Ecomarkets and the Farm of the Future

Terry Fankhauser is one of those rare breeds of people who seem at ease talking about both livestock production and wildlife conservation whether speaking to ranchers or environmentalists.

With his handlebar mustache and cowboy hat, Fankhauser displays his roots: He grew up in the Flint Hills of Kansas on his family’s ranch, but after completing a graduate degree in animal sciences at Kansas State University, returning home wasn’t an option. The family livestock operation didn’t generate enough money to support several generations. Instead, Fankhauser came west and took a job with the Colorado Cattlemen’s Association.

Today, as the association’s executive vice president, Fankhauser represents the oldest—and one of the most innovative—organized statewide groups of ranchers in the country. Founded in 1867, the Colorado Cattlemen’s Association works to promote the interests of the beef industry, but it has also recognized the inherent benefit in conserving the state’s land and water resources. The Colorado Cattlemen’s Agricultural Land Trust, which was among the first of its kind, has helped permanently protect more than 350,000 acres of working farms and ranches in the state from development since 1995.

Now, Fankhauser is heading up a new, spin-off organization called Partners for Western Conservation. The independent, nonprofit group’s purpose is to develop market-based projects that could benefit both business and conservation. Its programs will provide incentives to private landowners and regulated industries to protect wildlife and water resources, while helping to offset the costs of managing private lands to meet the conditions of regulatory laws, such as the Endangered Species Act. Fankhauser and others are promoting the view that the 31 million acres of private, agricultural land in Colorado provide “ecosystem services”— biodiversity conservation, water quality protection, carbon storage, to name a few—that should have a market value. “We see private lands as the huge, untapped reservoir,” Fankhauser says.

A handful of other initiatives in the state are also aiming to establish markets that will pay landowners to protect and restore wetlands, floodplains and endangered species habitat, offsetting damages resulting from development and providing a supplementary source of income for struggling farmers and ranchers. Global carbon markets used to mitigate emissions contributing to climate change are similar experiments, at a much larger scale.

The surge in Colorado toward environmental markets and payment for ecosystem services programs is part of a larger movement across the country and the globe to create financial incentives that promote economically sound land management and environmentally sound development. For Colorado and the West, market boosters say such programs could also help reverse trends and make family farms sustainable and profitable again.

“I see an opportunity to diversify a ranch operation and create a more sustainable entity that not only sells beef, but may also market other tangible offerings, in the nature of habitat or species management,” Fankhauser says. “It’s part of a philosophical shift that needs to happen.”

The Economic Value of Ecosystems

Most people who spend time enjoying the outdoors consider nature to be priceless. When we do contemplate the value of Ponderosa pine and aspen forests, gushing mountain streams and sagebrush-studded canyon lands, we don’t do so in terms of dollars and cents. But thinking of the environment as sacrosanct and separate from the economic realm has often meant that impacts to natural resources aren’t adequately, if at all, factored into land-use decisions and development plans, which are typically driven by financial motives. “There’s a disconnect,” says Josh Goldstein, an assistant professor at Colorado State University who studies environmental markets and conservation finance. The concept of ecosystem services “seems to clash with the moralistic views some people have of nature, but I’m not convinced.”

Goldstein understands some of the heartache over considering the environment in financial terms, but he points out that every decision we make puts an economic value on natural goods and services, whether or not it’s implicit or a conscious choice. If someone buys a cheap piece of furniture made of wood that was clear-cut from a tropical rainforest, they are sending a signal that the trees and wildlife habitat of that region aren’t worth very much. Presently, ecosystem services, such as air and water filtration, flood and erosion control, fish and wildlife biodiversity, and carbon sequestration, do not influence most people’s, or company’s, bottom lines.

For much of history, this economic disconnect wasn’t a pressing problem in most of the world because supply outweighed demand. Humanity had abundant natural resources at its disposal, and it seemed far fetched that we could substantially disrupt natural systems. But as populations have grown and industrialized and our land-use demands have expanded and intensified, we are faced with a declining supply of life-sustaining ecosystem services.

In the July 2010 issue of the science journal Nature, authors Ricardo Bayon and Michael Jenkins, leading proponents of ecosystem marketplaces, write that “an important reason for the alarming rate of environmental destruction across the world is that the true value of ecosystems is largely invisible.” In economic terms, ecosystem services have been externalities, Goldstein explains, societal benefits that don’t factor into prices. It’s a massive market failure: In 1997, another article in Nature estimated global ecosystem services provided $33 trillion in benefits, about twice the world’s gross national product at the time.

