has sunk in, they say. Adam Davis, president of Solano Partners Inc., an environmental investment consulting firm in San Rafael, Calif., says businesses are realizing that scientists’ warnings were correct: Human well-being depends on healthy, functioning natural systems.

Among those who view stewardship of nature as a moral obligation, there’s some skepticism about market-based approaches. Why should anyone profit from doing the right thing? Proponents counter that these approaches aren’t meant to supplant those obligations, but to provide an additional avenue for action.

“I wouldn’t want to get rid of the ethic to conserve,” says James Mandel, lead author of a recent paper on biodiversity derivatives in the journal Frontiers in Ecology and the Environment. “We just want to make the process more efficient.”

The traditional approaches to conservation – philanthropy and government intervention – no longer suffice.

“The scale of the problem is so enormous that our traditional philanthropic approach is not even going to make a dent,” says Nathaniel Carrol, project director at Ecosystem Marketplace, an information aggregator. Where to get the extra funding? Investors. And, says Mr. Davis: “if private capital is going to come in, you’ve got to have a fair return on the investment.”

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