Why biodiversity credits cannot work (commentary)

The earth is on the brink of a sixth extinction crisis, making it urgent to expand programs to conserve nature and its biodiversity, especially in tropical countries with the highest biodiversity. One option is the use of market mechanisms such as crediting systems to help conserve tropical forests to limit both the emissions of greenhouse gases and the loss of biodiversity. An existing market already exists for carbon credits, though it has been undermined by a series of critical investigations, and emerging programs are being discussed for biodiversity credits.

This article describes a number of fundamental flaws with biodiversity credits, any one of which is potentially fatal. Together they indicate that biodiversity credits cannot be effective in addressing the conservation of biodiversity, and that we need to develop and enhance other, more legitimate ways to fund biodiversity conservation. In essence, the principal reason we are talking about biodiversity credits is not because they are effective, but because of the relentless promotion of the idea by the financial intermediaries who would become its main beneficiaries.

Here are nine reasons why biodiversity credit trading cannot work:

Credit trading is a structurally unsound regulatory device that lacks integrity

The biggest problem is that crediting programs are a highly imperfect regulatory methodology that has rarely worked well anywhere. The system is easily gamed, accountability is lax, key issues like additionality and leakage are very difficult to prove, and it requires significant transaction costs to even begin addressing these problems. In the carbon field, many credit trades have been shown to be grossly overvalued, and the EPA’s prior experience with credit trading programs for criteria pollutants and wetland mitigation banking have both shown pervasive problems that are very difficult to solve.

Key weaknesses with crediting systems involve the need to measure theoretical alternatives that are very difficult to assess or prove. One is the need to demonstrate that predicted benefits will be “additional” to what would have happened anyway, a counterfactual that is hard to do, as it involves a determination of intention that is known only to the project applicant. A second is the need to demonstrate a lack of “leakage” that could occur if protecting a forest in one area through a credit trade simply displaces deforestation pressure to another area, which is also extremely hard to do.

Crediting systems are therefore easily gamed or manipulated due to the difficulty of determining these issues, and these problems are magnified by the market forces at play, which lead private companies to exaggerate expected results and motivate them to reduce their costs—particularly investments on the ground. A recent comprehensive study of the carbon market shows that credit developers would choose the most favorable quantification methods for their particular project for issues such as additionality, leakage, carbon content, and permanence, collectively leading to a widespread overestimate of the amounts that would be sequestered, sometimes by an order of magnitude.

Due to the fundamental weakness of project-based crediting programs, verification systems to date have failed to protect the integrity of most voluntary credit transactions, and it seems unlikely that any new, more stringent verification protocols can solve these structural problems.

Market incentives are misaligned or perverse

A fundamental problem with using market mechanisms such as credit trading to attain social goals is that their core economic incentives are contrary to the desired results. These incentives motivate companies to maximize their own revenues and to minimize their costs—i.e., the funding that actually accomplishes the social goal on the ground.

These economic incentives lead companies to exaggerate benefits, present overly optimistic projections, and seek out projects with low additionality in order to maximize their revenues. The same drivers motivate trading companies to minimize costs, which means minimizing payments to recipients for their rights, and for on-the-ground investments in conservation. This is a market failure, as such incentives do not incentivize the conservation outcomes and emissions reductions that the crediting system is intended to support—exactly the opposite of what society desires.

Another market failure is that unlike most market transactions, consumers of credits have no direct experience or relation with the product, so they are unable to judge its quality directly and must rely instead on information from the financial intermediaries (traders and verifiers). This means that the principle means of accountability that underlies for-profit transactions is lacking, greatly amplifying the above problems.

Transaction costs are grossly excessive

Transaction costs are a significant drain on the potential impact of credit programs, regularly eating up a quarter to a half of the project money and benefiting intermediaries such as traders and verifiers. These costs are completely unnecessary, as project funders do not need such intermediaries to accomplish a conservation project and achieve a desired conservation result.

Crediting systems are inherently expensive to operate and require costly due diligence and verification programs to attempt to address the lack of integrity of credit trading described above. The transaction costs alone can easily constitute 25 percent of the total project budget, and projects are even costlier when implemented by commercial crediting companies, which need to charge enough to cover their operational expenses and profit. In an exhaustive study of one of the largest private carbon credit projects, it was determined that only 14 percent of the funds went to the communities responsible for most mitigation actions, whereas 42 percent went to the carbon trader for its costs and profits. And biodiversity credit trading will likely be more expensive to verify, as biodiversity is so hard to quantify. The result is that in many cases, as much as half of a project’s budget is spent on transaction costs and intermediaries, rather than going toward the programs and actors that implement the conservation actions on the ground.

