HABITAT BANKING IN FINLAND - helsinki.fi · Presentation Name / Firstname Lastname 29/11/2017 5. ... development, after avoiding, minimizing and restoring impacts on site. OTHER GENERAL

HABITAT BANKING IN

FINLAND

Johanna Kangas29.11.2017

29/11/2017 1

WHY IS BIODIVERSITY IMPORTANT?

• Biodiversity “offers the broadest array of options for sustainable economic activity, for nurturing human welfare and for adapting to change” (The Australian and New Zealand Environment and Conservation Council Task Force on Biological Diversity)

• Increasing human population, land-use and consumption cause ecosystem degradation and are among the greatest threats for biodiversity

• Human use of ecosystem services is growing rapidly: approximately 60 % of the ecosystem services degraded or used unsustainably

29/11/2017Presentation Name / Firstname Lastname 2

THE STATE OF BIODIVERSITY IN FINLAND

• Approximately half of our habitat types are endangered

• Forests are the most important habitat for red-listed species

• Main threats: decreasing amount of decaying wood, forest management activities, the reduction of old-growth forests, decreasing number of large trees


FROM AN ECONOMIC ANGLE

• Biodiversity is a public good: market prices of land and raw materials do not signal biodiversity provision or changes in it

• There are no incentives for developers to consider biodiversity in their decision making

→ economic activity causes a negative externality to the environment

• Typically, this market failure has been corrected with government intervention (regulation and protected areas)


ECOLOGICAL COMPENSATIONS

• The basic idea is simple: a developer must provide an improvement in biodiversity so that the lost ecological value is compensated

• The aim is to achieve no net loss of biodiversity

• Offsets are designed to engage the actors that cause degradation and to internalize the external costs of development projects

• The costs of conservation are allocated to the party responsible for habitat degradation, in accordance with a spoiler pays principle


MITIGATION HIERARCHY


Offsets compensate for the unavoidable, residual impacts of project

development, after avoiding, minimizing and restoring impacts on site

OTHER GENERAL PRINCIPLES

• Additionality

• All impacts cannot be compensated

• Offsetting should not lead to the leakage of harmful activities and damage elsewhere is also essential


INTERNATIONAL EXPERIENCES

• 45 existing offsetting programs around the world

• At least 187 000 hectares of land is under conservation management each year

• The turnover is estimated to be more than USD 3 billion per year, growing at an annual rate of 10 %

• The US, Germany, Sweden, Australia, South Africa, among others


THREE MECHANISMS

1. Direct offsets

2. Offsetting funds

3. Habitat banking

• Can be voluntary or implemented in legislation


HABITAT BANK LANDOWNERSCOMPANIES

• Decreased costs

• Improve reputation

• Improve sales

• Broker

• Offset aggregator

• Banker services

• Invest in restoration

• Produce offsets

HABITAT BANK OF FINLAND

• We analyse, develop and pilot the principles of offsetting in practice

• We develop methodology and metrics to measure biodiversity

• The aim is to provide science based understanding and guidelines for offsetting in Finland

• We collaborate with different stakeholders: business, administration and NGO's

• Funding: UH, Ministry of the Environment, SITRA

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PROJECT TEAM

Markku Ollikainen, UH

Eeva Primmer, SYKE

Olli Ojala, SYKE

Minna Pekkonen, SYKE

Janne Kotiaho, UJ

Johanna Kangas, UH

IMPLEMENTATION AND DESIGN: HOW TO ACHIEVE NO NET LOSS?

• Measuring biodiversity

• Matching losses and compensation

• Uncertainty and offsetting multipliers, trading ratios

• Durance of compensation, monitoring, enforcing


MY RESEARCH QUESTIONS

• Are ecological compensations economically feasible?

• How large would the market be?

• Could an intermediary, a habitat bank, play a constructive role?

• Can markets eliminate failure risks in habitat restoration?

29/11/2017 13

THE MARKET MODEL IN A NUTSHELL

• The commodity traded is an offset credit

• The supply of offsets comes from habitat restoration and nature management

• Demand is driven by land-use changes


p*

Q*

p

Q

APPLICATION TO BOREAL HABITATS

• Pine mires: restored once, only an upfront investment

• Herb-rich forests: a larger investment in the beginning, nature management measures performed after 20 and 40 years

• Rural biotopes: must be managed annually, laborious and expensive


Total area Restorable Land use pressure

Pine mires 193 000 193 000 33 000

Herb-rich forests 377 600 264 000 2 500

Rural biotopes 100 000 30 000 3 300

EXPERT SURVEY

• How will the habitats evolve with and without restoration and nature management?

• What is the scope of uncertainty regarding restoration outcomes?


