Are biodiversity credits doomed to repeat the voluntary carbon market’s flaws?

Dozens of schemes for this nascent market have sprung up since 2022, after the Kunming-Montreal Global Biodiversity Framework (GBF) was passed at the last United Nations (UN) biodiversity summit. 

Apart from the landmark goal to preserve 30 per cent of the Earth’s lands and oceans by 2030, the GBF text also called for “at least US$200 billion per year” to be mobilised from both public and private sources, including from novel mechanisms like biodiversity credits.

Despite not being officially on the agenda for COP16 which kicked off on Monday, the emerging instrument is set to be a key discussion topic on the sidelines.

For instance, the United Kingdom (UK) and France-led International Advisory Panel on Biodiversity Credits (IAPB), the UN-backed Biodiversity Credit Alliance (BCA) and the World Economic Forum (WEF) are launching their finalised biodiversity crdits framework – underpinned by 21 “high-integrity” principles – on 28 October alongside 30 pilot projects worldwide, after an over a year-long consultation process. 

But in the environmental space, “credits” – which recalls the beleaguered voluntary carbon market (VCM) – has become a loaded and divisive term. 

Proponents of biodiversity credits, who often overlap with carbon market supporters, argue that they must be on the table to close the GBF’s estimated annual biodiversity financing gap of US$700 billion. Meanwhile, detractors have called the novel financing mechanism a “false solution to a false problem” that will delay action on biodiversity loss, just as carbon offsetting has delayed ambitious climate action.

But there seems to be broad consensus between these two groups that biodiversity markets must avoid the pitfalls of the carbon markets – which have historically allowed the largest polluters to offset their climate-warming emissions and have not equitably shared project revenues with Indigenous peoples and local communities. 

What lessons should be learned from the carbon markets, and are “high-integrity” biodiversity credits within reach? We ask experts if guardrails being suggested in emerging schemes are sufficient to avoid replicating the VCM’s flaws.

What is a biodiversity credit?

Biodiversity credits – which are designed to represent a unit of improvement of nature enabled by a project in a defined area, measured over a period of time – might seem like a relatively new idea adapted from the carbon markets, but developed countries have been experimenting with biodiversity markets for decades.

Even before the WEF’s 2022 initiative to explore the potential of biodiversity credits, the United States (US) has operated biodiversity markets worth over US$3 billion a year since the mid-1980s. Regulations requiring developers to offset or compensate for any damage to the wetlands which were deemed unavoidable, created a market for wetland mitigation bankers to profit off buying wetland areas to create, enhance and restore, to generate “wetland credits” for needy developers. Canada similarly employed offsetting as a wetland conservation tool in the same period.

In 2017, an Australian state introduced the Biodiversity Offsets Scheme, which allowed developers to buy credits for koalas and other threatened species to offset damage to their habitats. However, an audit of the scheme in June found that a third of the land set aside is in a worse state than before.

Koala credits are going for A$450 (US$342) while Emu credits are being sold at A$4,000 (US$3,038) on New South Wales (NSW)’s Biodiversity Offsets Scheme. Image: NSW Government

To date, at least 10 standard setters – including the world’s biggest carbon credits certifier Verra, which is due to publish its own nature credits framework this year – and 50 schemes have emerged.

Climate advisory and investment firm Pollination recently estimated, through a survey with 16 major credit suppliers, that between US$325,000 and US$1.85 million worth of voluntary biodiversity credits have been sold globally.

Image: Pollination’s State of Voluntary BIodiversity Credit Markets 2023

What does a “high-integrity” biodiversity market look like?

Pollination’s executive director Laura Waterford, who compared eight different biodiversity credit schemes last year, told Eco-Business that she would hesitate to say that a clear winner is emerging.

“What our review found was that they each had different strengths, and some of them were doing really well in some areas of high-integrity considerations, but fell short in others,” she said.

