Green hocus-pocus or planet-saving magic bullet?

Green hocus-pocus or planet-saving magic bullet?

A new green financial hit could be on the way, following the adoption of the UN Convention on Biological Diversity in December. Dubbed the little brother of carbon credits, biodiversity credits could help raise the money to avoid the dinosaurs' fate.

Since the world began, species of plants and animals have come and gone. "A 'normal' extinction rate, according to scientists, is two species out of every 10,000 every 100 years. This rate has accelerated abruptly five times in Earth's history, when mass extinctions have occurred.

The last such event was 65 million years ago, when dinosaurs, among other species, disappeared. We are now on the verge of a sixth such event, with extinctions jumping at least ten times the normal rate, and some pessimistic estimates put it at a hundred times. According to the UN, 1 million of the 8 million animal and plant species we know are threatened with extinction. All because of one species, Homo sapiens.

Our destruction of nature is such that even if progress is made on other fronts, if we continue at this rate, our planet will become uninhabitable for us too. It's no use putting solar panels on every roof, it's no use changing our meat-loving diet to a vegetarian one, it's no use developing new vaccines. We cannot prevent climate change, soil degradation or even further epidemics without halting the destruction of nature.

It was this realisation that led to the adoption of the Kunming-Montreal Global Biodiversity Framework by nearly 200 countries at a UN summit in Montreal, Canada, last month, after years of preparation. The document may at first glance appear to be a generic UN declaration. But it is more than that. In professional circles, it is known as the "Paris Agreement on Nature", a reference to the famous 2015 climate pact.

At the heart of the new agreement is a commitment by governments to increase the current share of land and sea under some form of nature protection to 30% by 2030 at the latest, from around 15% and 8% respectively. This is currently more than 20 percent for Hungary.

More money in a crisis?

Biodiversity - the diversity of living things - is largely a question of money. Money is needed to increase the network of nature guards in the Amazon rainforest, to replant the mangrove forests along the coast in Borneo, to buy saplings or to break up the endless farmland in our country with islands of wild flowers and pheasants.

Such nature-based solutions will cost $154 billion worldwide in 2021, according to the United Nations Environment Programme (UNEP). The organisation calculates that this amount would need to triple gradually over 8 years to meet the biodiversity targets now being adopted, and rise to at least €484 billion by 2030. By comparison, this is more than 2.5 times Hungary's total GDP in 2021.

Meeting this target is no easy task in a time of crisis, when most governments are facing inflation levels not seen for decades and many countries around the world are facing recession in 2023.

Climate protection is the model

The solution is not to make the taxpayer pay for the rising cech, but to make the private sector pay for it, i.e. companies that are happy to increase their spending if there is a financial interest. So far, nature-based solutions have not particularly captured the imagination of the corporate world: in 2021, the private sector accounted for only $26 billion of the $154 billion in total investment involved. The challenge is to whet investors' appetite and thus increase their spending.

This is not an unrealistic goal, if we take the example of climate protection efforts (which have a decades-long advantage over biodiversity). The San Francisco-based Climate Policy Initiative estimates that by 2021, climate action worldwide will cost between $850 billion and $940 billion, about half of which will come from private sources. It's no coincidence that the new UN Convention on Biodiversity seeks to build on and replicate the climate protection experience.

Carbon credit reloaded

The biodiversity agreement adopted in December sets 23 "action-oriented" targets for governments to meet "urgently". One of these targets encourages policymakers to promote the spread of "innovative incentive instruments", including biodiversity credits.

Biocredits are virtual commodities that are an evolution of a type of carbon credit that has existed since the mid-1990s. Their uptake is still in its infancy.

How are these two types of green financial instruments similar? In both cases, the credits are based on projects that create some kind of value. In the case of carbon credits, this takes the form of reducing carbon emissions. For example, replacing the kerosene-based lighting in an off-grid village in Somalia with a solar/energy efficient system, which not only slows down global warming, but also increases the life expectancy of the inhabitants and reduces their energy bills.

In the case of biodiversity credits, the value is not carbon reduction - although that can happen incidentally - but halting or restoring the destruction of a natural habitat. A good example might be the protection of a particularly rich forest area in Colombia.

Such projects are typically completed in 2-8 years. The real work of reducing emissions or restoring habitat takes less time, but the calculations need to be verified by a third party. The process ends when a standard-setting body gives its blessing to the project and issues credits to the project promoter, who can then resell them.

When the credits are used, a company, a country or an individual "retires" the credits, i.e. they are stashed in a carbon credit account similar to a bank account. The credit can then no longer be sold and is withdrawn from circulation.

Advertising gimmick or regulation for the future?

Typically, large companies buy carbon credits - and have been looking increasingly for biodiversity credits in recent months. Companies that want to demonstrate that they are taking action on climate change and natural diversity, and are financing quantifiable environmental benefits beyond their own in-house efforts.

