Market-Based Conservation

Market-Based Conservation

NRCSNRCSMarket-Based IncentivesMarket-Based Incentives

Washington, DCWashington, DCJanuary 10, 2006January 10, 2006

Douglas LawrenceDirector

Resource Economics and Social Sciences Division

What are Market-Based Solutions?

• Market-oriented approaches rely on the use of economic and marketplace principles to achieve beneficial environmental outcomes.

• The premise is that markets are more efficient at allocating resources than mechanisms such as government regulations. Markets and their prices reveal collective preferences.

• The concept is evolving

• Not a replacement for current approaches


What is a Market?

• A market allows people to trade, under the protection of law, and thereby allocates resources through prices that reflect collective preferences.

• In practical terms it is a set of rules for exchanging goods and services. (Bazaars, e-bay Safeway, used car dealers, CarMax, conservation easements, employment, TSPs ...)


Three Approaches to Market-Based Incentives

1. Creation of ecological markets (Chicago Board of Trade Carbon Market, Wetland Mitigation banking, Comet VR)

2. Use of economic principles to influence existing non-ecological markets (Cost sharing, information, education, research…)

3. Use of marketplace business practices to enhance conservation adoption (market segmentation, marketing, competition, partnerships)


What are the Benefits of Market-Based Allocations of Resources?

• Under perfect competition, a system of free markets will lead to an optimal allocation of resources.

• Reduction of government costs and private compliance costs

• Incentives for technological innovation.


Market-Oriented Approaches Include:

1. Using Economic approaches (auctions, cap-trade, improving information (KBC))

2. Applying business practices (precision marketing, fostering customer loyalty)

3. Encouraging competition (RFPs, bid-downs with multiple pools)

4. Informing the conservation investment decisions of others (Landcare)

5. Leveraging Resources (Wall Mart, PRS)

6. Providing information and tools to allow environmental markets to evolve or develop (Comet VR CCX)


Market-Oriented Approaches

• Focus on incentives (monetary and non-monetary)

• Implementation of performance-based conservation (CSP Enhancement Payments)

• Fostering knowledge-based conservation• Negotiating (NRCS has many assests)


Conventional Market-Based Tools

• Environmental Credit Trading• Sale of Environmental Services • Auctions and Bidding• Mitigation Banking• Green Labeling

C


Cuationary Notes Related to Market-Oriented Solutions

• Regulation often required (Dennis King Aritcle: Limits of Environmental Credit Trading)

• New York City Watershed - Gretchen Daily Book (Caution, what is presented is really cost-sharing not credit trading)


Economic Principles: Perfect Competition

• Atomicity – buyers and sellers are price takers.• Homogeneity -- goods and services in a given market

are perfect substitutes. • Perfect and complete information -- information is

available to all, transparency• Equal access -- to production technologies, and

resources (including information). • Free entry -- any firm may enter or exit the market as

it wishes.


Economic Principles: Supply and Demand


Supply

Price

Quantity

Demand

Shifters:

• Other prices (substitutes and complements)

• Income

• Tastes and Preferences

Shifters:

• Input prices

• Technology


U.S. Gulf Coast No 2 Diesel Low Sulfur Spot Price FOB (Cents per Gallon)

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Market for Conservation Tillage Equipment


Supply

Price

Quantity

Demand

Demand Shifters:

• Other prices (substitutes and complements)

• Income

• Tastes and Preferences

Supply Shifters:

• Input prices

• Technology

Demand with Higher energy costs

The net result is that as diesel prices increase, the demand for No-till equipment increases, thereby enhancing conservation.

Business Principles: Marketing

• Advertising• Market research• Marketing strategy• New Product Development• Direct Marketing• Precision Marketing• Partnerships• Business to business


Business Principles: Marketing



Conservation Behavior Changing Policy Instruments

StewardsBad Actors

Information

Education

Conservation Payments

Cross Compliance

Regulation

Business Principles:

• “Get, Keep, Grow” Focus on Customer Loyalty• Advisory Boards

– A group of executives, professionals or customers appointed by a company to provide guidance and support on issues critical to the organization. A Board of Advisors is a working as opposed to an honorary body that offers guidance versus governance

• Customer Focus, help them “Get the Job done”– Innovation and growth possibilities emerge from knowing what other

supporting, ancillary or related jobs customers may want to get done in conjunction with the primary job.

