But markets also pose risks, and a market for “ecosystem credits” may fall short of its potential without the necessary guardrails. What if the emerging demand for ecosystem credits doesn’t find the supply it’s looking for and, instead, searches for the lowest-cost option? What if market expansion outstrips regulatory safeguards? How do we guide landowners who wish to sell both carbon and biodiversity offsets from the same restoration project? To address these tough questions, we need both voluntary principles, and tougher regulation.

We can take a cautionary tale from carbon offset projects that have resulted in damage to wild places, and their replacement with monocultural forests that are effectively biological deserts. Some have failed to apply credible tools or assumptions when quantifying the expected changes in carbon sequestration. Others aim for the right outcomes, but lack the legal mechanisms to ensure accountability or the long-term financing to ensure the benefits are actually delivered.

These failures matter because they lead to real environmental risks: without diversified and resilient ecosystems, there is no life-support system and carbon-reduction efforts become superfluous. Policy risks also arise if actors use these offsets as a short cut to avoid hard decisions on how to reduce emissions, or other impacts on nature. Finally, there are reputational risks for all types of market actors, including investors, companies, and landowners.

Best-practice principles for ecosystem markets

In recent years, many different stakeholders have converged to agree standards for how nature repair should be pursued and how markets can best be leveraged, which can help buffer society against future costs associated with climate change.

A few examples of best-practice principles and why they are needed: 

• Holistic rather than single value: The Nature Markets Principles, published in October 2023 by the UK’s biggest nature charities, suggest that restoration should aim to improve several ecosystem services in the same location, rather than focus on a single value, arguing against “planting trees to generate carbon credits [if it] causes a reduction in biodiversity”. 

• Multiple benefits through stacking or bundling must be additional. If restoration projects are designed to include multiple ecosystem services, markets need a way to determine who gets paid for what. Stacking is when carbon and biodiversity credits generated from the same activities are sold separately; bundling is when they are sold together as a combined unit. These concepts are key, not only because they allow for the quantification of different ecosystem benefits, but also because they reduce the amount of land needed overall for nature investment. Importantly, bundling and stacking should adhere to the core offsetting principle of additionality, set out in Nature Markets Principle #3 – ie, it must be shown independently that each ecosystem service would not have happened without the income generated from the sale of that service.

• Local before regional: A technical working paper published in 2022 that identified a foundational principle: that companies should first address their own biodiversity impacts locally – by avoiding and minimizing impacts and by offsetting them, before investing in biodiversity credits on a regional or global scale. This important guardrail prevents companies from choosing easy transactions over the hard work of addressing their own negative impacts.

• Offset historical impacts, avoid future ones: Another principle addresses when the baseline for assessment is set: is it historic, present or future? While past environmental degradations are hard to undo, future degradations are increasingly seen as unnecessary. Since there is less public tolerance for offsets that allow for (or justify) continued degradations that are, in principle, avoidable, some experts suggest that offsets are only used to address historical degradation.

• Equivalence to the impact: Offsets should try to match the loss and gain of ecosystems in order to avoid cases where, for example, a marine habitat is replaced with a mountain one. When out-of-kind compensation is selected, it should be well-motivated ecologically and/or socially (e.g., balancing out a social injustice by providing access to green space within an urban area).

These principles provide basic guardrails during this rapid proliferation of markets, but must be updated as we gain experience in what does and does not generate nature-positive outcomes, and as public opinion evolves. For example, as the state begins to step in and set hard and fast rules, then principles may become less critical. It is clear that we need a more sophisticated approach to financing nature repair: oversimplification not only doesn’t deliver the promised benefits, it can make our forests more vulnerable to the risks that are expected to increase with climate change and ecosystem breakdown. And that will be costly.

We need an approach that dares to repair nature as a whole – that embraces all of its complexity, and ensures that we don’t mistake the forest for the trees.

Scott Cole is a senior environmental economist with WSP in Sweden. He works with clients to ensure compensatory offsets address lost value in a credible and transparent way. Read his previous article exploring the economic argument for biodiversity offsets and how they should aim to benefit both nature and people.

The author acknowledges valuable input from Jenny Merriman, Kyle Chapman, and Barbara Bleho.