The majority of those reviewed lacked clarity on the specific indicators that should be used to quantify improvements in biodiversity outcomes, while some did not specify the auditing approach for the data being tracked.

Waterford noted that the UK-based GreenCollar’s NaturePlus scheme, which commissioned Pollination’s report to review its scheme alongside others, has done a thorough job addressing most high-integrity considerations, which include ensuring the scheme is supported by a registry that tracks the issuance and retirement of credits, ensures long-term, additional biodiversity outcomes, and addresses whether credits can be sold on a secondary market.

Last week, GreenCollar also announced that its scheme will now be independently administered by a third-party called Accounting for Nature, in line with Pollination’s recommendations to have separate entities acting as project developers and scheme developers to address potential conflicts of interest, said Waterford.

“In the early days, many of the project developers were also the scheme administrators when they were in the test and pilot phase. We made the point that in order to have confidence in the outcomes, we needed to see a separation between those roles.”

A quick scan by Eco-Business found that two of the 10 major biodiversity credit standard setters – UK’s Biodiversity Future Initiatives and Columbia’s Terrasos – who are methodology developers also double-hat as project developers:

Image: Gabrielle See/ Eco-Business

Waterford said that in ascending order of rigour, the three large buckets that most biodiversity metrics fall under are: vegetation as a proxy of overall biodiversity outcomes, habitat value of specific species as well as an ecosystem, or “basket-of-metrics”, approach, which selects a defined set of metrics most relevant to a project’s landscape.

While a highly-specific measurement of outcomes may be ideal from an integrity perspective, she added that this also makes the project design more expensive, which may hamper the growth of demand for these credits.

“It’s probably going to be one of those three ways that becomes the dominant market approach. But we’re just not quite sure where exactly the sweet spot is going to be yet in terms of the willingness to pay versus desire for really thorough data,” she said.

There is high-level agreement among market players as well as environmental groups that a high-integrity biodiversity credit market must depart from the voluntary carbon market by ruling out international offsetting and secondary market trading, while shifting the leadership from brokers and developers in the Global North to Indigenous peoples and local communities in the Global South.

For instance, 88 per cent of suppliers surveyed by Pollination said their scheme is intended to support the issuance of biodiversity credits only, not biodiversity offsets. 

In addition, IAPB recently ruled out an international biodiversity offset market and secondary trading, and is now advocating for “regulated local to local offsets with policy-driven demand,” said Simon Zadek, co-chief executive of non-profit NatureFinance, one of the IAPB working group co-leads, in a LinkedIn post.

While Eddie Game, lead scientist and director of conservation at US-based non-profit The Nature Conservancy (TNC), which is an active member of the IAPB, has been “really pleased” at the progress the group has made, Game said that TNC remains “uncomfortable” that their recommendations still allow for voluntary, non-regulated credit systems.

Game, who is developing TNC’s position statement on biodiversity credits, said that “like for like offsets” should still be allowed to happen, albeit as a last resort and under a compliance market after following through the mitigation hierarchy where an entity has first tried to minimise its environmental impact.

He clarified that TNC is nonetheless in favour of a voluntary biodiversity “certificate”, as opposed to an offset, but it has to contribute to pre-identified national outcomes, like in the case of Australia’s Nature Repair Market, which is set to launch in 2025 as the world’s first government-run voluntary biodiversity market.

While Frederic Hache, lecturer in sustainable finance, Paris Institute for Political Studies and founder, Green Finance Observatory, saw IAPB’s announced ban on secondary market trading as “a very welcome development”, since local offsetting is arguably less problematic than global offsetting, he said it remains to be seen if the final guidance will follow a “like for like” or “like for better” principle. 

The UK’s biodiversity credit scheme is an example of the latter, where developers are allowed to purchase offsets from preserving biodiversity elsewhere to meet its mandatory requirements to deliver at least a 10 per cent gain in biodiversity, which Hache said poses an integrity risk since it relies on weak equivalences to create tradable credits.

