Biodiversity: A new frontier for the tokenized market
Original Author: Toucan Protocol
Original title: Biodiversity: The next frontier for tokenized markets
In this article, kristin McDonald delves into the role of biodiversity in the fight against climate change and how web3 may change future markets.
When it comes to environmental issues, public discourse generally revolves around reducing emissions and sequestering carbon, so much so that for many, "climate change" and environmental crisis are synonymous.
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1. The importance of biodiversity
Biodiversity underpins nearly every major ecosystem on Earth, so it is vital to the livelihoods and well-being of our species and species.
The Convention on Biological Diversity (CBD) defines biological diversity as: the diversity of living organisms from all sources including, in addition to terrestrial, marine and other aquatic ecosystems and the ecological complexes of which they are part, species Diversity within, between species and in ecosystems.
Higher numbers and densities of species increase the productivity of ecosystems because extensive interspecies competition and the resulting niche complementarity can maximize the productive capacity of limited potential resources.
In forests, plants with varying levels of light tolerance enable ecosystems to maximize primary productivity from a given amount of sunlight.
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Source: ICMM
Biodiversity not only increases productivity and supports the functioning of many ecosystems, it is also critical to helping ecosystems remain resilient and adaptable, as variability increases the vulnerability of ecosystems (or species) to threats such as disease and changing environmental conditions. Resistance (think of diseases in monocultured versus polycultured fields, or the ability of their ecosystems to survive climate change if their flora face the same or different temperature demands).
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2. Biodiversity as a commodity
Of course, these biodiversity-supported ecosystems add real (and economic) value to our societies. Biodiversity alone is estimated to be worth US$ 490 billion per year in maintaining global commercial forest productivity, while maintaining pollinator diversity can protect up to US$ 577 billion in annual crop yields.
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Examples of global natural declines, declines in biodiversity and their direct and indirect drivers. Source: IPBES
The enormous loss of biodiversity is the result of the current global economy's inability to internalize the value created by these ecosystem services.
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3. Current state of the biodiversity market
Addressing the biodiversity crisis means internalizing the true costs of these activities into our existing economic systems through regulatory or market-based instruments that incentivize behaviors that are more in the public interest. There are many existing solutions that try to do this.
Bioprospecting (the process by which pharmaceutical companies buy and explore certain ecosystems for value) and ecotourism are both multibillion-dollar industries that are trying to privatize some of the benefits associated with biodiversity.
Many companies also invest voluntarily in biodiversity conservation or restoration to attract green-conscious clients or, in the case of extractive industries, to forge partnerships with regulatory stakeholders, local communities and activist groups, an approach that has spawned A small but growing voluntary market for biodiversity offsets is roughly estimated at less than $100 million (compared with about $1.5 billion for the voluntary carbon market). In such voluntary offsets, regulatory requirements are very limited, and there is rarely any external verification channel to verify that the offset conditions are met, beyond the rules agreed between the developer and the offset provider.
Yet today's greatest impacts on biodiversity are almost entirely regulatory-driven. At least 37 countries require some form of biodiversity compensation, and in the US there are the Clean Water Act and the Endangered Species Act requiring compensatory mitigation, meaning any unavoidable damage to protected species is covered elsewhere offset by compensatory actions.
In addition to national-level regulation, there are some international organizations and groups working to set standards or provide guidance for biodiversity conservation and compensation, including the International Finance Corporation (IFC) and the World Bank, as well as the International Union for Conservation of Nature (IUCN), etc. . Together, these efforts create an estimated $10 billion market for compliance-driven biodiversity offsets.
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Biodiversity level. Source: World Bank Organization
Creating or implementing a biodiversity offset requires the collaboration of many stakeholders who may vary widely depending on the type of biodiversity offset, whether it is compliant or voluntary, and the region in which it is located. Often companies interested in buying offsets (because they want to or because an EIA shows they have to) engage third-party consultants, who in turn rely on private agencies to identify willing landowners, conduct or oversee restoration actions, and then negotiate with the government Agencies verify these credits. Compensation can range from as broad as setting aside a certain area of land for conservation to as specific as taking direct action to increase the population of a particular species.
The Dutch government has asked the Egmond aan Zee offshore wind farm to take biodiversity-offsetting actions, which include expanding a nearby bird sanctuary and restoring wetland ecosystems, among several other requirements.
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Ongoing NNF Bird Survey June 2016
Given the high cost of developing one-off offsets on a project-by-project basis, there has been an increasing turn to integrated biodiversity offset systems that seek to reduce implementation costs. These include everything from mitigation banks (which often “collect” compensation from privately owned conservation projects, which are then sold to project developers through brokers) or donations to existing biodiversity projects. Since purchased offsets are often bespoke, these approaches are most commonly used in voluntary markets where offset requirements are less stringent.
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4. Future Biodiversity Market
The impact of accelerated loss of biodiversity values has become more apparent over time, with regulatory and public pressure for its conservation and restoration increasing.
Many in the industry are already seeing signs of an inflection point in the voluntary biodiversity market, reminiscent of the evolution of the voluntary carbon market (which grew by 190% in 2021 and is expected to reach around $50 billion by 2030. Nestlé Companies like (Nestle), Salesforce and Bayer are moving beyond positive net-zero commitments to nature and are starting to enter a relatively nascent biodiversity market and trying to figure out how to deliver on those commitments, creating new demand in the industry and momentum.
Responding to this need in an effective manner will require us to increasingly consider biodiversity offsets as scalable commoditized assets. This implies an aggregated biodiversity offset system where offsets can be planned and implemented at scale and then 'sold' to project developers in an alternative way.
