nature as a firm - green surgenature as a firm • wp4 • page 4 2 background the economics of...

NATURE AS A FIRM

Towards a sustainable financial basis for ecosytem service

provisioning based on the Coase Theorem

WP 4

Triple ME, SRC

Tom Bade

Milestone MS30

Tom Bade, Erik Andersson, Crystal Adams

Triple ME, SRC

[Version] • May 28th 2015

NATURE AS A FIRM • WP4 •

TABLE OF CONTENTS

1 Introduction 3

2 Background 4

3 The nature of the problem 7

4 Rights and obligations 13

5 The nature of the firm 19

6 Epilogue: The right direction 22

7 References 23


1 INTRODUCTION

The concept of ecosystem services was first brought into popular use by the Millennium Ecosys-

tem Assessment in a statement entitled Living Beyond our Means (2005), which observed that we

are placing such strain on our planet’s ecosystems that it will soon cease to be able to provide

crucial, life-supporting services. These include provisioning services such as food and water,

regulating services such as flood and disease control, cultural services such as spiritual experi-

ences, recreational and cultural benefits and supporting services, such as nutrient cycles that

maintain the conditions for life on earth. In order to adequately address and analyse them, eco-

system services should be understood from a position where humans are seen as integral parts

of ecosystems and most of the ecosystems delivering ecosystem services are managed (Anders-

son et al. 2007). Ecosystem services thus can serve as a framework for both understanding value

(what and to whom) and the roots and requirements of these values.

This milestone report (MS30) will explore how financial mechanisms and institutional design can

be structured to ensure long term financing for a resilient supply of ecosystem services. The analy-

sis draws on work done by Triple ME1 on a model for how to finance ecosystem services, here

specifically related to urban green infrastructure (UGI). The report will first outline the back-

ground for valuation of ecosystem services and reflect on some problems with current ap-

proaches to then demonstrate how Triple ME used the Coase theorem to structure financial sup-

port for long term provisioning of UGI sourced ecosystem services. The work is based on and

reflects Triple ME experiences and sentiments. The milestone presents some entry points for

new business opportunities and setting up ne financial arrangement to ensure long term provi-

sioning of ecosystem services.

1 Former GREEN SURGE partner Triple ME Holding B.V. (TE; Arnhem, The Netherlands) was originally founded as an expertise centre

in 2006 in order to investigate the quantitative relations between nature and economy and to communicate the results to a wide

audience. Triple ME published more than 35 books and delivered a further 70 reports for various clients including municipalities,

provinces, central government, conservationists, industry, water boards and schools.


2 BACKGROUND

The Economics of Ecosystems and Biodiversity (TEEB) is an international initiative that aims to

draw attention to the global cost of biodiversity loss and ecosystem degradation. The study was

proposed by environment ministers of the G8+5 in Potsdam, Germany in 2007, who recognised

the need to highlight the economic value of ecosystem services. Subsequently, Germany and the

European Commission launched the TEEB initiative. It aims “to guide practical policy responses

to the growing evidence of the impacts of ongoing losses of biodiversity and ecosystem services”

TEEB, 2009). TEEB presents an approach designed to help decision-makers recognize and

demonstrate the economic values of ecosystems and biodiversity and utilise these values in deci-

sion-making.

Environmental valuation methods are fairly young and, as observed by Smith (1993), have de-

veloped slowly. Their development has been motivated by the specific objective of supporting

decision-making by governments. These methods are intended to provide information about

damage to nature and ecosystem services, usually when planning large-scale interventions such

as new infrastructure. During the decision-making process the 'soft’ values of nature and land-

scape are often overruled by 'hard’ economic values and to restore balance it seemed necessary

to place a monetary value on the damage to nature. This was a new, more practical, approach

compared with the macro-economic discussions concerning the relationship between economic

growth and environmental impact that were prevalent in the early 1970s, particularly after the

publication of the report of the Club of Rome (1972).

The advent of Environmental Impact Assessments (EIAs) in the 1980s represented an important

step toward valuating ecosystem services. The aim of an EIA is to quantify the impact of large-

scale human interventions on nature, and many countries now require an EIA to be performed

before the commencement of major infrastructure works. Part of an EIA is a Cost Benefit Analy-

sis (CBA) in which all the economic effects of interventions are calculated and visualized in one

currency for comparison by decision-makers. However, it is relatively easy to demonstrate the

economic value of a port or a highway in terms of anticipated revenue and jobs, but it is much

more complicated to establish the economic impact of biodiversity loss or the effects of pollu-

tants on human health.

Due to the difficult nature of the task, economists have developed a wide range of valuation

methods that can be used to perform CBAs. The TEEB approach incorporates a variety of these

valuation methods to establish the economic value of ecosystem services or, in the language of

its own mission statement, the economic cost of the loss and degradation of ecosystem services

and biodiversity. The two types of evaluation techniques currently used by TEEB are revealed

preference and stated preference techniques (TEEB, 2010). Revealed preference techniques ‘re-

veal’ value by looking at spending related to use. These values are known as use values because

they draw upon real-world usage data, using market prices as the central focus point.


Revealed preference techniques:

• Control Cost Method: Costs associated with measures taken to avoid, eliminate or control the

deterioration the environment.

