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Economic Insights in Ecological Compensations: Market Analysis With an Empirical Application to the Finnish Economy

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  • Kangas, Johanna
  • Ollikainen, Markku

Abstract

Biodiversity is decreasing at an alarming rate. Current policies focus on the most valuable species and habitats but cannot stop the degradation occurring in less valuable habitats. One solution is offsetting the loss of biodiversity caused by development projects. The basic idea of biodiversity offsetting is simple: a developer must provide an improvement in biodiversity so that the lost ecological value is compensated for. A banking mechanism for offsetting entails a third party providing offsets for developers to purchase, and thus, an offset market emerges. We develop an equilibrium model to analyse the offset markets and apply the model to the Finnish economy and three selected boreal habitats. We examine how the market depends on trading ratios, the presence of an intermediary and the realization of risks associated with uncertainty. An intermediary can facilitate the market participants meeting each other with minimal transaction costs and safeguard against risks. The results show that the size of the offset markets could potentially be quite considerable and providing offsets could be a profitable business for landowners in Finland. The outcome of the restoration investment and a possible time delay between biodiversity losses and gains impact the trading ratios and thus, have a major impact on the market equilibrium. An intermediary may significantly decrease the costs of compensation for developers, provided that it can provide mature offsets when needed.

Suggested Citation

  • Kangas, Johanna & Ollikainen, Markku, 2019. "Economic Insights in Ecological Compensations: Market Analysis With an Empirical Application to the Finnish Economy," Ecological Economics, Elsevier, vol. 159(C), pages 54-67.
  • Handle: RePEc:eee:ecolec:v:159:y:2019:i:c:p:54-67
    DOI: 10.1016/j.ecolecon.2019.01.003
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    References listed on IDEAS

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    1. Coralie Calvet & Claude Napoléone & Jean-Michel Salles, 2015. "The Biodiversity Offsetting Dilemma: Between Economic Rationales and Ecological Dynamics," Sustainability, MDPI, Open Access Journal, vol. 7(6), pages 1-22, June.
    2. Charles D. Kolstad, 2000. "Spatial Environmental and Resource Economics," Books, Edward Elgar Publishing, number 1918.
    3. Drechsler, Martin & Hartig, Florian, 2011. "Conserving biodiversity with tradable permits under changing conservation costs and habitat restoration time lags," Ecological Economics, Elsevier, vol. 70(3), pages 533-541, January.
    4. Doyle, Martin W. & Yates, Andrew J., 2010. "Stream ecosystem service markets under no-net-loss regulation," Ecological Economics, Elsevier, vol. 69(4), pages 820-827, February.
    5. Drechsler, Martin & Wätzold, Frank, 2009. "Applying tradable permits to biodiversity conservation: Effects of space-dependent conservation benefits and cost heterogeneity on habitat allocation," Ecological Economics, Elsevier, vol. 68(4), pages 1083-1092, February.
    6. Vaissière, Anne-Charlotte & Levrel, Harold, 2015. "Biodiversity offset markets: What are they really? An empirical approach to wetland mitigation banking," Ecological Economics, Elsevier, vol. 110(C), pages 81-88.
    7. Coggan, Anthea & Buitelaar, Edwin & Whitten, Stuart & Bennett, Jeff, 2013. "Factors that influence transaction costs in development offsets: Who bears what and why?," Ecological Economics, Elsevier, vol. 88(C), pages 222-231.
    8. Linda Fernandez & Larry Karp, 1998. "Restoring Wetlands Through Wetlands Mitigation Banks," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 12(3), pages 323-344, October.
    9. Levrel, Harold & Scemama, Pierre & Vaissière, Anne-Charlotte, 2017. "Should We Be Wary of Mitigation Banking? Evidence Regarding the Risks Associated with this Wetland Offset Arrangement in Florida," Ecological Economics, Elsevier, vol. 135(C), pages 136-149.
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    More about this item

    Keywords

    Biodiversity; Offsetting; Trading ratios; Market equilibrium; Uncertainty;

    JEL classification:

    • Q21 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Demand and Supply; Prices
    • Q28 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Government Policy
    • Q57 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Ecological Economics

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