Natural Capital Market Design
28 Pages Posted: 10 Oct 2018
Date Written: September 16, 2018
Renewable natural capital — terrestrial and marine ecosystems, fisheries, biodiversity, and groundwater — is in decline around the world affecting livelihoods of millions of people. Natural capital market design uses economic theory and analysis to develop practical solutions for maintaining, restoring, and improving natural capital. Many successful natural capital marketplaces (e.g. for emissions reduction, fish harvesting, and wetland restoration) focus on efficient trading of property rights. But many other natural capital markets (e.g. carbon sequestration offsets, water quality, and groundwater abstraction) are characterized by heterogeneity and high transaction costs that make trading difficult. We argue that in order to fix many natural capital market failures policymakers should instead pay more attention to the initial allocation of property rights: this is particularly crucial in many markets for ecosystem services (e.g. biodiversity conservation and watershed protection) which exhibit ecological complementarities. We propose several promising designs natural capital marketplaces which could fairly and efficiently allocate property rights over different ecosystems.
Keywords: Market Design, Combinatorial Auctions, Environmental Economics, Natural Capital
JEL Classification: D44, D47, H23, Q5, Q15
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