• Averting Behaviour Method: Household expenses, related to the degradation of ecosystems,

necessary to prevent or remedy negative impacts, e.g. buying bottles of water when faced with pol-

lution of natural water sources.

• Replacement Cost Method: Costs associated with measures necessary to restore or compensate for

decline or loss of nature as a result of a project.

• Production Factor Method: Value of nature as a production factor in economic production.

• Travel expenses method: Travel expenditures of visitors to a specific location are used as indica-

tor of that location’s economic value.

• Hedonic Price Method: Derived from value of houses, under assumption that natural and urban

green spaces have a positive impact on this value.

However, revealed preference techniques are in many cases not sufficient to completely estab-

lish the economic value of ecosystem services. It is also necessary to take into account non-use

values, which are values people place on things that they will never use or have. Consequently,

they are not made obvious by market prices and so require different methods to establish. To do

this, stated preference techniques have been developed, which play an important role in CBA's.

Stated preference techniques determine value by using simulated markets and modelling. The

following examples of stated preference techniques are used by TEEB (2010).

Stated preference techniques:

• Contingent Valuation Method: Value established using a questionnaire in which participants are

asked to assign value based on hypothetical (policy-induced) changes to the provision of ecosystem

services.

• Choice Modelling: Value established using model of decision-making process of individual in a

given context.

• Group valuation: Combines stated preference techniques with elements of deliberative processes

from political science.

CBAs based on non-use valuation can be applied not only to economic decisions, but also to judi-

cial ones. As Diamond and Hausman (1993) observe, non-use valuation “is potentially important

because economic analysis and the courts use similar values in reaching decisions” (p.4). Court

cases dealing with environmental disasters have required new valuation techniques for ecosys-

tem services that may otherwise be unquantifiable. In addition to this, the use of non-use valua-


tion techniques has increased in order to inform legislative decisions. Portney (1994) describes

how the contingent valuation method found legitimacy as it was used to inform regulations deal-

ing with environmental damage assessments in the United States in the 1980’s, particularly in

relation to the Exxon Valdez oil spill. The contingent valuation technique was used to determine

values, other than direct use values, that people place on Prince William Sound.

There is, however, some doubt as to whether non-use valuation techniques are genuinely in-

formative. Diamond and Hausman (1993) argue that “it is not possible to generate a meaningful

estimate of non-use values” using contingent valuation because it essentially consists of “the

results of opinion polls over unfamiliar choices” (p.5). Yet over more than three decades, the

application of both use and non-use valuation techniques has become widespread in response to

a growing sense that ecosystem services must be economically visible if they are not to be

lost. TEEB now uses these techniques to establish the growing cost of biodiversity loss and eco-

system degradation. It is suggested here that there exists an alternative that can capture the eco-

nomics of ecosystems more adequately.


3 THE NATURE OF THE PROBLEM

Triple ME has found that, when working with people towards making ecosystems financially

resilient, two general questions arise:

• What are the economic benefits of nature (including valuable agricultural landscapes and urban

green spaces)?

• How can we deploy sustainable financing that will make ecosystems financially resilient in the long

term?

It is difficult to answer these questions using TEEB concepts. We find in our toolkit instruments

like CBA and EIA, valuation techniques that are aimed at helping decision-makers weigh ecosys-

tem services in the balance. These valuation techniques delineate the economic benefits of na-

ture, which then allows decision-makers to allocate the appropriate funds and conservation

measures. Importantly, the target group is decision-makers, who tend to be government officials.

However, the people who deal directly with – and often make decisions about – nature are con-

servation organizations and landowners, rendering the existing valuation methods problematic.

The key instrument is a business plan, and real money should be the focus for making ecosys-

tems financially resilient.

On the ground, it is real money that is needed to protect and develop UGI and ecosystem ser-

vices. Money is needed to buy land, finance management, pay staff salaries, buy Range Rovers,

outfit visitor centres and for myriad other expenditures. So rather than the abstract valuation of

ecosystem services, the financing of ecosystems seems a more apt approach. The FES method

(Financing Ecosystem Services model) that Triple ME has developed provides a new way of look-

ing at the financing of nature. UGI is seen as an entity around and within which many services

are being rendered to society, yet this entity is not reaping the benefits of the services it renders.

Specific stakeholders are earning a lot of money and none of this money is going back to conser-

vation and management. Not only does UGI provide services for free but also conservation and

management organizations do not have sufficient income to invest in activities. So costs and

benefits can easily be established but the organizations and entities with the costs are not receiv-

ing the benefits. And this makes conservation seem like a liability, dependent on tenuous finan-

cial arrangements such as government support and donations from charities and civil society

organizations.

The FES method is consequently only interested in real transactions, in the form of real money

and other human investments. In all Triple ME’s studies it is found that the nature of the problem

is not that people are unwilling to pay for use or non-use. Instead the problem is that they are

already paying for ecosystem services, yet none of this money flows back to the maintenance of

the ecosystem services that create all this income. Companies freely extract resources or freely

utilise space and customers pay for the resultant products. In effect, it is a classic free rider prob-

lem.

