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Behavioural and Welfare Analysis of an Intermediary in Biodiversity Offset Markets

Author

Listed:
  • Johanna Kangas

    (University of Helsinki)

  • Markku Ollikainen

    (University of Helsinki)

Abstract

This paper provides a behavioural and welfare analysis of an intermediary in biodiversity offset markets. These markets are characterised by high information requirements and transaction costs, threatening economic efficiency and even biodiversity outcomes. Specialised intermediaries facilitate trading by providing information and brokering services. By buying, holding and selling offset credits from storage, the intermediary can decrease both financial and ecological risks in the market. As a drawback, the intermediary may exploit market power upstream or downstream due to ecological features of the offset market. Intermediaries decrease the trading parties’ transaction costs by offering specialised information, reduce uncertainty, and decrease the costs of offsetting by increasing liquidity in the market and offering certain offset credits. When the intermediary has market power, selling and buying prices deviate from the competitive equilibrium. This welfare loss may be lower than the loss from transaction costs and trade ratios in decentralised trade, even in the case of the intermediary having both monopoly and monopsony power. The intermediary is the most useful when trade ratios are high and when the intermediary stores mature credits, which eliminates ecological uncertainty and thereby offers cost savings for developers, and may result in a higher level of biodiversity.

Suggested Citation

  • 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.
    • Handle: RePEc:kap:enreec:v:84:y:2023:i:4:d:10.1007_s10640-022-00751-5
    DOI: 10.1007/s10640-022-00751-5
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    References listed on IDEAS

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    More about this item

    Keywords

    Biodiversity offsetting; Ecological compensation; Habitat banking; Intermediary; Market power; Offset market;
    All these keywords.

    JEL classification:

    • Q57 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Ecological Economics
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • H41 - Public Economics - - Publicly Provided Goods - - - Public Goods

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