Is there potential for biodiversity offset markets in Finland?
Biodiversity is decreasing at an alarming rate, both globally and in Finland. As current conservation actions are not sufficient, there is a need for new policy tools. One solution is compensating the loss of biodiversity caused by development projects. A new article is the first to provide analysis at the market level.

Biodiversity offsetting (also called ecological compensation) is a conservation tool designed to compensate the loss of biodiversity caused by development projects. The basic idea is simple: a developer must provide an improvement in biodiversity so that the lost ecological value is compensated for. Offsetting complements the existing conservation measures, allocating the costs of conservation to the party responsible for habitat degradation, in accordance with a polluter pays principle.

Offsets are generated by restoring degraded habitats and preserving existing valuable ones. Developers can buy offsets from a third party who provides habitat restoration – often referred as habitat banking. This makes offsetting an economic instrument and allows a market to emerge. There can be ecological differences as well as time delays between degraded and restored habitats, which calls for the use of trading ratios. The trading ratio matches the ecological value of biodiversity losses and gains. Not all restoration projects succeed, which creates a risk in the market and the environment.

The article develops an equilibrium model to analyse the biodiversity offset markets and applies the model to three Finnish habitats. The results show that the outcome of the restoration investment and possible time delays between biodiversity losses and gains impact the trading ratios and thus, have a major impact on the market equilibrium. An intermediary that provides brokerage and banker services may significantly decrease the costs and risks of compensation for developers. The results show that there may be potential for both supply of and demand for biodiversity offsets in Finland. The size of the offset markets could potentially be considerable, which is a prerequisite for a functioning biodiversity offset market.

Implementing an offsetting mechanism could improve the current state of biodiversity and habitat restoration in Finland. Still, offsetting alone will not be sufficient as all impacts cannot be compensated and preserving the most valuable species and habitats is essential.

The article is a part of the work of Habitat Bank and EKOTEKO projects, which are funded by University of Helsinki, KONE Foundation and SITRA.

Reference: Kangas, J. & Ollikainen, M. (2019). Economic Insights in Ecological Compensations: Market Analysis with an Empirical Application to the Finnish Economy. Ecological Economics 159: 54-67. https://doi.org/10.1016/j.ecolecon.2019.01.003

The open-access article can be downloaded from https://authors.elsevier.com/sd/article/S0921800918306554