50 Shades of Green Part II: The Fallacy of Environmental Markets

Green Finance Observatory, Policy Report, May 2019

92 Pages Posted: 28 Apr 2020

Date Written: May 2019

Abstract

Recent calls to action to address critical loss of biodiversity are both long overdue and very welcome, but a parallel debate on the ‘how’ is missing. Yet the ‘how’ is arguably as important as the headline objective. The ‘how’ is also in the process of changing drastically with the promotion of new financial markets on environmental destruction, and the mainstreaming of a new kind of sustainable finance. Offset markets on biodiversity and other ecosystem services have been shown to suffer from intractable conceptual issues, including measurement issues, incalculable additionality, highly uncertain valuations and an inexistent price signal. As a result, they will never be able to achieve their environmental and social objectives. Empirical evidence also suggests an appalling social and environmental track record for some existing markets. As importantly, the selective pricing of only some ecosystem services and the ignorance of ecosystem interdependencies mean that the resulting values cannot claim to represent biodiversity. Traditional environmental regulation would be far more effective, simpler and cheaper to address the critical loss of natural resources. They would not require the unrealistic assumptions and oversimplifications needed to create markets on biodiversity, and would accommodate infinitely better the high scientific uncertainty and our incomplete scientific knowledge. While putting a price on nature to save it is a catchy formula, it would therefore seem that regulating nature’s destruction would be a far superior alternative. Sustainable finance should not foster the creation of such markets if it is to be truly sustainable.

Keywords: natural capital, biodiversity, offset, habitat banking, market, ecosystem service

JEL Classification: G15, G18, F64

Suggested Citation

Hache, Frederic, 50 Shades of Green Part II: The Fallacy of Environmental Markets (May 2019). Green Finance Observatory, Policy Report, May 2019, Available at SSRN: https://ssrn.com/abstract=3547414 or http://dx.doi.org/10.2139/ssrn.3547414

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