Hache also maintained that offsetting, which has proven to be “very problematic” in the carbon markets, should remain strictly voluntary. “If you make [offsetting] regulatory, it will arguably take a bigger space within the policy mix, which displaces environmental regulation,” he said.

Simon Counsell, an advisor to London-based human rights charity Survival International and former director of Rainforest Foundation UK, is less optimistic that IAPB will have the power to uphold some of these promises.

“Who exactly is going to stop there being a global market?,” said Counsell. “One of the strongest – and to me, the most concerning – similarities with the carbon markets is that some of the key players in the carbon markets are now getting very much involved in the biodiversity credit markets. Standard setters like Verra, Plan Vivo and Cercarbono.”

“These have always been global actors, and there’s absolutely no reason why they should recognise any kind of local or regional limits to their activities,” he said, adding that secondary markets are inevitable, once various organisations become dependent on the selling and trading or credits. 

But Waterford said that greenwashing litigation could act as a strong deterrent for flouting what standards have stated in black and white, such as preventing the use of credits as offsets. 

Game also emphasised the need to design biodiversity schemes from the outset such that Indigenous peoples and local communities – who have almost unanimously rejected offsets – can participate in the market on their own terms. 

“As soon as the system becomes so difficult to navigate as you have a lot of developers taking a big revenue cut from a biodiversity project because they are bearing the upfront cost of its development, then we’re going to fall straight into the cycle that the carbon market is in,” he said.

Relatedly, the cost of monitoring and verification, which is prohibitively high in the carbon market, needs to be brought down so that smaller patches of land that are owned by communities or individuals can register as projects. 

Game also believes that it is possible to bring down the cost of tracking more complicated ecosystem metrics through automated systems like acoustics or remote-sensing technologies.

Do we really need biodiversity markets?

But Counsell said that there is a cheaper solution than what Game is proposing: to recognise Indigenous lands.

“Helping local communities to protect their community forests or preserves is not that expensive. If you look at those kinds of solutions on a much bigger scale… then the cost [for biodiversity financing] will be much less than the kinds of figures that TNC are suggesting. If the costs are much lower, then perhaps they are affordable without having to resort to these very unreliable, market-based solutions,” said Counsell.

Over 270 civil society groups and academics worldwide, including Survival International and Green Finance Observatory, have expressed “grave concerns” regarding biodiversity credits. Instead, they have suggested reforming and redirecting harmful subsidies – which amount to at least US$2.6 trillion a year – as well as providing public financing in the form of grants as lower risk and more effective alternatives.

While Game recognised that “the biggest thing” we could do for nature is to remove harmful subsidies, he believes market-based mechanisms could shift things along faster.

“I suspect the reason why biodiversity credits are on the agenda, and massive subsidy reforms are not, is because the subsidy reforms are really difficult,” he said. “Markets are both a hope for something new that will be easier, because initially it’ll basically be people choosing to participate in it… and it will be a slightly easier lift than unpicking the global system of subsidies.”

Counsell, however, argued that “if the likes of very influential and powerful organisations like TNC tried a little bit harder to do something about these subsidies, rather than emphasising the market solutions all the time, then perhaps we will get somewhere.”

“And it isn’t just TNC, it’s all of the big international conservation organisations: WWF, Wildlife Conservation Society, Conservation International and so on.”

Ultimately, Hache said that biodiversity credit proponents need to answer this question: Why do we need a market?

Recounting an exchange he had with a Europe-based natural capital investment platform’s chief executive after he made a speech about wanting to help poor farmers in Asia, he said: “I told him, ‘Before we move there, first explain to me where is the need for a market?’ And he had no answer.”

“According to the UN, there is a need to increase funding by US$200 billion annually. This can be easily achieved by redirecting a fraction of the annual US$6 trillion of implicit harmful subsidies. There is absolutely no need to create a market. End of the story, move on, this is bullshit framing.”