The impact of relative individual ecosystem demand on stacking ecosystem credit markets

Abstract

A blended actual and hypothetical vertical ecosystem services stacking scenario is developed for a water quality trading (WQT) program in North Carolina. Demand is estimated for total nitrogen reduction and simulated for total phosphorous reduction. Nitrogen and phosphorus are complementary pollutants jointly produced by a single conservation practice, riparian buffers. The supply of reduction is based on the amount of riparian buffers that would be implemented by farmers at a given offering price for WQT credits. Nitrogen reduction is the primary ecosystem service that already has a market in the form of a WQT program. Phosphorus reduction is a hypothetical, secondary ecosystem service that we introduce to evaluate ecosystem stacking. We specifically evaluate stacking in thin markets, where there are few buyers and/or sellers. Our detailed analysis shows that the relative size of demand for different services plays a profound role in the success of stacking when markets are thin; and many if not most ecosystem markets are thin. A secondary service with relatively low demand will either be too small (insufficient) to generate any new credits, or, in a non-competitive market with few sellers, produce no additionality of the secondary service (double dipping). In these two cases, sponsors of the secondary market should not make payments since they will receive no additional benefits above what would have been achieved under conservation practices implemented for the primary ecosystem service. We find that ecosystem stacking is most likely to generate more revenue to producers and to reduce pollution emissions when demand for the secondary service is comparable in magnitude to the primary service. Accurate assessment of relative demand can help policy makers determine where stacking might work, and help purchasers avoid paying for services without results, especially where markets are thin.