A market for trading water credits is a viable way to conserve water, because the commodity can be easily measured, said Singapore president Tharman Shanmugaratnam.
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This contrasts with biodiversity credits which are facing increasing scrutiny, since nature and biodiversity are more complex concepts and their value is harder to quantify, he said.
“As much as biodiversity is beguiling and complex, water is not. It can be measured and it is not so different from carbon. You can see how much water is left in the soil, how much water is wasted or conserved, and how much is polluted,” he said.
Shanmugaratnam, who is also co-chair of the Global Commission on the Economics of Water, was speaking at the World Economic Forum (WEF) in Davos, Switzerland, about a proposal to develop high-integrity markets for both water and biodiversity credits. Rather than creating completely new frameworks for these market-based mechanisms, “stapling on” the credits to existing voluntary carbon markets (VCMs) would be more feasible, suggested the president.
This could potentially create new sources of funding for nature-based solutions, since these projects can generate carbon, biodiversity as well as water-related benefits, he said.
Shanmugaratnam was also responding to fellow panellists who raised doubts about whether the use of such market-based solutions to attract private capital would lead to “perverse outcomes”, much like how carbon credits have faced criticisms over their integrity.
Governments are often unable to move fast to properly price carbon or tax high-emitting polluters as such maneuvers are politically-costly, he said. Hence, even though solutions like biodiversity credits are imperfect, and should not distract from the pursuit of more ambitious public policy action, there is a need to “push on all fronts”.
It is also possible to ensure that the vast majority of credits are of high integrity, he said.
“We take a large risk if we simply argue for the right thing to be done, knowing full well that the right thing has taken a very long time to happen.”
‘Difficult territory’
Over the past year, biodiversity credit projects and the methods to calculate their value have proliferated, but these have invited scrutiny of whether “like for like” credits for nature preservation make scientific sense.
At the Davos panel discussion, Mads Christensen, executive director of environmental group Greenpeace International, said the organisation has many concerns about the commodification of nature driven by short-term financial considerations, and hence is sceptical about credit markets creating positive outcomes for conservation.
“Fundamentally, nature is too complex. We cannot capture all the dimensions of nature nor its intrinsic value through a set of metrics, so I urge everyone to be careful when applying market logic to creditising nature and biodiversity,” said Christensen, while describing the endeavours as “difficult territory”.
“Maybe it is my limited imagination, but I simply cannot see how we could avoid the mechanisms creating an inherently unjust situation, particularly when the markets are not created by those who are directly impacted,” he said.
In recent years, media investigations as well as scientific studies have found that the majority of carbon projects are flawed or fraudulent. A January 2023 exposé by The Guardian revealed that more than 90 per cent of rainforest carbon offsets accredited by Verra, the world’s leading carbon standard for the voluntary offsets market are “worthless”, although the certifier has disputed these allegations. The carbon market outlook remains murky, even as standards organisations like Verra have worked on restoring trust with wary buyers.
Christensen emphasised that Greenpeace is not against polluters-pay regimes and believes that taxing the use of natural resources or common goods in a fair way under well-designed schemes can be an important funding source.
Neither is the organisation against seeing a paradigm shift in how the private sector plays a more important role in financing nature conservation, he said. “But I would challenge the scarcity narrative surrounding the funding gap. It is more that we have not done our job well enough to find the sources of financing…We need to talk about how we fix problems in our tax systems.”
Cenk Alper, chief executive officer of Turkey-based conglomerate Sabanci Holding, agreed that integrating biodiversity, water and carbon markets could slow the world down. “We don’t have time and the cost of inaction is extremely expensive today,” he said.
Alper said that very few financiers will work for outcomes aimed at keeping nature intact, and that nature projects have a latency – the returns usually come after at least a decade, whereas returns for carbon projects are more immediate.
Larger ripple effect for nature-based solutions
Biodiversity credits are related to, but distinct from, voluntary carbon credits. While the latter represent units of a carbon equivalent avoided or removed from the atmosphere, the former represent units of biodiversity restored or preserved, which may have a variety of distinctive characteristics.
Some projects, particularly nature-based solutions, can generate units of both carbon and biodiversity benefits. As Shanmugaratnam argues, water credits can also be “stapled on” which could potentially allow these projects to deliver premiums for benefits that go beyond carbon reduction to natural ecosystems or communities.
The president, has on various occasions, spoken about other water-related solutions, such as advocating for water-related disclosures to be built into carbon reporting frameworks. He said that while the benefits of coupling carbon credits with biodiversity co-benefits are now not as well-defined but “done rather qualitatively”, even such an approach has significantly raised premiums of some carbon credits. The same can be done for water, he suggested.
“Nature-based solutions are now severely underfunded. If we can think of them as a way of managing water and preserving biodiversity too, the ripple effect would be much larger,” said Shanmugaratnam.
He called on WEF to work with other global coalitions to work on developing rigour in the process of integrating the markets.
According to WEF, with effective progress across multiple fronts, global demand for biodiversity credits could reach US$2 billion in 2030 and US$69 billion in 2050.