PINE MIRES


0,0

0,2

0,4

0,6

0,8

1,0

1,2

0 50 100 150 200

HERB-RICH FORESTS


0,0

0,2

0,4

0,6

0,8

1,0

1,2

0 50 100 150 200

RURAL BIOTOPES


0,0

0,2

0,4

0,6

0,8

1,0

1,2

0 20 40 60 80 100 120 140 160 180 200

THE RESULTS: WHAT ARE WE INTERESTED IN?

• How does the market equilibrium depend on trading ratios?

• Ecological equivalence between losses and gains

• Time delays

• Transaction costs and the risk of failure

• We add a brokerage fee collected by the intermediary


BENCHMARK CASE:TRADING RATIO 1

• A perfect, well-functioning market

• No time delays

• Ecologically equivalent losses and gains


Price

€/ha

Profits

€/ha

Compensation

sites in total, ha

Pine mires 3 315 118 30 321

Herb-rich forests 14 309 431 1 673

Rural biotopes 35 456 408 2 100

LET’S ADD TIME DELAY

• 15 years’ delay and 3 % discount rate, the trading ratio increases from one to 1,6

• Both equilibrium prices and restored land areas increase for all habitats

• In terms of land area, the increase is the most dramatic in pine mires

• Landowners’ profits almost double in pine mires, the increase is approximately 65 % in other habitats

• The costs to companies needing offsets increase from 200 million to 315 million euros


MARKET SIZE

Total size, M€ Total area, ha

Trading ratio 1 1,6 1 1,6

Pine mires 101 163 30 321 46 729

Herb-rich forests 24 37 1 673 2 514

Rural biotopes 74 115 2 100 3 218

199 315 32 882 52 461


WHAT IF GAINS DIFFER FROM LOSSES?

• The ecological value of compensation is less than the biodiversity loss (as it can be in pine mires and herb-rich forests) or it is more than the loss (which may be the case in rural biotopes)


Loss Gain Trading ratio

No time delay Time delay 15 years

Pine mires 0,5 0,2 2,5 4

Herb-rich forests 0,5 0,35 1,5 2,3

Rural biotopes 0,5 0,6 0,8 1,3

AGAIN, WITH AND WITHOUT TIME DELAY

• No time delay

• Offsets prices from pine mires and herb-rich forests increase

• In pine mires, their restored land is now almost 2,5 times higher in comparison to the benchmark case

• The opposite happens to the price of offsets from rural biotopes

• With time delay

• Again, both prices and the total area of compensation sites increase. Now, the trading ratio in rural biotopes rises also above unity.

• Due to especially high trading ratios in pine mires, the area of compensation sites now covers almost half of the potential restorable area.


PRICING IN THE INTERMEDIARY SERVICES

• The intermediary can reduce market participants’ transaction costs by providing broker services. It can also reduce the risk of failure in the market.

• In the previous cases, these services were assumed to be costless but naturally, this is not plausible

• How do additional fees collected by the intermediary affect the market equilibrium?

• The fee is added to the offset price


WHAT HAPPENS TO THE MARKET EQUILIBRIUM?

• The brokerage fee: prices increase >10 %. Profits and traded quantities decrease 10-20 %.

• The risk premium: prices increase up to 20 %. Profits and traded quantities decrease 20 %, apart from rural biotopes where the decrease is 70 %

• Thus, the impacts are not especially large in the market, except for the land area in rural biotopes

• In contrast, its impact on biodiversity may be considerable

• Economic risk is the greatest in rural biotopes and the risk in terms of land area is the greatest in pine mires


CONCLUSIONS

• The size of offset markets could potentially be considerable. Providing offsets could be a profitable business for landowners.

• There is enough land and suitable habitats for compensations in Finland, even if trading ratios are relatively high

• In habitats where restoration or nature management is laborious and expensive, offset prices can be very high

• The ecological equivalence and possible time delays between biodiversity losses and gains have a major impact on the market equilibrium

• An intermediary that provides broker, offset aggregator and/or banker services may significantly decrease the costs of compensation for developers


CONCLUSIONS

• Implementing an offsetting mechanism would improve the current state of biodiversity and habitat restoration in Finland

• There is a lot of experience and knowledge regarding the restoration and management of mire and forest habitats in Finland, as well as degraded habitats suitable for restoration and management, which is an advantage

• Still, ecological compensations alone will not be enough

• Preserving the most valuable species and habitats is essential, and all impacts cannot be compensated

• Irreplaceable, extremely vulnerable ecosystems and habitats or endangered species are always no-go areas where offsetting cannot be applied


ANY QUESTIONS?


THANK YOU!

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HABITAT BANKING IN FINLAND - helsinki.fi · Presentation Name / Firstname Lastname 29/11/2017 5. ... development, after avoiding, minimizing and restoring impacts on site. OTHER GENERAL