Economic insights in ecological compensations: market analysis with an empirical application to the Finnish economy

Research output: ThesisMaster's thesisTheses

Abstract

Biodiversity degrades at an alarming rate, both globally and in Finland. Habitat loss is the most significant threat for biodiversity. Biodiversity offsets (also called ecological compensation) are becoming a common market-based policy instrument, aimed at balancing economic development and conservation of ecosystems and species. Offsets are designed to compensate for the residual environmental impacts of development projects, after avoiding and minimizing impacts on site. The idea is that costs of conservation are allocated to the party responsible for habitat degradation, thus a polluter pays principle is implemented. Offsets complement the pre-existing conservation instruments. Ecological risks as well as the theoretical and practical challenges of offsetting are widely discussed in literature but economic analysis on biodiversity offsetting schemes is limited to few. The aim of this thesis is to increase the understanding of the economic basis of biodiversity offset markets and in particular, the influence of trading ratios and intermediaries. I developed an equilibrium model, and applied it to Finnish data and three selected habitat types: abundant mires, scarce herb-rich forests, and laborious and valuable rural biotopes. The supply of offsets comes from habitat restoration and nature management. Data on the areas suitable for habitat restoration, restoration measures and associated costs were obtained from several documented sources. I utilized the results of the working group on improving the status of habitats in Finland (ELITE, Kotiaho et al. 2015), and supplemented it with an expert survey that I designed to estimate the changes in the selected habitat types after restoration and management under uncertainties. I used Monte Carlo simulation to examine the impacts and risks of uncertainties. Further, I estimated demand based on a report by Tiitu et al. (2015) where they predict the increase of built-up areas and infrastructure in Finland for a time period of 2013-2040. I examined how the market equilibrium, prices, and quantities traded depended on trading ratios. Trading ratios differ depending on whether biodiversity losses from development are ecologically equivalent to gains from compensation or not. I also examined the role of an intermediary, a broker firm. The intermediary helps demanders and suppliers meet each other with minimal transaction costs, safeguards against risks and guarantees maturity and quality of offsets. The analysis showed that the presence of the intermediary affects the trading ratios as there is a time delay between losses and gains which must be discounted to present time if the intermediary is not in the market guaranteeing mature offsets. Time discounting further increases trading ratios. The results show that the market size could be considerable and providing offsets could be a profitable business for landowners. There is enough land for compensations in Finland, even when trading ratios are relatively high. The presence of the intermediary in the market decreases both the trading ratios and credit prices, which lowers the costs of compensation for developers. Both ecological and economic risks may decrease as the intermediary safeguards against failures in restoration by guaranteeing that all offsets provide good quality. Pricing these services in the market does not excessively increase offset prices and shrink the market size.
Original languageEnglish
Place of PublicationHelsinki
Publisher
Publication statusPublished - 2017
MoE publication typeG2 Master's thesis, polytechnic Master's thesis

