Crediting uncertain ecosystem services in a market

The margin of safety (MOS) approach is an increasingly prevalent tool for ensuring the integrity of market-based programs for providing ecosystem services. Over-crediting is reduced by setting aside mean estimates of uncertain services in favor of a more conservative estimate. Like many environmental policy problems, ecosystem service markets involve the aggregation of uncertainty over multiple scales, e.g. from landowners to market intermediaries to the overall market. We examine how the MOS instrument affects, and is affected by, an ecosystem services market. We show that the common bottom-up approach of imposing risk preferences at a local, disaggregated level—held over from earlier development in the context of toxics and command and control-style health risk regulation—leads to several unintended consequences. Furthermore, discounting landowner services can actually increase their profits, conditional on the elasticity of credit demand. We illustrate theoretical insights with an empirical application to greenhouse gas offset crediting in agriculture.