“Ecosystem services and market-based programs are not a silver bullet for all our problems,” says Goldstein, “but there are places where they can be used effectively.”

Markets Stimulated by Regulation

The Millennium Ecosystem Assessment, a 2005 assessment of the planet’s ecological health published by the United Nations, identified 24 specific ecosystem services in categories including food production, water quality and regulation, erosion control, pollination, waste treatment and genetic resources. Market initiatives to tie economics to the protection of three of those services have been the most prevalent, largely because they are the most globally regulated, but also because they are the most visible to key affected stakeholders: biodiversity conservation, watershed services and climate change mitigation.

In the 1970s, the United States first began regulating the degradation and loss of environmental resources through a series of laws. The Clean Air Act, Clean Water Act and Endangered Species Act all take regulatory approaches to protecting and restoring natural resources. Government agencies set limits on pollution levels, loss of wetlands, species decline and habitat degradation. Constituents must then abide the restrictions through government-directed remedies, regardless of the impacts to their own livelihoods.

Landowners have complained that the laws set up financial disincentives. To have endangered species habitat or wetlands on one’s property prohibits money-making land uses—grazing, construction, energy development—that may interfere with regulatory goals. Laws, such as the Endangered Species Act, pit the recovery of a species against the economic well-being of private property owners. Policy analysts have criticized the laws because they promote regulated entities to take the minimum action necessary to meet legal standards, instead of investing in innovative practices that could actually exceed the laws’ goals.

“What we’re living with right now is huge regulatory failure,” says Sally Collins, former director of the U.S. Department of Agriculture’s Office of Environmental Markets and past associate chief of the U.S. Forest Service. Collins, who recently left the government and now lives in Lyons and works as a private consultant, says she initially opposed the valuation of ecosystem services and paying to protect endangered species. Her conversion came with the realization that regulatory laws weren’t effectively recovering species or protecting wetlands.

Among the first experiments with outside-the-box environmental markets was the one for wetland mitigation credits triggered by the Clean Water Act in the 1980s. The law requires developers wishing to fill or dredge wetlands to show they are attempting to avoid and minimize damages, and then to offset or mitigate any losses that cannot be curtailed. Mitigation means compensation—creating or enhancing an equal or greater amount of wetlands with similar functions—opening the door to wetland mitigation banking.

Today, there are more than 400 wetland banks across the United States, where private landowners and companies protect and restore wetlands in order to sell credits to developers who need to offset their damages. In Colorado, the Middle South Platte River Wetlands Mitigation Bank opened for business in 1999. On about 90 acres situated in Boulder County near the town of Frederick, the bank’s owner, David Yardley, and his partners created three types of wetland habitat on former farmland. Clients have purchased credits to compensate for wetland losses from the construction of schools, roads, shopping centers and subdivisions.

Yardley says the Middle South Platte bank isn’t exactly a cash cow, and he knows of only a couple of other wetland banks that have opened in Colorado. Nationally, however, economists estimate the market in wetland mitigation credits is now worth roughly $2.4 billion a year.

Examples of markets aimed at biodiversity conservation and wildlife habitat in Colorado are limited, but successful efforts in other states provide a blueprint for how programs here could work. The world’s largest population of the golden-cheeked warbler occurs on the Fort Hood army base in Texas. The bird’s occupied habitat covers nearly a quarter of the military reservation, but since it landed on the federal endangered species list in 1992, the Army has had to mitigate any negative impacts to the bird’s population. In the mid-2000s, as the Army was expanding training exercises on the base, the military teamed up with the Environmental Defense Fund and other governmental and supporting partners to create the Fort Hood Recovery Credit System.

Through this market program, the Army compensates for harming the warbler’s turf by purchasing recovery credits from nearby private landowners, who agree to conserve and manage for appropriate habitat. The system steadily increases the net benefits to the warbler by setting aside 10 percent of available credits each year and conducting transactions where the credits ensure more acres are being protected than affected. A March 2010 independent evaluation concluded the three-year program has achieved habitat conservation, facilitated efficient interactions between market participants, and added flexibility to the Endangered Species Act (ESA).