Triple ME began to come to this conclusion twenty years ago when nature conservation organi-

zations and other owners of UGI wanted to know about the possible economic benefits of their

properties for the local and regional economy. There were also questions from governments who


were spending money on nature conservation (organizations), hoping for some economic as well

as ecological gain. In the beginning their motives were driven by ideas of emancipation. For ex-

ample, the Dutch government had spent a lot of money on nature conservation and the organiza-

tions that received this money wanted to show the public that their activities not only led to eco-

logical profits but also to economic profits that would benefit society as a whole. This was also

the case for conservation organizations that wished to show that a nature is a form of economic

infrastructure. In a later stage (during the crisis years, since ca. 2008), with earlier results show-

ing that there were indeed economic benefits, organizations were looking for opportunities to

harvest some of the economic benefits in order to finance further nature conservation.

These practical, ground level questions led to a distinct discursive trajectory, with Triple ME

focusing only on real cash flows in and around urban and natural green spaces. Triple ME drew

upon similar valuation techniques to those used by TEEB but with a difference focus, looking

instead at data on the daily transactions that constitute our economic system. These data are

derived from Chambers of Commerce, the Cadastre, banks and governmental institutions such as

the Central Bureau of Statistics. The real and direct nature of the data provides an enormous

advantage compared to valuation methods that use indirect data developed by scientists (re-

placement costs and shadow pricing) or the more problematic data derived from surveys asking

people to talk about money that they do not have and things they will never use, as with the con-

tingent valuation method.

The first technique used in FES studies by Triple ME (and under active investigation in GREEN

SURGE) establishes real cash flows by tracking the commercial turnover associated with UGI, or

with specific green spaces. The steps are:

• Ascertain which companies/economic activities are located in and around UGI.

• Determine which companies are likely to be using UGI to generate income, using indicators like

address (proximity) and company activities, and establish the turnover of these companies (using

data from the Chambers of Commerce).

• Ask business owners to approximate the amount of their turnover that is dependent on UGI or

dependent on ecosystem services provided by UGI.

• Collate information provided by stakeholders in order to establish an estimation of the real finan-

cial value generated by UGI.

Asking business owners to approximate their nature-dependent turnover is key, as it locates real

money related to UGI or a specific green space, and also personal interest. This method is not

dissimilar to the stated preference techniques used by TEEB, which also use interviews and ap-

proximations. The crucial difference is that the estimations obtained from business owners are

about money they actually have and things they actually use. Furthermore, this line of enquiry

allows business owners to affirm that they have an interest in the presence of UGI and therefore

may also be interested in its conservation, since they benefit financially from its existence.

The second technique used by Triple ME is the revealed preference technique of hedonic pricing

valuation, which maps real estate prices (and is currently being developed within GREEN

SURGE). The steps are:


• Map the houses in and around UGI and determine their prices.

• Compare these prices with the same type of houses in the region in non-green areas and establish

the difference.

• Interview brokers about value added by the proximity of UGI.

• Establish the total added value of house prices generated by the proximity of UGI.

The third technique in a FES study is determining avoided costs. For example in the eastern part

of the Netherlands water-use for drinking water is purified naturally at no economic cost. Con-

versely, in the western part of the country surface water must be treated extensively, with huge

associated costs leading to higher prices for drinking water. So by calculating how much it would

cost if it were also necessary to purify water in the east, we can establish the avoided costs (and

the free riders). These calculations can be made using regular data derived from public sources.

All these data (nature-dependent turnover, house prices, avoided costs) demonstrate that both

companies and individuals are using UGI without paying anything for their upkeep. In essence,

FES studies reveal a free rider effect. Using the geographical distribution of commercial activities

and property prices to map cash flow in relation to green spaces, an outward flow materializes

(Fig. 1). This places the FES approach firmly within the tradition of economic geography. Green

spaces are location factors, shown by the pattern of companies and private properties situated in

and around them.


Figure 1. Cash flowing out of de Hoge Kempen National Park, demonstrating free rider effect (from

Bade et al. 2011).

The spatiality that is part of the FES method distinguishes it from the TEEB approach, which

lacks a spatial understanding of the economic benefits of UGI. As Triple E developed the FES

model, Ronald Coase, who developed an economic theory explaining why people form single

production units or firms rather than work in isolation (1937), became a distinct influence. Coase

argues that firms arise from the need for joint arrangements to solve problems, and deals with

such issues as proximity, mutual benefits and reciprocity. Drawing on Coase’s ideas, Triple ME

shows that if UGI is seen as an entity, it makes ecological and financial sense to incorporate that

entity into a firm. Firms are formed based on the mutual benefits of consolidating spatial and

financial relations. Organization that benefit from UGI can not only reinvest into its conservation,

but benefit further from an intimate, reciprocal relationship. This thinking has parallels in classic

economic geography, specifically the spatial economics of Johann Heinrich von Thunen (1966).

Similar spatial approaches can be found in contemporary literature. For example, Ferraro & Ha-

nauer (2014) found that in Costa Rica, direct proximity to protected natural areas reduces pov-

erty. Their analysis suggests that nearly two-thirds of the poverty reduction associated with the

establishment of Costa Rican protected areas is causally attributable to tourism. The establish-

ment of protected areas leads to changes in infrastructure, tourism services, and other ecosys-

tem services, which positively affect neighboring communities (Ferraro & Hanauer, 2014). Also

found in contemporary literature is mention of real cash flows, such as in the study by Bulte et al.