The extent to which this is driven by moral commitment or marketing considerations will be determined by the actual actions taken.

British pharmaceutical giant GSK, for example, has announced that it will buy biodiversity credits at a unit price of $5 over the next 12 years and carbon credits at $10 to protect a diverse forest in Honduras.

Whatever one thinks about the motivations of companies, environmental considerations are bound to be a part of any company's future. Today, responsibility for carbon emissions and destruction of nature, often on a voluntary basis, is gradually becoming mandatory worldwide.

Many feel that it is worth preparing for the future rules as soon as possible to ensure a smooth transition. This recognition is also driving demand for carbon and biocredits.

How are these two types of credits different? The fundamental difference between the two markets is that while the correlation is true for climate change, where carbon reductions in one part of the world benefit equally in another part of the world, this is not the case for biodiversity. In terms of slowing down global warming, it makes no difference where the project is implemented, but cutting down an Indonesian rainforest cannot be replaced by planting trees in the Pilis. You cannot compensate for the disappearance of a family of orangutans by increasing the population of the Pannonian lizard, even though the latter is a rare species.

Another important difference between the two markets is that while there is a clear unit of measurement for carbon credits, the common metric for biodiversity credits is still being discussed. For a carbon market project, the impact of a project that reduces methane or nitrogen dioxide emissions can easily be converted into 1 tonne of carbon dioxide. For biodiversity, however, such a clear unit of trade does not lend itself. How do we measure species richness?

Koala credits

The brainstorming started less than a year ago, but now the UN summit in Montreal could give new impetus to the brainstorming. There is a company that would name credits after specific species and somehow match them halfway around the world. In Australia, for example, a company called Greencollar is planning to come up with 'koala credits' in the coming months. The idea is that one of these biocredits will be for one hectare of marsupial habitat.

A French company, Carbon4, is thinking of a more complex model and would build on the so-called biodiversity carrying capacity of habitats. All over the world, it is possible to determine the species and populations that an area can support. Credits could be based on changes in this indicator.

The most ingenious idea is based on a well-established methodology in economics, the consumer price index, which shows the change in inflation. Like the change in the price of a basket of goods and services purchased, the biodiversity basket would quantify the change in a bundled weighted indicator. A bio-basket, based on the methodology of the UK's Wallacea Trust, would look at five factors - water, soil, air quality and pollination potential. Credits would be based on the percentage change per hectare per year.

There is already a lot of competition to decide which will become the common unit of credit in the future. Australia, one of the 17 'mega-diverse' countries on Earth (home to 9.6% of the world's known species), is in the process of developing a national framework. This draft was put out for public consultation by the government before Christmas and is open for comments until the end of February.

Meanwhile, the US standards body Verra, the largest standard-setter in the carbon credit market, is working on a conservation methodology for issuing biodiversity credits to projects.

Market potential

Despite recent efforts, no estimates have yet been published on how the market for biodiversity credits could take off. As a starting point, the market for carbon credits has grown strongly over the past year.

According to statistics from Ecosystem Marketplace, the organisation best known in the market, the carbon credit market will reach a total of $2 billion in 2021, four times the 2020 level. This includes not only the trade in carbon credits but also the value of services related to the sector, such as rating agencies, consultants, brokers and stock exchanges. The market is forecast to stagnate at around $2 billion in 2022, as the year of war and energy crisis has somewhat dampened corporate buying of carbon credits.

Nevertheless, McKinsey analysts expect growth to continue, resulting in a carbon credit market of up to $50 billion per year by 2030. This gives confidence that biocredits have the potential to generate a good share of the funds needed to meet the biodiversity targets.

Dubious credits

However, a prerequisite for any market to take off is that the system is transparent and that credits of dubious origin, poor quality and unreliability are filtered out.

The carbon credit market today is hardly transparent: there are many good quality projects, many poor initiatives, many of which have no proven environmental value, and the resulting carbon credits. There were many scams in the press last year (even the popular British-American comedian John Oliver devoted a special show to dubious carbon credits).

Yet bad experiences should not be a reason to simply sweep a fledgling scheme off the table. The transition from barter to cash was not a smooth one, and there are still counterfeiters today.

Carbon and bio-credit scams will not disappear completely, but it is hoped that as the market matures, transactions will become more reliable and transparent. To help this, a number of major guidelines will be published this year - including in this country, with the involvement of the Magyar Nemzeti Bank - to guide the current system of cheques.

Whatever the success of biocredits, they will surely have the benefit of giving nature a monetary value. This is essential if companies and governments are to see the environmental impacts more clearly, to better integrate them into their investment decisions, and thus to have a chance of postponing the sixth wave of extinctions on Earth by a few million years.

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