Closer to home, the Environmental Defense Fund is involved with another pilot market-based project in southern Utah for the Utah prairie dog, which has been listed under the ESA since 1973. Ted Toombs, the regional director for Environmental Defense Fund’s Center for Conservation Incentives, based in Boulder, and a board member of Partners for Western Conservation, says his organization has worked with the Utah Farm Bureau, university extension staff, local landowners, and state and federal government scientists to build support for the project, which is modeled on the Fort Hood initiative.

The Natural Resources Conservation Service, a branch of the USDA, has supported the effort through its Conservation Innovation Grants program, established to fund market-based and innovative approaches to land management. The agency has contributed $300,000 as seed money to go toward a first round of credits, which will be used to purchase conservation easements protecting established prairie dog colonies on private lands. The credits were scheduled to go on sale to potential buyers, such as developers who have to offset impacts to the prairie dogs, in December 2010, according to Toombs, who adds that the launch will help determine interest and demand.

Both the golden-cheeked warbler and the Utah prairie dog initiatives center on the species being listed by the ESA and the regulatory requirements that mandate certain actions, so Toombs says it is unclear how well the frameworks and results will translate over to voluntary market scenarios. But in Colorado, Fankhauser is ready to test how such voluntary markets might work, with an eye toward conservation of the greater sage-grouse.

“We recognize that to have this become mainstream, like conservation easements, there’s a tremendous amount of heavy lifting to be done early.” – Terry Fankhauser

“Incentivizing” Voluntary Conservation

Across Colorado’s Western Slope, millions of acres of sagebrush encompass a portion of the range of the greater sage-grouse. Flocks of these birds were once prolific across much of the Interior West, but the species now occupies a little more than half of its historic range due to habitat loss and other factors. In March 2010, U.S. Secretary of the Interior Ken Salazar announced that the listing of the greater sage-grouse under the Endangered Species Act was “warranted but precluded.” The decision means the bird needs protection and recovery support to avoid extinction, but that it won’t receive statutory help because the federal government has to address recovery for higher priority species first. Environmentalists, who had sued to force the listing of the sage-grouse, jeered at the ruling, saying it left the species’ survival to chance.

Fankhauser, on the other hand, who believes the ESA is “reactive” and says it has proven to be unsuccessful over time, isn’t among those critics who are just “grousing” about the dilemma. When the greater sage-grouse was denied ESA listing, Fankhauser seized the opportunity to start hatching an environmental market centered on its habitat.

Conceptually, a sage-grouse biodiversity market would target oil and gas companies that are sinking well pads all over Colorado’s Western Slope and drilling in prime grouse habitat on public and private lands, resulting in habitat loss and fragmentation. Through Partners for Western Conservation, Fankhauser has met with energy company officials, state wildlife staff and landowners to discuss a market for grouse habitat, which could stave off ESA listing and turn conservation actions into revenue streams. The energy companies would offset their impacts by purchasing credits from landowners who would sign contracts, agreeing to protect or restore grouse habitat on their private lands. Fankhauser’s group would act as a broker, connecting landowners with interested companies and facilitating deals.

Landowner actions could include adjusting grazing schedules, erecting new fencing to exclude cattle from grouse breeding grounds, or planting vegetation beneficial to the birds. Money from credits would compensate landowners for the costs of these practices and also offset the loss of income resulting from scaling back their agricultural operations.

The energy industry is already required to comply with limited state and federal protection for the greater sage-grouse and other wildlife habitat requirements through the state oil and gas commission. Fankhauser hopes to launch a pilot project in the next year or so based around these regulations, but he also envisions a voluntary market where the companies could choose to take further measures to mitigate harm to the birds. This type of “pre-compliance” market would be optional for energy companies, but Fankhauser and others believe it could prove financially worthwhile for them to participate by averting listing and the additional federal restrictions that come with it.

“To get private industry and agencies to invest early on, they need to find the [long-term] benefits,” says Fankhauser. “We recognize that to have this become mainstream, like conservation easements, there’s a tremendous amount of heavy lifting to be done early.”

Launching an environmental market before a species hits the ESA has some advantages, adds Goldstein. A preemptive initiative should require less drastic actions, have greater chances for successful recovery, and cost facilitators, buyers and sellers less than programs built around more threatened and regulated species. At the same time, the looming possibility of regulatory controls can motivate potential buyers and sellers.