(2003), who explore non-use values and equitable conservation strategies. The authors argue

that it is not in the interest of local people to set aside extensive stretches of land based on “elu-

sive non-use values [that] are not backed up by true transfer flows,” (2003, p. 28). There is not,

however, any quantification of these flows and the solutions proposed come in the shape of trad-

able development rights, habitat conversion taxes, and conservation through transfers and sub-

sidies.

FES aims to integrate spatiality and real cash flows without the need for taxes or subsidies, in

order to create real, sustainable financing. This can represent an alternative to government fi-

nancing, which has been proven to be unreliable and insufficient in the long term and even ab-

sent in many developing countries where nature is under severe pressure. Funding uncertainty

makes nature conservation vulnerable to overexploitation or even repurposing for other forms

of land use. In this struggle for survival, virtual monetization of ecosystem services is ineffective

in helping to defend against competing and destructive interests. UGI needs to be financially re-

silient and economically viable if we are to avoid degradation of crucial ecosystem services.

In fact what we find is that results put forward by TEEB studies, where the values of ecosystem

services are often estimated in the billions, can make things worse. This is because conservation-

ists and policy makers are made to believe that the billions of dollars presented in their reports

are in fact real money, with the potential to be put to use funding daily conservation activities.

What is in fact presented by TEEB is virtual money that only exists in the reports by theoretical

economists, and which contains what in business economics could at best be called 'goodwill.'

What is instead needed is to reverse cash flows so that economic activity is supporting ecologies,

as shown in Fig. 2.


Figure 2. New arrangements for de Hoge Kempen National Park, making the shift form free riders

to partners and reversing path of the cash flows.

Triple ME demonstrates that a significant amount of real money is being earned in and around

UGI that are directly related to the provision of ecosystem services, but that it is a tacit economy

and none of this cash flow goes toward conservation or sustainable development. It seems clear

that the real challenge of green economy and TEEB should be to finance the protection and de-

velopment of UGI, other natural areas and ecosystem services with real money. With the current

application of TEEB we then have still two problems to solve:

• An economic deficiency: The use of inadequate valuation methods and inadequate data that do

not lead to sustainable financing of nature conservation.

• An institutional deficiency: An inadequate institutionalization of the economics of conserva-

tion and ecosystem services.

Both could be solved by giving the Coasian Theorem a central role in the institutionalization of

nature conservation and the according new financial arrangements. As we will show, a system of

rights and obligations can curb free riding and be used as the foundation for reinvestment of

financial profit in the maintenance of UGI and generation of ecosystem services. As will be re-


ported much of the experiences of Triple ME are from working outside UGI, but we hold the find-

ings and reflections to be relevant also to urban systems.


4 RIGHTS AND OBLIGATIONS

The first problem to address is the economic deficiency of the TEEB approach. At the heart of the

problem is lack of knowledge about the true nature of needs in the field. Nature conservationists

urgently need to economically emancipate UGI from land use competition and political decision-

making processes. Lack of economic emancipation inevitably leads to the discontinuation or

even absence of sustainable financing. Emancipation will not be achieved by the application of

virtual valuation methods and virtual markets as used by TEEB. On the contrary, this worsens

the situation, as the high values presented have no connection to the daily financial problems of

nature conservation. Simultaneously, there is a lack of focus on real cash flows, thereby ignoring

economic actors that are already profiting from green spaces and missing opportunities for sus-

tainable financing. Having identified existing cash flows and having identified countless free rid-

ers in and around UGI using the first steps of the FES model, the next logical step was to start

working on how to finance these green spaces. The idea was that the free riders should one way

or another be 'persuaded' to become participants. To do this, Triple ME has developed a system

of rights and obligations as a means of financing nature conservation.

Obligations come in the shape of expenses as, under this new system, free riders are obliged to

protect and manage UGI and the ecosystem services it provides. Managing UGI and protecting

ecosystem services necessarily compels or precludes certain actions and both cost money (the

latter in the form of lost income). To finance these obligations, and indeed persuade people to

fulfil them, a system of rights is implemented. Organizations are given the right to perform cer-

tain activities that will generate income, so long as an agreed portion of that income goes into

protecting UGI. This could be the right to raise a toll or a parking fee or perhaps the right to

mount certain touristic endeavours (hotels, restaurants). In some limited cases, it might even be

the right to sustainable extraction of raw materials in and around UGI.

Obligation, in the sense it is used here, is consistent with the dictionary definition, i.e., something

by which one is bound or obliged. Conversely, right is used in a very specific sense here and

therefore it is necessary to provide a working definition:

A privilege granted to an organization in the form of continued use of a particular space, product or

service, associated with UGI and ecosystem services, granted only on the basis that said organiza-

tion agrees to fulfil ecological obligations stipulated in advance.

In this sense a right is something to be conferred and then owned. It is governments who must

play the role of conferrer of rights, instead of the traditional role of funding body and enforcer.

