USDA NRCS recently released its Natural Resources Credit Trading Reference. This reference tool explains the challenges and opportunities available for landowners and farmers to engage in environmental service markets. These markets allow landowners and farmers to receive monetary compensation for improving or protecting different aspects of the environment.
Non-farming landowners interested in supplying environmental services on leased agricultural land should discuss the matter with the tenant and may need to address the issue in the lease contract. For more information on this topic visit Chapter Six of The Landowner’s Guide to Sustainable Farm Leasing.
The NRCS reference provides the following explanation of environmental service markets and goes on to address markets for water quality, carbon sequestration, wetlands mitigation, and wildlife habitat.
Generally, markets are a good way for society to decide what and how much to produce and consume. We all – consumers and producers – enjoy the returns from a market system. Market forces provide strong motivation for firms to provide the many goods and services desired by consumers at low cost. Markets in general, though, do not provide incentives for the production of environmental goods and ecosystem services even though many people value them highly. This is because it is difficult for providers of environmental goods to earn a profit on them. This happens in part because many environmental goods can be enjoyed by everyone whether they paid for them or not. Air quality is an example of a public good?a good that once provided can be enjoyed by many people, including those that did not help pay for it. Another reason is that it is difficult for farmers to absorb the costs of reducing the offsite environmental effects of their activities (their externalities) and remain profitable in very competitive markets for crops and livestock. ECT, by creating a price for credits provides a way for farmers to receive compensation for the costs they incur when they undertake socially beneficial and valuable activities which improve environmental quality. By creating a price, ECT also spurs long term technological improvement, since innovations that allow for cheaper, more effective ways to enhance environmental performance can get rewarded in the marketplace. Other approaches commonly used in conjunction with ECT are regulation, historically used to deal with environmental problems created by the production of a commodity, and conservation technical assistance programs, which help farmers and ranchers with a variety of decisions regarding conservation and land use decisions.
However, several conditions must be met for environmental markets to achieve cost-effective results. These conditions include having buyers and sellers willing to participate in the market with no single buyer or seller having too much influence over how prices are set. Without willing buyers and sellers no market can form. If a buyer or seller has too much influence, they can use it to affect the price they pay or receive, ultimately leading to less of the product being produced or consumed than would occur otherwise. One important way this can be prevented is ensuring that those who want to enter the market are not prevented from doing so. Another condition is that the ownership of the environmental goods being bought and sold must be clear. In the case of environmental goods, ownership is not always readily apparent, and may require legislation or a court ruling to be determined. This issue is linked to the condition that there must be agreement by both buyer and seller on the commodity being traded. Finally, efficient markets require two conditions linked to information. The first is that prices must be broadly known and the second is that the cost of participating in the market, the transactions costs—finding a buyer or a seller and agreeing to a deal—must be low. All these conditions when met help ensure that the best, most cost-effective trades take place.