Fields of Science

  • 1172 Environmental sciences
  • 511 Economics

Cite this

@phdthesis{55065443d5e44b6faf93105c10ee44e2,
title = "Economic insights in ecological compensations: market analysis with an empirical application to the Finnish economy",
abstract = "Biodiversity degrades at an alarming rate, both globally and in Finland. Habitat loss is the most significant threat for biodiversity. Biodiversity offsets (also called ecological compensation) are becoming a common market-based policy instrument, aimed at balancing economic development and conservation of ecosystems and species. Offsets are designed to compensate for the residual environmental impacts of development projects, after avoiding and minimizing impacts on site. The idea is that costs of conservation are allocated to the party responsible for habitat degradation, thus a polluter pays principle is implemented. Offsets complement the pre-existing conservation instruments. Ecological risks as well as the theoretical and practical challenges of offsetting are widely discussed in literature but economic analysis on biodiversity offsetting schemes is limited to few. The aim of this thesis is to increase the understanding of the economic basis of biodiversity offset markets and in particular, the influence of trading ratios and intermediaries. I developed an equilibrium model, and applied it to Finnish data and three selected habitat types: abundant mires, scarce herb-rich forests, and laborious and valuable rural biotopes. The supply of offsets comes from habitat restoration and nature management. Data on the areas suitable for habitat restoration, restoration measures and associated costs were obtained from several documented sources. I utilized the results of the working group on improving the status of habitats in Finland (ELITE, Kotiaho et al. 2015), and supplemented it with an expert survey that I designed to estimate the changes in the selected habitat types after restoration and management under uncertainties. I used Monte Carlo simulation to examine the impacts and risks of uncertainties. Further, I estimated demand based on a report by Tiitu et al. (2015) where they predict the increase of built-up areas and infrastructure in Finland for a time period of 2013-2040. I examined how the market equilibrium, prices, and quantities traded depended on trading ratios. Trading ratios differ depending on whether biodiversity losses from development are ecologically equivalent to gains from compensation or not. I also examined the role of an intermediary, a broker firm. The intermediary helps demanders and suppliers meet each other with minimal transaction costs, safeguards against risks and guarantees maturity and quality of offsets. The analysis showed that the presence of the intermediary affects the trading ratios as there is a time delay between losses and gains which must be discounted to present time if the intermediary is not in the market guaranteeing mature offsets. Time discounting further increases trading ratios. The results show that the market size could be considerable and providing offsets could be a profitable business for landowners. There is enough land for compensations in Finland, even when trading ratios are relatively high. The presence of the intermediary in the market decreases both the trading ratios and credit prices, which lowers the costs of compensation for developers. Both ecological and economic risks may decrease as the intermediary safeguards against failures in restoration by guaranteeing that all offsets provide good quality. Pricing these services in the market does not excessively increase offset prices and shrink the market size.",
keywords = "1172 Environmental sciences, 511 Economics",
author = "Kangas, {Johanna Ad{\'e}le Marjaana}",
year = "2017",
language = "English",
publisher = "[Johanna Kangas]",
address = "Finland",

}

Economic insights in ecological compensations : market analysis with an empirical application to the Finnish economy. / Kangas, Johanna Adéle Marjaana.

Helsinki : [Johanna Kangas], 2017. 74 p.

Research output: ThesisMaster's thesisTheses

TY - THES

T1 - Economic insights in ecological compensations

T2 - market analysis with an empirical application to the Finnish economy

AU - Kangas, Johanna Adéle Marjaana

PY - 2017

Y1 - 2017

N2 - Biodiversity degrades at an alarming rate, both globally and in Finland. Habitat loss is the most significant threat for biodiversity. Biodiversity offsets (also called ecological compensation) are becoming a common market-based policy instrument, aimed at balancing economic development and conservation of ecosystems and species. Offsets are designed to compensate for the residual environmental impacts of development projects, after avoiding and minimizing impacts on site. The idea is that costs of conservation are allocated to the party responsible for habitat degradation, thus a polluter pays principle is implemented. Offsets complement the pre-existing conservation instruments. Ecological risks as well as the theoretical and practical challenges of offsetting are widely discussed in literature but economic analysis on biodiversity offsetting schemes is limited to few. The aim of this thesis is to increase the understanding of the economic basis of biodiversity offset markets and in particular, the influence of trading ratios and intermediaries. I developed an equilibrium model, and applied it to Finnish data and three selected habitat types: abundant mires, scarce herb-rich forests, and laborious and valuable rural biotopes. The supply of offsets comes from habitat restoration and nature management. Data on the areas suitable for habitat restoration, restoration measures and associated costs were obtained from several documented sources. I utilized the results of the working group on improving the status of habitats in Finland (ELITE, Kotiaho et al. 2015), and supplemented it with an expert survey that I designed to estimate the changes in the selected habitat types after restoration and management under uncertainties. I used Monte Carlo simulation to examine the impacts and risks of uncertainties. Further, I estimated demand based on a report by Tiitu et al. (2015) where they predict the increase of built-up areas and infrastructure in Finland for a time period of 2013-2040. I examined how the market equilibrium, prices, and quantities traded depended on trading ratios. Trading ratios differ depending on whether biodiversity losses from development are ecologically equivalent to gains from compensation or not. I also examined the role of an intermediary, a broker firm. The intermediary helps demanders and suppliers meet each other with minimal transaction costs, safeguards against risks and guarantees maturity and quality of offsets. The analysis showed that the presence of the intermediary affects the trading ratios as there is a time delay between losses and gains which must be discounted to present time if the intermediary is not in the market guaranteeing mature offsets. Time discounting further increases trading ratios. The results show that the market size could be considerable and providing offsets could be a profitable business for landowners. There is enough land for compensations in Finland, even when trading ratios are relatively high. The presence of the intermediary in the market decreases both the trading ratios and credit prices, which lowers the costs of compensation for developers. Both ecological and economic risks may decrease as the intermediary safeguards against failures in restoration by guaranteeing that all offsets provide good quality. Pricing these services in the market does not excessively increase offset prices and shrink the market size.