For instance, a government might need drinking water extraction and could present an extrac-

tion organization with the exclusive license to operate in an area. This concession would only be

given on the strict condition that the organization fulfils certain ecological obligations in that

area. Similarly, a commercial organization might requests a right (to perhaps place a hotel near a

national park or an attractive urban green space) and only receive the concession if it agrees to

perform, or pay for, a stipulated amount of conservation and maintenance activities. Enterprises

like hotels and restaurants, which previously had been free riders, would become major contrib-

utors to conservation and management. And conservation organizations, which previously had

struggled to attain funding, are able to diversify into areas hitherto outside of their remit.


There exists a real need for these new arrangements. Funding for nature conservation and pro-

tecting ecosystem services has always been scarce, particularly in developing countries. In re-

cent years and as a result of the economic crisis it has also become scarcer in developed coun-

tries. In 2009 the Dutch government paid around 60% of the cost of nature conservation, which

amounted to €600 million annually. In 2010 these organizations were confronted with a cut of

60% of the budget (CBS, PBL, Wageningen University, 2014). Along with this, fewer public dona-

tions were made as a result of the crisis. Severe financial problems were encountered, putting

enormous pressure on efforts to protect ecosystem services.

The Dutch government now has the policy of no longer directly financing nature conservation

and is gradually implementing a system of rights and obligations. Not only does this make eco-

logical and financial sense but also it has been shown to work in the past. Working with a system

of rights and obligations is not new, although creating a structural basis for the system is. For

example, since the 19th century, the Netherlands has successfully used rights and obligations to

harness ecosystem services from sand dunes, while simultaneously protecting them. Coastal

sand dunes provide crucial protection from the sea and they also act as a natural water purifier,

a feature that Dutch water companies have been able to harness. Indeed, the dunes have proved

so effective that as demand has increased, non-potable river-water has been pumped into the

dunes, to later be extracted as clean drinking water. In return for the right to extract this water,

water companies are obliged to maintain the dunes.

This sustainable arrangement has been in place for 150 years now and has led to a situation

where the Netherlands have healthy dunes that provide essential protection from flooding, have

important recreational functions and, most of all, are ecological hot spots. This is a good example

of the use of rights and obligations, of payment for ecosystem services and of sustainable devel-

opment generally. Previous generations have made good use of ecosystem services without sac-

rificing the ability of future generations to do the same. In the case of Dutch water companies, it

has made practical sense for them to maintain the sand dunes because the dunes act as their

water treatment plant. The companies involved would likely have performed this service even

lacking a sense of ecological responsibility because the connection between their product and

the dunes is obvious. The problem is that this connection is not always obvious, and the chal-

lenge is to make it become so.

It is necessary to emphasize that a right is only viable if it is a long-term arrangement, measured

in decades. From an ecological point of view, a long-term view is the most sustainable. Effective

natural resource management requires far-sighted planning and long-term implementation. Fur-

thermore, natural resource management entails long-term liabilities and a long-term arrange-

ment represents a more attractive and viable prospect for the organization concerned, whether

it be an organization focused predominantly on conservation, or one for which conservation is a

secondary obligation. For conservation organizations, a long-term right represents a stable

source of funding, preferable to perpetually applying for government subsidies. These are usual-

ly short-term, have ever-changing conditions and often involve the possibility of being revoked

entirely. Government subsidies and direct financing cannot be considered a good basis for sus-

tainable financing when they are open to ever changing political moods. And equally, for enter-

prises whose main focus is not conservation, a long-term right represents an attractive economic


advantage. A hotel operator near a UGI, who holds a long-term license to operate there, has an

incentive to remain and fulfil their obligations.

The FES method could be used to create rights of many kinds, and be employed outside cities

and UGI. For example, Triple ME developed the right to deploy wind turbines in a region adjacent

to UGI that needed protection. The profits generated by the wind turbines are spent on preserv-

ing this UGI (Bade, 2012). Triple ME also proposed the right for nature conservation organiza-

tions to gain income from the ecosystem services provided by UGI they are responsible for. For

example, a conservation organization might charge another organization for the privilege of ex-

tracting naturally purified water. Another of Triple ME’s proposals is the right to deploy a petrol

station near a nature reserve, provided that a certain value per litre goes toward funding conser-

vation. Triple ME calls this natural gas, and a full tank means a certain amount of money goes

into managing the adjacent nature reserve.

Triple ME’s system of working with rights and obligations is now becoming general practice in

the Netherlands. A government report on the future of nature conservation (2013) recommend-

ed the FES approach to the Dutch secretary of state as an alternative to the traditional way of

financing conservation with subsidies. This approach is also welcomed by nature conservation

organizations that want to become less dependent on government funding. Moreover, the idea of

affording rights and obligations is not solely applicable to nature conservation. The FES model

has also worked for heritage, where a system of rights and duties has been developed. The social

obligation to restore bunkers might be made possible with the right to organize events, so that

money is earned that can be used to finance the restoration of the bunkers. Instead of 'old' finan-

cial arrangements in which the government finances the restoration up front and then, in order

to make a return on their investment, has to ask a high rent for the bunkers. If the price is too

high, it leads to degradation of the bunkers caused by lack of use. Formulated properly, the

framework could thus be used to support and promote biocultural diversity and complex assets

made up both by ecological components and tangible as well as intangible cultural layers.

Some important remarks have to be made about scale. Rights and obligations must be in balance

and working at the right scale is a precondition for success. For example Triple ME has outlined a

Table of rights by scale (Table 1) for the Dutch State Forestry Commission with provides exam-

ples of obligations on national, regional and local levels.