The permanence problem

Another major issue with private-sector crediting programs is the longevity problem, as biodiversity needs to be protected forever, but typical crediting projects only guarantee about twenty to thirty years of funding. One of the advantages of regular conservation programs carried out by social actors such as governments and nonprofit organizations is that these often tend to seek permanence, by trying to create permanent protected areas, title indigenous land, or create sustainable funding mechanisms that promote permanence. Although it is possible for commercial crediting programs to develop approaches focusing on such permanent methodologies, there is no motivation to do so, as the credit trading rules do not require this, and so it is cheaper not to.

No standard definition of biodiversity

Existing crediting programs are based on commodities—units that are easily defined and are essentially identical. Examples include a ton of carbon dioxide or other air pollutants, a bushel of wheat or corn, or at a maximum, an acre of wetlands in the same geographic area. However, there is no standard definition of biodiversity, and different measurement systems can vary wildly. For one, there are two different components of biodiversity: alpha diversity or species richness, and beta diversity or the variation among species between habitats, that would give quite different measurements in a given area. Additionally, biodiversity varies widely between different areas: on a local scale, it increases with vegetative structure, and on a geographic scale, it increases exponentially as one approaches the equator. Essentially, biodiversity is not a commodifiable concept appropriate for a crediting system.

Credit traders lack the necessary expertise to achieve successful biodiversity conservation projects

Unlike most crediting programs, biodiversity conservation projects take place in remote areas of the world where large areas of natural ecosystems still exist, and are distant from human societies’ built infrastructure and population centers. In these areas, the rule of law is weak, land rights are poorly defined, institutions lack capacity, and corruption is commonplace. All these challenges must be addressed to have a successful biodiversity conservation program, through investment in defining property rights, institutional strengthening and capacity building, and the development of a stronger rule of law, while working in a collaborative framework between all groups. Commercial credit traders lack the expertise needed to address these issues, and the incentive in commercial project-based credit trading is simply to close one deal and move on to the next.

To be successful, a project requires not only financing but the capacity to address these complex political elements, together with an understanding of the communities’ cultural values, and the time required to build trust. The time frames, capacities, and costs of private credit programs make it impossible to achieve these goals.

Commercial crediting processes lack transparency and equity

There is also an enormous cultural and capacity gap between the commercial credit traders who must survive in a highly competitive global market economy and the rural communities that own or inhabit most forest and other high biodiveristy lands. The negotiating power and technical sophistication of the private crediting agents can lead to heavily one-sided agreements that lack transparency and are unfair.

Provisions that private credit developers commonly include in deal documents that communities and landowners must sign include:

• A lack of information about the sale price and buyers of the credits.
• Confidentiality clauses that may have criminal penalties.
• Exclusivity requirements.
• Requirements that the community pay for the technical studies, with loans to the community at high interest rates.
• Requirements that all intellectual property of the project belongs to the company.
• Conflict resolution and choice of law clauses that favor the company.
• Requirements that the company own all the ecosystem services provided by an area.

Note that financial mechanisms easily operate with great transparency—the stock markets of the world provide 100% transparent information on prices of trades and the identities of buyers and sellers. However, private credit traders provide almost no transparency about the deals they are making, which they reinforce by confidentiality clauses with landowners and communities. Pricing and transactional information is typically hidden, and many verification systems do not require project developers to even reveal how the money from credits will be used.

Chilling effect on land conservation efforts

Another major problem with credit trading is that in areas where private traders are actively promoting the possibility of funding from credits, landowners are urged not to protect their land in any formal way until they are able to reap the benefits of a credit trade. As if the land were to be already protected, there would be no additionality on which to justify a credit trade. Since credit trades are difficult, expensive, and rarely occur, this kind of advocacy causes a chilling effect on any other direct land conservation efforts or programs for these lands.

This problem is very apparent in carbon credit trading, where the actions of traders have motivated communities to request additional lands to expand their territories, far more than official rules allow for the needs of the community, and even to file lawsuits to strip protection status from a protected area (i.e., degazetting) so that the communities might then make a claim for that land and apply for potential credit funding. All of this intensifies social conflict, both within and between communities and between communities and other sectors as they vie for land titles in order to benefit from possible future credit projects.

