RAND > ISE > Projects & Resources > Our Future, Our Environment > Nature's Services

Nature as Currency

As an example of why currencies matter when referring to valuing ecosystem services, consider wetlands mitigation banking. This policy permits developers, once they have taken steps to avoid and minimize wetland loss, to compensate for wetlands that will be destroyed through development by ensuring the restoration of wetlands in another location. The regulations mandate trades that ensure equivalent value and function between the destroyed and restored wetlands. In practice, however, most trades are valued in units of acreage. Within very loose guidelines, trades between productive (though soon to be destroyed) wetlands and restored wetlands are approved on an acre-for-acre basis. More sophisticated banks require ratios, trading development on one acre of productive wetlands for, say, restoring four or five acres of wetlands somewhere else. Counting acres may make for easy accounting, but it's poor policy.

Why? The social value of the habitat is absent from the transaction. The ecosystem services provided by the wetlands -- positive externalities such as water purification, groundwater recharge, and flood control -- are largely ignored. Opinions may differ over the value of a wetland's scenic vista, but they are in universal accord over the contributions of clean water and flood control to social welfare. Trading acres for acres provides an inadequate measure to capture what's really being traded of significance. To be sure, such a simple metric allows trades, but other important, unaccounted tradeoffs are occurring. The program can suffer from a lack of accountability (or, more accurately, a lack of countability).

To achieve the optimal outcome from environmental trading markets, we need to understand and account much better for the qualities being traded. To do so requires careful consideration of the measure of exchange -- the currency -- since in the final analysis the currency forms the very basis of the transaction. The trading currency superficially makes the commodities fungible, determining what is being traded and, therefore, protected.

Indeed, focusing on three aspects of currency reveals a great deal about a trading program's structure and success in promoting social welfare. Currency adequacy concerns selection of the currency unit. Can the metric capture the significant values exchanged or do some important features remain external to the trades? In part because of cost and in part because of technical difficulty, in practice most currencies remain crude -- that is, unable to account for important nonfungibilities across space, type, and time.

Exchange adequacy addresses construction of the exchange market. In the face of a currency that fails to capture significant values, how can the market be structured to ensure trades support environmental protection? In practice, regulators use exchange restrictions to compensate for inadequate currencies. Crude currencies will result in tightly constrained trading schemes if the market maker desires to restrict environmental externalities. As with currency adequacy, however, equally strong pressures counsel loosening of trading restrictions.

Review adequacy addresses the institutional mechanisms for reviewing trades. If, in practice, neither currency nor exchange adequacy will often be achieved, then even trades of nonfungible commodities that fully comply with the trading program's rules will occasionally, perhaps systematically, fail to increase social welfare. When currency and exchange adequacy are not ensured, the model of exchange transforms from a commodity market to a barter market, from anonymous trading of generic commodities to individuals haggling over goods and services with unique attributes. In this setting, to what extent should we be willing to let owners of nonfungible environmental features strike deals which the rest of us cannot evaluate through any common medium of exchange and which many of us might not strike? Put more generally, who should determine the equivalency of such trades?

For a fuller discussion of these issues, see James Salzman and J.B. Ruhl, Currencies and the Commodification of Environmental Law, Stanford Law Review (2001).


Sections
Click here for text.
Sections
Nature's Services: Front Page
Ecosystems Are More Than Wildlife Habitat
New York City Watershed
Tradeoffs May Be Trading Up
Pollination Services
Nature as Currency
Audio
Pam Matson
Prof. Pam Matson
Department of Geological and Environmental Sciences, Stanford University, describes ecosystem services and how we value them.
Video: Concept of Ecosystem Services
  56k  T1
Video: Values and Conflicts
  56k  T1
Click here for text version.
Download Plugin
Audio
Tom Lovejoy
Tom Lovejoy
Chief Biodiversity Advisor
to the President of the
World Bank talks about underappreciated
ecosystem services
Audio
Click here for text version.
Download Plugin
3 Voices
Listen to three perspectives from the debate surrounding natural filtration of New York City's water supply.

Richard Coombe
Richard Coombe
Chair, of the Watershed Agricultural Council
Audio
Click here for text version.


Joel Miele
Joel Miele, Sr.
Commissioner of the New York City Department of Environmental Protection
Audio
Click here for text version.

Jeff Gratz
Jeff Gratz
Team Leader of the U.S. Environmental Protection Agency Region 2 New York City Watershed Team
Audio
Click here for text version.
Download Plugin
External Links
Project on ecosystem services in Costa Rica (in Spanish)

Water and Wetlands

Arcata Marsh and Wildlife Sanctuary


Forests
Climate, Ecology, and Human Health


Valuation

Monetary Measurement of Environmental Goods and Services: Framework and Summary of Techniques for Corps Planners
(PDF)

Environmental protection: Is It Bad For The Economy?

Ecosystem Valuation
Biodiversity Prospecting: Shopping the Wilds is Not the Key to Conservation

Forecasting

Patuxent Landscape Model Project Description


Pollinators

Arizona-Sonora Desert Museum, Forgotten Pollinators Campaign

Bee All That You Can Bee

New York City Watershed
NYC Watershed

New York City's Water Supply System
New York City Watershed
RAND Home Stay Informed Search RAND Publications View Cart