Investigating Potential Impacts of Credit Failure Risk Mitigation on Habitat Exchange Outcomes

Voluntary, market-based conservation programs are one tool available to land managers and regulators to maintain and enhance environmental resources. One such program type is a habitat exchange, through which a private landowner sells conservation to developers to offset a disturbance on the landscape. Since landowner participation is voluntary, price and contract terms must be sufficiently appealing to induce participation. Moreover, landowners who undertake costly actions to generate sellable credits face risk of failure. In particular, stipulated habitat improvements may fail to be achieved in the future due to events outside the control of landowners, resulting in foregone conservation payments. In the absence of sufficient real-world data for conventional econometric analysis, we implement a laboratory market experiment to assess the impact of market structure, credit failure risk, and a potential reimbursement policy on habitat exchange outcomes (market price, quantity traded, earnings, and efficiency). Findings suggest that failure risk significantly reduces habitat credit production and trade in this market environment, putting the potential success of such emerging markets in question. A private party risk mitigation strategy of buyers reimbursing sellers for production costs on failed units could mitigate these impacts. Specifically, reimbursing sellers for production costs on credits that fail to maintain habitat quality for their contract life can significantly mitigate reductions in conservation production resulting from this risk.