Environmental Markets

Abstract

Ecosystems services (ES) and the natural assets that produce them are valued by people. Not all of these values are reflected in markets, but all of them contribute in some ways to human well-being. Economic values of ES and natural assets relate in rigorous ways to the economic concept of welfare, which has been shaped by market logic. The advantage of this approach is that efficiency is defined consistently in the public sector, where it is reflected in cost benefit analysis (CBA) and in the private sector given efficient markets. The benefits and costs of many environmental initiatives have market and nonmarket dimensions, and methods of nonmarket valuation are introduced and discussed. None of this is free of controversy: market actors are often skeptical of nonmarket values, and CBA has critics protesting that market logic dismisses values arising from nonutilitarian ethical stances while paying too much attention to the preferences of the well-off.

Price and value can be harnessed in payment programs and markets that incentivize enhanced provision of ecosystem services. Two such programs, the US sulfur oxides cap-and-trade program and the Australian experiments with conservation auctions, are discussed in some detail. These kinds of markets are intended to serve the public interest in providing ecosystem services efficiently, but they can succeed only if they also provide opportunities for cost-savings and/or business expansion for private operators large and small.