AB - Biodiversity degrades at an alarming rate, both globally and in Finland. Habitat loss is the most significant threat for biodiversity. Biodiversity offsets (also called ecological compensation) are becoming a common market-based policy instrument, aimed at balancing economic development and conservation of ecosystems and species. Offsets are designed to compensate for the residual environmental impacts of development projects, after avoiding and minimizing impacts on site. The idea is that costs of conservation are allocated to the party responsible for habitat degradation, thus a polluter pays principle is implemented. Offsets complement the pre-existing conservation instruments. Ecological risks as well as the theoretical and practical challenges of offsetting are widely discussed in literature but economic analysis on biodiversity offsetting schemes is limited to few. The aim of this thesis is to increase the understanding of the economic basis of biodiversity offset markets and in particular, the influence of trading ratios and intermediaries. I developed an equilibrium model, and applied it to Finnish data and three selected habitat types: abundant mires, scarce herb-rich forests, and laborious and valuable rural biotopes. The supply of offsets comes from habitat restoration and nature management. Data on the areas suitable for habitat restoration, restoration measures and associated costs were obtained from several documented sources. I utilized the results of the working group on improving the status of habitats in Finland (ELITE, Kotiaho et al. 2015), and supplemented it with an expert survey that I designed to estimate the changes in the selected habitat types after restoration and management under uncertainties. I used Monte Carlo simulation to examine the impacts and risks of uncertainties. Further, I estimated demand based on a report by Tiitu et al. (2015) where they predict the increase of built-up areas and infrastructure in Finland for a time period of 2013-2040. I examined how the market equilibrium, prices, and quantities traded depended on trading ratios. Trading ratios differ depending on whether biodiversity losses from development are ecologically equivalent to gains from compensation or not. I also examined the role of an intermediary, a broker firm. The intermediary helps demanders and suppliers meet each other with minimal transaction costs, safeguards against risks and guarantees maturity and quality of offsets. The analysis showed that the presence of the intermediary affects the trading ratios as there is a time delay between losses and gains which must be discounted to present time if the intermediary is not in the market guaranteeing mature offsets. Time discounting further increases trading ratios. The results show that the market size could be considerable and providing offsets could be a profitable business for landowners. There is enough land for compensations in Finland, even when trading ratios are relatively high. The presence of the intermediary in the market decreases both the trading ratios and credit prices, which lowers the costs of compensation for developers. Both ecological and economic risks may decrease as the intermediary safeguards against failures in restoration by guaranteeing that all offsets provide good quality. Pricing these services in the market does not excessively increase offset prices and shrink the market size.

KW - 1172 Environmental sciences

KW - 511 Economics

M3 - Master's thesis

PB - [Johanna Kangas]

CY - Helsinki

ER -