“I think regulation is always going to play a role,” Goldstein says, even in cases of voluntary markets. “It’s about a productive balance between the carrot and the stick.”

To Market, to Market…Bearing Supply

Regulation or not, Fankhauser has become a sort of troubadour for environmental markets across the state, and he’s meeting lots of fellow travelers. In southeastern Colorado, landowners in the Piñon Canyon area who had united against the Army’s proposed 400,000-acre expansion of Fort Carson are pursuing a payment for ecosystem services program, based on ecological data collected by state scientists.

Steve Wooten, a rancher whose family has raised livestock in the region dating back to the 1860s, says the market concept came to expansion opponents after a coalition of landowners decided to pay for an environmental assessment of their private lands. Through the Colorado Natural Heritage Program, ecologists conducted biological surveys on more than 1 million acres to identify and document rare and threatened wildlife species, plant communities and insects. The natural heritage surveys provide a baseline on natural resources, which is often used to support conservation programs and priorities, but the Piñon Canyon landowners also believe the information could shape a regional ecosystem services exchange.

The idea is that different sets of landowners could ultimately band together, with assistance from Partners for Western Conservation, to market ecosystem services based on the resources on their properties. Although Wooten believes a trial project probably won’t get underway for several years, the ability to put together groups of neighboring landowners who are managing hundreds of thousands of acres similarly and then have Fankhauser and his group help seal a deal with industry holds appeal. “It sure takes out a lot of the headache for me as an individual rancher trying to go out and market what we have on our place alone,” says Wooten.

In southwestern Colorado, Art Goodtimes is also exploring options for payment for ecosystem services (PES) projects. A performance poet, environmental activist and San Miguel County commissioner, in no particular order, Goodtimes was inspired while attending a conference on collaborative conservation at Colorado State University in September 2009, where he heard Sally Collins and others speak. “They all were talking about PES projects, but no one was really doing them,” says Goodtimes, who decided his county would be a prime area for a market-based experiment.

San Miguel County voters had approved a bond issue in 2001 to pay landowners to preserve open space. The initiative funded the purchase of development rights from farm properties, which prohibits subdivision of parcels and puts conservation easements in place. Goodtimes considered the county’s support of the program as a signal that his constituents—a mix of liberal-minded skiers and hippies in Telluride and conservative ranch families in much of the rest of San Miguel—would be open to innovative PES projects that would support ranch families and local land stewardship.

With financial support from the county and a grant from Colorado State University’s Center for Collaborative Conservation, Goodtimes has convened a county working group, receiving support from Toombs, Fankhauser and Goldstein, to develop local PES programs. Similar to the Piñon Canyon idea, one project could center on rare plants, identified through the state’s Natural Heritage Program. A second option would build on a past county monitoring project for old-growth wetlands called fens and create a market to protect sensitive wetland areas. Goodtimes and Fankhauser have also spoken about extending a sage-grouse market program to include Gunnison sage-grouse. The distinct and smaller grouse species also received a “warranted but precluded” ruling from the government this past September, so any market initiatives would, again, rely on voluntary actions.

Over the next year, Goodtimes expects to develop at least one of the ideas into a pilot program. Along the way, the working group will have to identify landowners willing to participate and settle on the ecosystem services that could drive a credit program.

“I’ve always been upset that we don’t get a real accounting of what natural resources are really worth in the economy,” Goodtimes says. “I want this to be a model so other people can see if it works.”

Market Demand a Factor for Success

Goodtimes isn’t shy about saying “if” when talking about whether market-based initiatives will work. As a self-proclaimed environmentalist and a member of the Green Party, he has issues with every aspect of the economic valuation of the environment. “But,” he says, “I see it as a great tool for society. If it doesn’t work, the pilot will show that.”

Beyond any philosophical discussion over defining nature in economic terms, payments for ecosystem services have raised some harsh criticism. One of the leading arguments aimed at PES programs and environmental markets is that despite the economic and environmental objectives, the programs facilitate development without actually achieving biodiversity conservation.

Critics argue that ecosystem services make for complicated commodities that are difficult to measure. Programs that aim for “no net loss” of wetlands or wildlife habitat might look good on paper, but can still fail to positively impact species populations or water quality measures.