Table 1. Table of rights by scale.

Table of rights by scale

Scale

Space

National level Regional level Local level

Dunes Right to harvest wind

Delta Right to store water (on agricultural

land)

Northern woods Right to store water (underground)

Delta metropolis Right for small-scale wind harvest-

ing

Dunes Right to extract water

Southern woods Right to harvest biomass

Heritage Right to dig a well

UGI Right to arrange events

Local wilderness Right to brand wilderness beer

A large-scale obligation like managing sand dunes in order to protect the Netherlands from the

sea needs to be tied to a large-scale right, which will provide the necessary funding. In order to

derive rights at the appropriate scale, the scale and extent of the obligation must be taken into

account. This means that an organization that is, for example, obliged to manage sand dunes

might be afforded rights that extend beyond the dunes. In this case, Triple ME proposed a large

wind farm at sea to finance this national-scale obligation. The unattractive alternative would

have been to look for arrangements with recreational organizations, meaning the Dutch Forestry

Commission would have to negotiate with many different bodies to acquire funds that can be

obtained with one wind farm. The enormous transaction costs involved in dealing with multiple

organizations would almost certainly render the endeavour unprofitable.

By contrast, local obligations such as the construction and management of walking tracks can be

financed by recreation organizations with a local purview. One right Triple ME developed is the

passage right. This requires tourism-based businesses to pay for the maintenance of paths that

bring tourists to or past their places of business. For example, the owners of a restaurant in or

adjacent to UGI have to either pay for, or adopt the management of, part of any nature trail that

passes their restaurant. Another idea is the right to dig a well to produce geothermal energy or

cogeneration. This might be used to preserve heritage sites, which are by definition very old and

usually require large amounts of energy. Heritiage buildings are often relics of times when insu-

lation was unheard of, but now need to be kept at a warm 20°C. This leads to high energy bills


and unprofitable exploitation of heritage, but for the right to produce energy tax-free from their

own well.

Working at the right scale ensures viability by providing the appropriate revenue and reducing

transaction costs. In economics, this way of thinking is in line with the work of Ronald Coase,

especially with his ground-breaking article The Problem of Social Cost (1960). Coase was a British

economist and Nobel Prize laureate whose works laid the foundation for the cap-and-trade sys-

tem. In The Problem of Social Cost, Coase deals with externalities and transactions costs, both of

which are important aspects of nature conservation. Coase talks about firms that have harmful

effects on others (externalities), and argues that if transaction costs were nominal or non-

existent, bargaining would produce efficient economic outcomes. The Coase Theorem shows that

with low transaction costs and clearly defined property rights, externalities can be internalized.

The FES method is greatly inspired by Coase’s thinking. Human activity is having harmful effects

on ecosystems worldwide and the FES method can help to internalize these externalities by low-

ering transaction costs and delineating clearly defined rights.

Coase’s work provides a solid foundation within economic literature, upon which to build the

theoretical framework for the FES model. Coase demonstrates that the question concerning con-

flicting economic activity is usually framed in the wrong way, arguing that it is “commonly

thought of as one in which A inflicts harm on B and what has to be decided is: how should we

restrain A?” (1960, p. 2), going on to state, “to avoid the harm to B would inflict harm on A.” The

nature of the problem is in fact reciprocal. We should instead be asking if either should be al-

lowed to harm the other.

Applied to ecosystem services, the formulation is slightly different. Free riders (A) benefit from

ecosystem services, taking what they need, and ecosystems (B) become depleted and have needs

that are not being fulfilled. If we rewrite the Coase passage, based on the FES approach, the fol-

lowing emerges: Rather than the problem of how to restrain A and protect B, we are dealing with

a problem of positive reciprocal nature. A benefits from B, and B should in turn benefit from A.

This is in contrast to the traditional conservation approach which would see A completely cut off

from B, or require a third party to undertake conservation. Following the new approach, a posi-

tive relation is formed based on mutual benefits, with minor transaction costs and clearly deline-

ated rights and responsibilities. It is argued here that this will prove more effective than the

TEEB approach, which does nothing to lower transaction costs or define rights. Within the TEEB

approach ecosystem services remain externalities, albeit with a virtual price attached. An ap-

proach based on mutual benefits makes sustainable financing arrangements between commer-

cial enterprises and nature conservation organizations possible, both with and without govern-

ment intervention.

Take the example of Wilderness Beer. A recreational enterprise situated near a forest and the

Dutch State Forestry Commission developed the label Wilderness Beer, of which 10% of the

price of a pint goes to nature conservation (i.e. the State Forestry Commission). This is an exclu-

sive brand that can only be used by participating retailers. The ecosystem is protected by means

of financial arrangements based on mutual benefits, but with no government intervention. An-

other example is the right to settle. Allocating space for economic activities in the immediate

vicinity of a green space allows enterprises to benefit from ecosystem services associated with


that space. The arrangement might be that government grants concession of a new restaurant or

campground to a nature conservation organization in return for their managing the space.