We need a social solution to these many problems, not only a financial solution.

Note that the previous three issues all share a common theme, that market mechanisms carried out by for-profit actors don’t work well in the remote parts of the world important for biodiversity and forest conservation. Because biodiversity credits appeal to the profit motive in local constituencies, they promote greed and social conflict, disrupting the ability to address the more important social problems. In addition, the major difference in legal and technical sophistication of the financial intermediaries and the local governments and communities leads to overreaching, inequity and a lack of transparency. These problems are exacerbated by the weak rule of law in these frontier areas, making the application of crediting systems carried out by commercial actors fraught with peril and generally negative in their overall result.

Substitution effect

A basic justification for the use of market mechanisms by the private sector is that traditional sources of money to fund conservation are inadequate. Private capital is therefore needed to make up the shortfall. In this view, private finance works as an addition to other financing streams such as public and philanthropic funding.

But this would not be the case if countries count this private capital flow as part of their funding commitments to address biodiversity conservation. Then the reality becomes that this private money could reduce the funding that would have otherwise been provided by more effective programs, and so may actually decrease the amount of more effective funding for biodiversity conservation. Therefore, in analyzing these deals, it is important to ask what has been forfeited as a result.

Conclusion

Potential biodiversity credit programs have several fundamental flaws that are very hard to resolve. These include the difficulties of demonstrating additionality and avoiding leakage, which create a fundamental lack of integrity; excessive transaction costs that drastically reduce the funds that could otherwise go toward biodiversity conservation; and the longevity problem of the crediting projects intended to compensate for them.

There are also implementation problems that exacerbate these failures, especially when implemented by private traders. These include issues of inequity in the negotiation of private projects, their lack of transparency, misplaced economic incentives that pressure private companies to reduce their costs or investment in the country, and the cultural differences and power imbalances between commercial trading firms and rural communities. These factors have led to social unrest and conflict when commercial credit traders work to create credit deals in remote rural and forest areas.

Finally, there is no definable need for a crediting program to conserve biodiversity, as donors can and are providing funds directly to conservation projects without needing to pay the expensive transaction costs of a crediting program that can absorb up to 50% of the total funding. Governments need to understand that we will need to spend about 5% of global GNP to ensure the survival of our planet, eliminate harmful subsidies, and choose effective public programs to accomplish that—not programs like credit trading that provide no added value and primarily benefit financial intermediaries.

Citations

• Shreya Dasgupta, Are biodiversity credits just another business-as-usual finance scheme? Mongabay (2024 Mar 19)
• Funding Nature: The Essential Role of Governments and the Illusion of Biodiversity Credits (Jan. 9, 2023) Campaign for Nature.
• The Biggest Obstacle to Saving Rainforests Is Lawlessness. Economist, February 27, 2023.
• Haya, B. K., Alford-Jones, K., Anderegg, W. R. L., Beymer-Farris, B., Blanchard, L., Bomfim, B., Chin, D., Evans, S., Hogan, M., Holm, J. A., McAfee, K., So, I. S., West, T. A. P., & Withey, L. (2023, September 15). Quality assessment of REDD+ carbon credit projects. Berkeley Carbon Trading Project.
• Joseph Romm, “Are Carbon Offsets Unscalable, Unjust, and Unfixable—and a Threat to the Paris Climate Agreement?” White Paper, University of Pennsylvania Center for Science, Sustainability, and the Media, June 2023.
• Patrick Greenfield, Revealed: More than 90% of Rainforest Carbon Offsets by Biggest Certifier Are Worthless, Analysis Shows. Guardian, January 18, 2023.
• Byron Swift, Ken Berlin, George Frampton, and Frank Willey, The Flaws in Project-based Carbon Credit Trading and the Need for Jurisdictional Alternatives. April 23, 2024.
• Patrick Greenfield and Nyasha Chingono, “We Don’t Know Where the Money is Going” Guardian, March 15, 2023.

Byron Swift has devoted much of his career over forty years to conservation issues in Latin America, working in most of the region’s countries on protected areas, biodiversity and natural resources conservation, and capacity building of local organizations. He has served as president of Nature and Culture International, founder and president of Rainforest Trust, and led the US office of IUCN. An environmental lawyer, he also spent a decade at the Environmental Law Institute working on pollution control and emissions trading issues.