Learning How to Establish a Functioning Biodiversity Offset Market From Tradable Pollution Permit Markets

With biodiversity net gain being mandated there will need to be an effective market established for biodiversity offset sites (habitat banks) that can satisfy the demand for conservation credits from ongoing and future development. It is welcome to, therefore, see a paper published in the Journal of Applied Ecology (Needham et al in press) that has reviewed how the market for tradable pollution permits operates and to see whether there are lessons that can be learnt from it in terms of organizing an effective market in biodiversity offsetting.

Tradable pollution permit markets fix or cap the total allowable level of pollutants such as emissions and operators have to purchase permits to be compliant. Setting the cap at a certain level, backed up by standards and accreditation, gives certainty to the market and drives down pollution because of the availability of permits. The authors suggest that the cap in a biodiversity offset market should relate to no net loss of a well-defined unit of biodiversity. Since we are now looking at delivering biodiversity net gain rather than just no net loss, the ‘conservation credits’ raised by brokers for example (as in the case of Environment Bank) will increase in value and there will need to be more of them available.

On-site Provision Should Be Subject to a Long-Term Contact

Companies embarking on a development project would need to hold offset credits ie purchase them from brokers at some stage prior to starting their development in order to be compliant with planning policy. Revenue from the sale of credits would be used to restore biodiversity at scale in the wider countryside. The authors demonstrate that the price of credits would need to reflect the cost of securing the offset, in the same way pollution permit prices reflect the costs of reducing emissions. In the case of offsets, the funding needs to be sufficient for both the creation of new wildlife habitat and its long-term management under a biodiversity management plan. I have made the point elsewhere that onsite provision must also work to the same rules as offsite areas ie be guaranteed, managed under a long-term contract (25+ years) and be enforceable with restorative measures put in place to deal with failure.

Let’s Not Over-complicate

The paper also stresses that, as in pollution permitting, the asset (ie in our case biodiversity), reflected in conservation credits that are traded, should be simple, measurable and standardized. There is some interest in some quarters to compound the classes from other natural capital assets and ecosystem services. I have argued that this would severely over-complicate the market and would be a turn off to developers, not least because of the cost burden. It is therefore much better to concentrate on the sale of conservation credits to provide the compensation mechanism for biodiversity impacts rather than conflating this asset class with others, not least because the measures and tracking of natural capital is complex and not properly calculated as yet. The message from evidence from the pollution permit market is ‘keep it simple’

Regional Offset Markets Will Be Required

The authors also advocate creating a regional offset market embedded in a broader landscape plan. This is exactly how we are operating at the Environment Bank – working with a range of stakeholders and the planning authorities to identify spatial locations and conservation priorities where the funds from the conservation credits sold to developers can be spent with landowners, farmers and conservation bodies, creating habitat at scale through habitat banks.

Offset sites, ie habitat banks, also require adequate governance, monitoring and enforcement, developed through a range of legal and financial tools. Environment Bank already has a range of governance documents – we write Supplementary Planning Documents and Local Plan wording for Local Authorities so that the mechanism is effectively embedded into the planning and development control system. We also have Conservation Credit Purchase Agreements between ourselves and the developer and Conservation Bank Agreements between ourselves and the habitat bank provider. These documents have been through legal compliance scrutiny and so give confidence to Local Authorities that an effective and workable mechanism can be delivered.

Finally, the paper shows the difference in effectiveness between a regulated system (as embraced by the pollution permit market) and a voluntary approach (as biodiversity net gain has been until now). Where companies were mandated to acquire credits an effective market for them was rapidly developed. By contrast, a voluntary offset market has been slow to emerge, there has been much inconsistency, lack of clarity and much needed investment into the natural environment has not materialized as a result.  

Important Not to Focus On Only On-Site Provision

A mandatory system for delivering biodiversity net gain needs to be flexible rather than rigid in the way in which developers comply. Placing too much emphasis on on-site delivery rather than off-site delivery will stifle the market and prevent conservation bodies, landowners and farmers bringing forward sites. Flexibility towards a preference for offsite provision will engage developers because it is much more cost effective and better for biodiversity.

The authors therefore, rightly in my view, suggest that the traditional application of the mitigation hierarchy should be re-considered by allowing developers to choose a “best package” of conservation outcomes from avoid, minimize, restore and offset. As the authors state ‘Relaxing the hierarchy to allow developers to choose whether they avoid, minimize, restore or purchase offsets may offer a potential net gain for conservation activities as developers can choose to send funds to the least cost conservation activity’ but which is the most effective for biodiversity.

David Hill – Chairman

The above is based on a paper by Needham, K., de Fries, F.P., Armsworth, P.R. & Hanley, N. (in press). Designing Markets for Biodiversity Offsets: Lessons from Tradable Pollution Permits. Journal of Applied Ecology.

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