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Will a market for biodiversity help address Australia’s conservation crisis?

The world is becoming more attuned to a crisis that looms as large as climate change: biodiversity loss. Penned as one of the top three risks humanity faces today, increasing rates of species and ecosystem loss are expected to have dire consequences for every aspect of the economy. This is true on a global scale, as well as closer to home. The recently published 2021 State of the Environment Report found that Australia’s ecosystems and species are deteriorating at an alarming rate, and current strategies and investments in biodiversity conservation do not match the scale of the biodiversity loss challenge.

A significant increase in investment is required to slow and reverse this trend. The Paulson Institute has estimated that current investments in biodiversity, 80% of which are supplied by the public sector, fall short of global needs by at least US$598 billion annually. Given the importance of nature to all other systems, there is a clear need for an increase in investment in the conservation, restoration and resilience of nature – particularly from the private sector – and done so in a way that accounts for the projected effects of climate change.

To this end, some governments have begun exploring policies to facilitate private sector investments in nature. One such approach is the recent announcement by Australian Prime Minister Anthony Albanese and Commonwealth Minister for the Environment and Water Tanya Plibersek of the creation of a biodiversity certificates scheme. This scheme will reward landholders who undertake activities to restore or manage local habitats by granting them biodiversity certificates which can be sold to other parties as part of a biodiversity market. This is intended to operate similarly to the Australian Government’s Emissions Reduction Fund (ERF), a scheme where proponents are allocated carbon credits for actions that reduce the amount of carbon released into the atmosphere.

This announcement is a welcome signal of an increasing effort by the Commonwealth to provide the appropriate leadership and policy guardrails around this agenda, in support of increased private sector investment to deliver conservation outcomes. It is also an indication that the Commonwealth is unwilling to supply the full funding needed to arrest Australia’s environmental decline and will seek the support of the private sector to meet its environmental objectives. This renewed government interest forms part of a broader suite of interlinked Commonwealth initiatives to better understand the value of nature and its importance to Australia’s economy and our wellbeing. This includes the recent release of Australia’s first National Ocean Ecosystem Account, which quantifies the benefits provided by mangroves and seagrass.

In lieu of details on how the scheme will quantify, reward, and safeguard biodiversity benefits, it is difficult to judge how effective it will be at reversing biodiversity loss. In designing this scheme, a range of questions will need to be answered – the most fundamental relate to supply and demand:

A biodiversity marketplace should be underpinned by robust, science-based methods which lead to certifiable biodiversity outcomes in the habitats which need it most. Measuring and verifying these outcomes can, however, be technically challenging, with associated costs threatening to eliminate gains from trade. This will be addressed somewhat as technological improvements and innovative collaborations improve access to reliable data.

However, there remains the question of how the value of a project is translated to a buyer, through the currency of a biodiversity certificate. Typically, marketplaces operate with reference to currencies defined by homogenous, fungible units, such as a dollar or tonne of carbon dioxide. In contrast, biodiversity is by definition diverse, comprised of complex ecosystems which cannot be represented by attributes listed on a certificate. Falsely imposing simplicity could fail to adequately value the costs and benefits associated with biodiversity, and may even pose risks to fragile ecosystems.

For this reason, to effectively channel finance to deliver biodiversity benefits, a biodiversity certificate scheme will need to strike a balance between accessibility and integrity. If the scheme is too complex, it will deter participation and impact supply in the market. However, if it is too simple it may not deliver the positive biodiversity outcomes that are so desperately needed.

It is difficult to determine whether there will be sufficient demand to support a liquid biodiversity market, as it is unclear who the intended ‘end users’ of a biodiversity certificate should be.

The ‘end user’ for carbon credits is clear. Carbon credits may be purchased and traded an unlimited amount of times, but will eventually be retired and removed from the market, usually by entities seeking to comply with regulatory obligations or voluntary decarbonisation commitments. It is the obligations of these ‘end users’ which generate the demand for a competitive market.

At present, it is uncertain whether similar obligations will exist for biodiversity. The vast majority of Australian corporates have yet to announce voluntary biodiversity commitments, particularly in lieu of a globally agreed, ‘net zero’ style target for nature.

The Commonwealth has a central role to play in directing the market to value and fund certain activities in particular locations that require urgent attention. This will help ensure that investment is directed to high-value projects that deliver the biodiversity outcomes that are needed.

Further, the Commonwealth has not yet determined whether the scheme will operate as a regulated offset scheme, similar to those which already exist in some states and territories. While enabling the market to supply offsets could help stimulate demand, this would impede its efficacy as a true market. This is in no small part because biodiversity cannot be truly ‘offset’ – whereas a tonne of carbon on one side of the world is largely equivalent to a tonne on the other, species are heavily location-dependent, and cannot be said to be equivalent across regions. For this reason, the end use of a biodiversity certificate should be carefully defined.

The Commonwealth may consider being an active purchaser of biodiversity certificates in a similar way to how it currently purchases carbon credits through ERF Auctions. This will help give the market much-needed liquidity as it establishes itself and provides potential market participants confidence that certificates earnt will generate reliable financial returns.

The Commonwealth is currently conducting consultations to inform the development of the scheme – find out more and make a submission here. 

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