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Economic Insights in Ecological Compensations: Market Analysis With an Empirical Application to the Finnish Economy

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  • Kangas, Johanna
  • Ollikainen, Markku

Abstract

Biodiversity is decreasing at an alarming rate. Current policies focus on the most valuable species and habitats but cannot stop the degradation occurring in less valuable habitats. One solution is offsetting the loss of biodiversity caused by development projects. The basic idea of biodiversity offsetting is simple: a developer must provide an improvement in biodiversity so that the lost ecological value is compensated for. A banking mechanism for offsetting entails a third party providing offsets for developers to purchase, and thus, an offset market emerges. We develop an equilibrium model to analyse the offset markets and apply the model to the Finnish economy and three selected boreal habitats. We examine how the market depends on trading ratios, the presence of an intermediary and the realization of risks associated with uncertainty. An intermediary can facilitate the market participants meeting each other with minimal transaction costs and safeguard against risks. The results show that the size of the offset markets could potentially be quite considerable and providing offsets could be a profitable business for landowners in Finland. The outcome of the restoration investment and a possible time delay between biodiversity losses and gains impact the trading ratios and thus, have a major impact on the market equilibrium. An intermediary may significantly decrease the costs of compensation for developers, provided that it can provide mature offsets when needed.

Suggested Citation

  • Kangas, Johanna & Ollikainen, Markku, 2019. "Economic Insights in Ecological Compensations: Market Analysis With an Empirical Application to the Finnish Economy," Ecological Economics, Elsevier, vol. 159(C), pages 54-67.
    • Handle: RePEc:eee:ecolec:v:159:y:2019:i:c:p:54-67
    DOI: 10.1016/j.ecolecon.2019.01.003
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    References listed on IDEAS

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    1. Coralie Calvet & Claude Napoléone & Jean-Michel Salles, 2015. "The Biodiversity Offsetting Dilemma: Between Economic Rationales and Ecological Dynamics," Sustainability, MDPI, vol. 7(6), pages 1-22, June.
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    8. Coggan, Anthea & Buitelaar, Edwin & Whitten, Stuart & Bennett, Jeff, 2013. "Factors that influence transaction costs in development offsets: Who bears what and why?," Ecological Economics, Elsevier, vol. 88(C), pages 222-231.
    9. Linda Fernandez & Larry Karp, 1998. "Restoring Wetlands Through Wetlands Mitigation Banks," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 12(3), pages 323-344, October.
    10. Levrel, Harold & Scemama, Pierre & Vaissière, Anne-Charlotte, 2017. "Should We Be Wary of Mitigation Banking? Evidence Regarding the Risks Associated with this Wetland Offset Arrangement in Florida," Ecological Economics, Elsevier, vol. 135(C), pages 136-149.
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    Citations

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    Cited by:

    1. Qi Wen & Jie Fang & Xia Li & Fang Su, 2022. "Impact of Ecological Compensation on Farmers’ Livelihood Strategies in Energy Development Regions in China: A Case Study of Yulin City," Land, MDPI, vol. 11(7), pages 1-18, June.
    2. Feng Yang & Ruochen Hu & Qiong Xia & Dawei Wang, 2024. "A DEA-based method of watershed ecological compensation allocation and liability sharing and its application: a case study of the Xin’an River," Environment, Development and Sustainability: A Multidisciplinary Approach to the Theory and Practice of Sustainable Development, Springer, vol. 26(11), pages 28161-28186, November.
    3. Riku Lindqvist & Chiara Lombardini & Leila Suvantola & Markku Ollikainen, 2024. "The deterrence effect of criminal sanctions against environmental crime in Finland: an application of the rational choice model of crime," European Journal of Law and Economics, Springer, vol. 58(2), pages 175-200, October.
    4. Gastineau, Pascal & Mossay, Pascal & Taugourdeau, Emmanuelle, 2021. "Ecological compensation: How much and where?," Ecological Economics, Elsevier, vol. 190(C).
    5. Zheng Cai & Xiuli Yang, 2023. "Research on Restoration of Heavy Metal Contaminated Farmland Based on Restoration Ecological Compensation Mechanism," Sustainability, MDPI, vol. 15(6), pages 1-14, March.
    6. Drechsler, Martin & Wätzold, Frank & Grimm, Volker, 2022. "The hitchhiker's guide to generic ecological-economic modelling of land-use-based biodiversity conservation policies," Ecological Modelling, Elsevier, vol. 465(C).
    7. Johanna Kangas & Markku Ollikainen, 2023. "Behavioural and Welfare Analysis of an Intermediary in Biodiversity Offset Markets," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 84(4), pages 1127-1154, April.
    8. Luxton, Sarah & Smith, Greg & Williams, Kristen & Ferrier, Simon & Bond, Anthelia & Prober, Suzanne, 2023. "An introduction to financial opportunities, ecological concepts, and risks underpinning aspirations for a nature-positive economy," OSF Preprints cu8rj, Center for Open Science.
    9. Elofsson, Katarina & Hiron, Matthew & Kačergytė, Ineta & Pärt, Tomas, 2023. "Ecological compensation of stochastic wetland biodiversity: National or regional policy schemes?," Ecological Economics, Elsevier, vol. 204(PA).
    10. Martin Drechsler, 2022. "On the Cost-Effective Temporal Allocation of Credits in Conservation Offsets when Habitat Restoration Takes Time and is Uncertain," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 82(2), pages 437-459, June.
    11. Drechsler, Martin, 2021. "On the cost-effective temporal allocation of credits in conservation offsets when habitat restoration takes takes time and is uncertain," MPRA Paper 108209, University Library of Munich, Germany.
    12. Christopher J. Banks & Katherine Simpson & Nicholas Hanley & Rowland R. Kao, 2023. "Assessing the potential impact of environmental land management schemes on emergent infection disease risks," Papers 2311.07735, arXiv.org.

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    More about this item

    Keywords

    Biodiversity; Offsetting; Trading ratios; Market equilibrium; Uncertainty;
    All these keywords.

    JEL classification:

    • Q21 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Demand and Supply; Prices
    • Q28 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Government Policy
    • Q57 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Ecological Economics

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