A shift toward a system of rights and obligations creates a sound basis for the sustainable financ-

ing of UGI. And although this represents a divergence from the current discourse, the use of

rights is not totally uncommon in nature conservation. It could be argued that the need to devise

a theory based on the concept of rights was identified as early as 1968 by Hardin in The Tragedy

of the Commons, when arguing that we “must cease to treat [National Parks] as commons or they

will be of no value to anyone” (p.1245). Hardin suggests several ways we might deal with this

problem, including to “allocate the right to enter them” (p.1245).

Indeed, rights have always been used in nature conservation to control harvesting. Hunting

rights, logging rights and fishing rights have been and still are in common use to regulate sus-

tainable harvesting. In many early cases, uncontrolled harvesting by poorly defined rights led to

environmental and economic disasters, causing market failure. Yet increasingly, rights have been

endorsed as a method providing an income for conservation organizations. For example, Bulte et

al. (2003) argue that harvest efficiency can be improved with the allocation of property rights in

the form of hunting permits. Permits are either allocated at no cost or auctioned, the latter rais-

ing revenue for the government, which then acts as monitor and enforcer.

Bulte et al. (2003) also describe how the CAMPFIRE project in Zimbabwe and the regulation of

vicunas in Peru has been used to protect populations of threatened animal species whilst gener-

ating income for local communities. In another example, Hersoug (2011) describes how the use

of Individual Transferable Quotas in small-scale fisheries in Indonesia “has meant that provincial

and local authorities use the fisheries… to generate money through taxation, while management

is still lagging behind” (p.26). Yet, Hersoug does not propose fishing rights as a management so-

lution to social problems connected with small-scale fishing, particularly poverty. Rather, Her-

soug recommends investment in education in the fishing villages. And although investment in

education is never a bad allocation of resources, it is argued here that fishing rights could be an

efficient and empowering solution to the problem. Fishing rights, combined with appropriate

ecological obligations would provide a source of revenue and give small-scale fisheries financial

stability, while improving conservation efforts that foster a sense of ownership and environmen-

tal stewardship.

Provisioning services like hunting are just one of the ecosystem services for which rights can

improve conservation outcomes. Long-term biological services such as the regulation of CO2 and

relatively new cultural services also can benefit from a system of rights and obligations. The

Tragedy of the Commons remains very applicable to the shift we have to make. It shows that the

system of rights as proposed here should not only be applied in a proper way to the 'old' ecosys-

tem services but also to burgeoning recreational services. As Hardin states, “In a still embryonic

state is our recognition of the evils of the commons in matters of pleasure” (p.1248). All ecosys-

tem services, however tangential, need to be duly paid for. The next section sets out the mecha-

nism by which sustainable financing based on a system of rights and obligations will function.


5 THE NATURE OF THE FIRM

It is proposed here that solving TEEB’s institutional deficiency requires institutionalization of

new, sustainable financing of nature conservation and ecosystem services. Consumers are al-

ready paying for ecosystem services leading to real cash flows, which might be used to finance

management of UGI by means of rights and obligations. TEEB concepts like ‘willingness to pay’

put the focus on the consumer, but consumers are not the key to the solution. The sustainable

financial arrangements we seek lie with entrepreneurs. They are the key to the solution, and the

challenge is to make conservation a viable and attractive prospect.

In studies based on the FES-method it was established in many cases that, like consumers, entre-

preneurs are willing to pay for ecosystem services when payment is tied to concessions, some-

times even in existing situations. This willingness stems not only from moral awareness, but also

from opportunities identified in the form of branding, marketing, exclusivity and other ad-

vantages. Often business-owners want to cooperate, but only under the strict condition that the

money generated by the right will be used only for the (management of the) UGI that provides an

ecosystem service. It is important that money acquired in this manner not become a form of tax-

ation that is the subject of an opaque decision-making process and ends up being used for totally

different purposes. So it is necessary to create a vehicle that really makes certain that the money

goes to nature conservation.

Listed below are four examples that could fulfil these conditions, each increasing in the degree of

specificity in terms of reciprocal exchange (UGI and beneficiaries):

• Voluntary. Using this model, parties come to a voluntary agreement on a contribution from a profita-

ble project to an unprofitable project (for example, between a private company and conservation

organization).

• The contract. A contract connects the costs and revenues of projects. A direct relationship between

costs and revenues is submitted, which clearly shows where contributions need to be made. There is

no legal entity established by the parties, instead money flows directly from one project to another

project.

• Joint fund. When setting up a joint fund, parties agree on a payment from profitable projects to an

independent fund that finances nature conservation. The parties are considered contributors and the

board consists of independent members. (For example, Triple ME set up a regional fund for nature

conservation based in the Ooijpolder called Via Natura.)

• Special purpose vehicle. After the establishment of a joint entity, rights and obligations can both be

accommodated in this combined entity (rather than between two parties). This might be a for-profit

or non-profit organization: the main condition is that rights and obligations are the backbone of the

business philosophy.

All of the above are examples of a firm. UGI becomes an entity that is in effect collaborating in a

mutually beneficial business enterprise. Of these examples, the special purpose vehicle repre-

sents the strongest firm, as it precludes the possibility of money leaking away and thereby creat-


ing new free riders (both private and public). Forming a firm reduces transaction costs and alle-

viates the bureaucracy surrounding nature conservation (like that involved in acquiring Europe-

an subsidies).

