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MEA Bulletin

Guest Article

21 March 2007


By Anantha Kumar Duraiappah, Chief, Analysis and Emerging Issues Unit, UNEP Division of Environmental Law and Conventions (DELC), Former Director, Economic Policy, IISD


Ecosystems provide many services from which people benefit that are not traditionally bought or sold in the marketplace, such as clean water and erosion control. Unfortunately government regulation has not been sufficient to protect these services. An alternative policy approach is to create and develop market mechanisms that would improve the way these ecosystem services are used. These markets for ecosystem services (MES) are increasingly recognized as having an important role to play in the sustainable use of ecosystem services and, more recently, in reducing poverty. These instruments can generate financial resources, divert funds to environmentally-friendly technologies, create incentives for investment and increase the involvement of the private business sector in environmental management. In light of the deteriorating trend in ecosystems highlighted by the Millennium Ecosystem Assessment (MA), MES can be expected to take on an increasing role in providing incentives for conservation and the sustainable use of ecosystem services. Furthermore, there is a potential for using MES to enhance the implementation of multilateral environmental agreements (MEAs). 

Although today’s technology and knowledge can contribute to minimizing the human impact on ecosystems, their potential is unlikely to be deployed fully until ecosystem services cease to be perceived as free and limitless and their full value taken into account. There have been successes in pricing provisioning ecosystem services through the creation of markets. This is largely due to the fact that ownership of these services can be easily established through property rights. However, many of the prices for these services are still far from perfect because the damage caused to the environment, i.e., externalities, by the use of these services are still not internalized within pricing mechanisms. 

Establishing prices for regulating, cultural and supporting ecosystem services raises a more serious challenge. Many of these services are public goods by definition. This means that these services are beyond the boundaries of private property rights. Can Market-Based Instruments (MBIs) such as transferable permits and auctions be used in this respect? Market-based approaches may not be feasible or even desirable for all ecosystem services, and when used their designs need to consider impacts on and information feedback loops from ecosystems and stakeholders. 

The role of the public sector is critical for successful pro-poor MES. Governments have a role to play in facilitating and creating MES, managing transaction costs, and providing institutional structures so that these markets work efficiently and equitably. MEAs can also contribute towards the deployment of MBIs. As legally-binding instruments, they offer an appropriate institutional structure for supporting MBIs. Furthermore, MBIs can be useful mechanisms for mainstreaming MEAs within the broader sustainable development frameworks used in countries.

This abstract summarizes an IISD report of the same title. It can be accessed at: http://www.iisd.org/pdf/2007/economcs_markets_eco_services.pdf

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