– Value is also created by helping customers get a specific job done more efficiently. Companies must be able to capture from customers the set of metrics — that define how they want to get the job done



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USDA Policy

Market-Based Environmental Stewardship

• USDA is launching a market-based conservation initiative which supports the White House Cooperative Conservation Conference and the Under Secretary’s Legacy Goals.


USDA Policy

Market-Based Environmental Stewardship

• The Policy

– Defines USDA roles and responsibilities– Formalizes a Coordination Council and a

mechanism to evaluate and resolve issues– Formalizes a work-group to support the

Coordination Counsel


USDA PolicyMarket-Based Environmental Stewardship

• USDA will Cooperate with other Federal departments, Tribal, State, and Local governments, and NGOs to:

– Establish a role for agriculture and forestry in providing environmental offsets and enhancements

– Develop accounting procedures for quantifying environmental goods and services.



– Enable USDA partners to take advantage of and promote the awareness of stewardship markets.

– Promote the use of environmental credit trading and voluntary reporting registries, etc.



– Develop innovative tools to quantify environmental impacts

– Conduct outreach, education, technology transfer, and partnership building activities

– Increase awareness of environmental stewardship markets within USDA



• Status of the NRCS Market-based Incentives Strategy Team:• Core work-group meeting (NRCS, FSA, FS and OCE)• Partnership with DOD• Co-sponsor - National Water Quality Trading Conference

– May 23-25, 2006, Pittsburgh, PA• Co-sponsor - Annual Conference on Mitigation and

Conservation Banking– April 10-13, 2006, Portland, OR

• Agency Strategic and Business Plans– Market-based Incentives Emphasis Area in B-Plan– Strategic Plan overarching approach

• 2006 Ag Outlook Forum (February, 2006)– Concurrent session on Market-based Environmental

Stewardship


Current Market Oriented Solutions

Used by NRCS

• Easements (FRPP, WRP, GRP) • EQIP Buy-Down (pre 2002)• Environmental Credit Trading (CIG, Ohio )• Implementation of Comet VR• Program performance awards• Transparency in program allocations• Advisory Boards• Development of Marketing Strategies


Opportunities for Using Market-Based Solutions

• Informing Investments of Others (Conservation Certification, measuring carbon credits)

• Knowledge-Based Conservation• Performance Payments (Cherry grower, EQIP

incentive payments for pest management used for weather stations.)

• Stimulating Industry Innovation (precision farming)• Supporting Tradable Development Rights programs• Mitigation Banks (Wetlands, FPPA)• Auctions (85 percent reduction FA costs in AUS)• Reverse auctions for State allocations (TA bids for

FA, FA cost share bids for FA and TA)



• Using Economic Principles (program auctions, cap-trade, improving information (KBC))

• Applying business practices (precision marketing, fostering customer loyalty)

• Encouraging competition (RFPs, bid-downs with multiple pools)• Informing the conservation investment decisions of others (reducing

their risk)• Focusing on incentives (monetary and non-monetary, health

insurance, enterprise planning, )• Implementing performance-based conservation (CSP Enhancement

Payments)• Fostering knowledge-based conservation• Negotiating



• Yield indemnification• Expand the use of partial interest in land• “Think like a farmer” (Boot camp, “mile in my boots,

Farm Management Training)• Leveraging regulations• Use PRS as a platform for the accomplishments of

others, NGOs, agencies, industry, etc.



U.S. Gulf Coast No 2 Diesel Low Sulfur Spot Price FOB (Cents per Gallon)

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Summay1.Use economic principles (incentives)2.Apply sound marketplace or business practices3.Encourage competition 4.Inform the conservation investment decisions of others 5.Leverage resources of others (partnerships)6.Provide information and tools to allow environmental markets to evolve or develop (Comet VR)

• Incentives

• Incentives

• Incentives



Market-Based Conservation

Documents

marketbased solutions

given market

benefits of market

based allocations of

conservation easements

environmental markets

prsproviding information

complete information