Triple ME highlights the need to focus on real transactions, and although cash flows are a crucial

aspect, other kinds of human investments can also play a big role. Obligations might entail pay-

ing a second party to undertake conservation activities, or paying for and directly implementing

activities. But obligations might also encompass different kinds of capital. For example, Figure 3

shows an organization responsible for conservation and education. This organization is respon-

sible not only for investment in conservation activities, but also for education about ecosystem

services, providing crucial investment in the future of those services. These activities are fi-

nanced by the right to charge a fee at the entrance, deploy wind turbines and settle. Settlement

might entail establishing hotels and other recreational activities in the vicinity of a nature re-

serve or UGI.

Figure 3. The Nature of the firm.

Coase’s work provides the basis for the establishment of a firm. Ronald Coase (1937) reasoned

that people organize themselves into a firm because the transaction costs of using the price

mechanism are too high and market transactions eventually are replaced by one monthly admin-

istrative action: paying wages. Requesting proposals from third parties and negotiating endlessly

over prices are replaced by the employment of people with the right skills. Their services are

procured in exchange for a wage, and the firm then has the capacity to take orders. Coase (1937)

states that one of the disadvantages of using the price mechanism is that a long-term contract

may be more desirable than several shorter ones. Certain costs are avoided by making a long-

term contract for the supply of a product or service. Coase goes on to argue that a firm emerges

when short-term contracts are not suitable, and that this is particularly applicable to services.

Coase’s ideas are applicable not only to human labour, but also to ecosystem services. Conserva-

tion organizations could fund their activities by in effect leasing out ecosystem services. They

become a special purpose vehicle (a firm) that has both rights and obligations. A conservation

The Firm

Right

To charge

entrance fee

To harvest

windTo settle

Obligation

Education Conservation


firm also has other economic advantages when compared to traditional arrangements like subsi-

dies. The transaction costs of traditional arrangements where funding is based on government

support are much higher. Those who practice nature conservation know that subsidies take

enormous effort to acquire and the risk of not being rewarded is high. Moreover, subsidies often

come with very restrictive control mechanisms based on 'accountability.' Triple ME has found

that in many situations these mechanisms can consume more than 30% of the budget.

Traditional arrangements have been based on what one might call ‘organised distrust,’ which is a

good argument for the implementation of a new model. Rather than organised, distrustful con-

trol mechanisms aimed at forcing organizations to fulfil their obligations, a Coasian model would

be based on mutual benefits and trust. A firm that fulfils its obligations using money obtained by

rights can bypass the distrust that causes major transaction costs. And given that UGI becomes a

participating entity under this model, mutual benefits will – or could at least potentially – serve

to cultivate a sense of reciprocation and stewardship of ecosystem services.


6 EPILOGUE: THE RIGHT DIRECTION

Every aspect of nature conservation, management and even development requires a long-term

approach. In many cases the long-term vision exists but structural financial support is lacking.

However, if governments create rights that support the organizations responsible for conserva-

tion, management and development of ecosystem services, the foundation is laid for long-term

financing and continuity. The benefits will be manifold, especially when enterprises fulfil their

ecological obligations year upon year. It may take longer to achieve this goal in situations where

there is little money for initial investments in new activities, and organizations may have to work

from small- to large-scale operations. But the continuous cash flow created by rights will allow

firms to gradually fulfil their ecological and economic ambitions.

The shift we need to make is one that genuinely brings nature conservation and management

into the economy. As with the example of the Dutch water companies, organizations that profit

as a result of ecosystem services must internalize those services, demonstrating that a system of

payment for ecosystem services, based on long term rights and obligations, brings us closer to

the definition of sustainable development than the current TEEB approach. Although the FES

method uses similar valuation techniques to those used by TEEB, the objective is not to generate

virtual value, but instead to locate real value and provide a clear course of action. In the case of

the Dutch water companies, the course of action was obvious because failing to maintain the

sand dunes would have led to a failure to extract clean drinking water. The dunes were already

internalized. But for many, if not most, of the organizations that profit from ecosystem services,

it is not obvious. The benefits gained are in essence free, and the externalities invisible. A system

of rights and obligations renders these externalities visible.

Seen as an independent entity, UGI becomes visible. Coase shows us that it makes economic

sense for individuals to organise themselves into firms, and we argue here that it makes both

ecological and economic sense for nature to be enrolled in exactly the same way. The FES meth-

od serves to eliminate free riders and by integrating ecosystem services with real economies.

This approach speaks well to GREEN SURGE’s, and could advance understandings of the linkages

between economies and biodiversity. The FES method could contribute to Work Package 4, as it

provides an “innovative [approach] to unlock cash flows from urban green spaces”. As indicated

earlier, work is in progress within GREEN SURGE to improve the methods for capturing value

and then applying them on both ULL and other cities. The outcome of these exercises could be

used as a foundation for discussing the potential to use the rights and obligations model to or-

ganize governance and UGI maintenance. The FES approach helps to render the real value of eco-

system services visible through valuation and integration into sustainable business plans.


7 REFERENCES

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LIST OF PARTICIPANTS

No. Participant legal name (and short name) Country Organization type

1 Triple ME Netherlands SME

2 SRC Sweden Academic

nature as a firm - green surgenature as a firm • wp4 • page 4 2 background the economics of...

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