“One of my big concerns with these markets is that the wrong people will get paid. Let’s do this so money doesn’t just go to investors, but to people on the land.” – Sally Collins

And while Partners for Western Conservation’s concept of paying private landowners for habitat improvements on their property could certainly benefit wildlife, Bart Miller of Western Resource Advocates in Boulder questions whether private land is the place to achieve the most impact. “Land that has been disturbed or managed heavily does have habitat value, but it is not pristine,” he contends. “It doesn’t have the full suite or composite of habitat for a broader range of species.”  The most important thing, to the extent there is payment, he believes, is to target the most bang for the buck. “If there’s potential for greater benefit on public lands, then it makes more sense to go there.”

To add some certainty to environmental markets, proponents also need to pay more attention to the demand from would-be buyers, says Stephanie Gripne, who directs the Initiative for Sustainable Development at the University of Colorado’s Leeds School of Business. “We’re flooding the market with products when we haven’t figured out if people want to buy them yet.”

After previously working at a green private-equity fund, Gripne is now developing several market initiatives through her position at the University of Colorado, including programs for carbon mitigation and water resources protection. But instead of building markets around the eager potential sellers ready to peddle their properties’ ecosystem services, she says supporters need to analyze what is driving corporations and others’ demand, whether it’s social responsibility, branding and marketing, regulatory compliance or pre-compliance. “I’m cautiously optimistic in this phase, but I feel like if we don’t get some big successes in the next few years, people will abandon it,” Gripne says. “But will we be abandoning it because of poor execution or because there really are no markets?”

Delivering on ecological and financial assurances also remains a grand challenge for PES initiatives, especially as Wall Street investment firms and banks are tuning in to the potential of ecosystem services. “One of my big concerns with these markets is that the wrong people will get paid,” says Sally Collins. “Let’s do this so money doesn’t just go to investors, but to people on the land.”

That should be the power of environmental markets, supporters say. By building a relationship between business and conservation, between the demand for and the supply of ecosystem services, market programs connect natural and human communities and pass on the financial benefits of functioning natural systems to the people who are preserving and restoring them.  “This puts people at the center of the ecosystem,” Collins adds.

Beyond Government Responsibility

When it comes to shared resources—particularly those we associate with public lands, such as biodiversity or water quality—our tendency is to look to the government for their protection. But through market-based projects, the private sector is investing itself in these matters. Neither developers nor landowners can look at the environment strictly as a government regulatory issue if they are charged with recovering an endangered species, maintaining watershed flows or canceling out carbon emissions. This is the philosophical shift that Fankhauser envisions, and he’s not alone in imagining how ecosystem services could reset the rural landscape across Colorado and the United States.

When Collins headed the USDA Office of Environmental Markets, the agency began promoting the “Farm of the Future,” a concept of how working landscapes of farmers and ranchers can build their livelihoods around agricultural production and ecosystem services. In addition to crops or livestock, rural landowners can collect their income through biodiversity credits, watershed services, wetlands mitigation, certified sustainable timber and carbon sequestration. “It’s a big cultural change,” says Collins. “I think we’re going to draw a lot of people back into farming and ranching.”

Other regions are already moving in this direction. In Oregon, the Willamette Partnership began as a watershed restoration task force and has since developed strategies focused on ecosystem services and market-based solutions. In 2009, the partnership created a credit accounting system with “currencies” in water quality, salmon habitat, upland prairie and wetlands. Each market is connected to a regulatory law. The framework is a major step toward building a protocol for how credits translate into on-the-ground restoration, and participants see the system as the beginning of a functioning ecosystem services market operating across Oregon.

Similar aspirations have Fankhauser, Goodtimes, ranchers and environmentalists logging hours to start payment for ecosystem services programs and markets all over Colorado. But the Farm of the Future and the proliferation of environmental markets aren’t going to materialize overnight.

Fankhauser is frustrated they can’t move faster, but he also knows what’s at stake. Colorado loses about 690 acres of agricultural land and open space every day—roughly a family ranch or farm disappearing from the state daily. By 2022, the state is projected to lose another 3.1 million acres of agricultural land to development. Existing programs through the federal Farm Bill and the state lottery-funded Great Outdoors Colorado provide financial support for open space and wildlife habitat protection, but the Colorado Conservation Trust estimates a $1 billion funding gap to slow the rate of land conversion in the state.

“The horse is already out of the barn. The market is making these decisions already,” says Collins, “but the market doesn’t control us. We control it.”