This will allow us to significantly reduce the transaction costs and logistical challenges of designing and implementing new offsets, which in turn increases buyer participation in the market and drives funding growth. This will also allow us to apply clearer standards as they will be on a large scale rather than a one-off. This will improve the overall quality and effectiveness of the offsets generated and again further increase engagement. Finally, an integrated approach will allow us to respond more effectively to the crisis by considering cumulative demand and its impact, and corresponding pricing offsets.
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5. On-chain biodiversity
In the past 10 years, there has been a lot of innovation in carbon markets, such as the ReFi movement and the emergence of on-chain markets, and we are now seeing more signs of similar voluntary biodiversity markets starting to emerge, which shows that leveraging existing Carbon infrastructure to accelerate this trend makes sense.
Biodiversity is already tradable in our carbon markets in the sense that voluntary carbon offsets with biodiversity as a common good represent the highest amount of offsets sold, and relative to offsets without biodiversity , received a premium. . It is not hard to imagine a world in which biodiversity co-benefits are measured, valued and sold separately from associated carbon offsets. In fact, doing so could be a net benefit to the carbon market, as it would ensure that carbon offsets are only valued for the quality of carbon sequestered, while the biodiversity component would benefit from adherence to verification standards rather than ethereal strings attached, And allow the project to attract more capital.
While building this biodiversity marketplace on-chain, players like Toucan bring the same level of scalability, trust, and transparency to carbon markets. Higher liquidity will ensure greater participation, and reduced trading friction will create greater market access for suppliers and buyers.
This feature is especially important for biodiversity because, unlike carbon, biodiversity is hyperlocal (while a ton of carbon in Brazil and a ton of carbon in Germany are fungible, biodiversity is not) . This irreplaceability means that to have real impact requires a system that can engage millions of small and diverse stakeholders, which is the strength of web3.
Biodiversity markets are less mature than carbon markets, meaning ReFi pioneers will play a larger role in setting standards and creating market infrastructure. This could give us a unique opportunity to move away from the fragmentation and lack of standards in the carbon market and potentially create a more fluid, flexible and resilient ecosystem.
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6. The bottleneck of scale
Achieving this goal means breaking through bottlenecks, and creating effective tradable biodiversity offsets requires us to create market systems that can internalize the complexity of nature. Biodiversity offsets suffer from the same additionality and permanence issues as carbon offsets, but biodiversity is not as fungible or easily measured and defined as carbon, leading to new concerns about equivalence (whether offsets create equal or better biodiversity is losing value).
The biodiversity, ecological function, species, and genetics of ecosystems all represent different kinds of irreplaceable ecological value, and biologically important issues such as habitat fragmentation and isolation must be taken into account when assessing quality.
Biodiversity offsets also typically involve more uncertainty about implementation risks, measurability of impacts, and temporal variability than carbon offsets. Creating a liquid market requires us to define criteria for measuring and monitoring all these different characteristics in order to trade them in a reliable and scalable manner.
Of course, in a market where buyers may just be trying to demonstrate a net positive impact, getting all of these characteristics exactly right isn't important, making the voluntary market a great place to start. But even in the voluntary market, equivalent biodiversity offsets purchased by companies seeking to offset specific impacts make up a significant portion of the market. To accommodate this, we need to account for many of these nuances and definitions, and use them to assign offsets into categories that are "similar enough" for fungibility, which will create fragmentation and reduce liquidity.
Biodiversity is not only more complex than carbon, but also harder to measure. The MRV of biodiversity relies in part on repeated, expensive, and labor-intensive surveys and complex data collection and statistical analysis to establish baselines and demonstrate demonstrable results. This process does not scale well and creates a supply bottleneck that will quickly impede a fluid biodiversity market.
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7. The cusp market
While scaling remains a challenge, as demand increases so does the drive to innovate, we are already starting to see the first signs of ecosystems and supply chains coming together that could ultimately support more fluid biodiversity market.
On the MRV side, a new generation of researchers, technologists and entrepreneurs are working to find ways to expand biodiversity data collection. Salo uses precise satellite imagery, remote sensing, and advanced ML to assess high-level ecosystem health in order to better direct resources on the ground. Pivotal monitors plant and animal life on the ground in detail using drones, acoustic and image sensors, then applies ML and statistical models to estimate biodiversity levels, guided by expert ecologists.
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Source: Pivot Earth
Just as biodiversity markets can leverage the infrastructure of on-chain carbon markets, so too can recent carbon MRV innovations create synergies. Companies like TreeSwift are using drones, lidar and computer vision to better measure forestry biomass and carbon sequestration, and may also evolve to measure more complex biodiversity data. Gaia equips foresters with tools to measure carbon data, and Open Forest Protocol has a network of validators to validate forestry information — both networks could, in theory, be used to collect and record information about biodiversity, or could provide A template to enable local communities to also participate in and benefit from biodiversity MRV.
The revenue stream and increase in land value provided by carbon offsets has also led to a substantial increase in project developers and investors looking to regenerate land on a large scale (players such as Farm and Cultivo). This means that there are new suppliers, often technologically advanced decision makers, who are willing to experiment and implement new technologies and enter the market to offset biodiversity, thereby creating unique opportunities and initial supply sources for new markets. For many of these actors, biodiversity offsets represent a higher-quality source of income than carbon offsets, because increasing levels of biodiversity almost always have a net positive impact on their land, whereas carbon offsets do not. Not always. Meanwhile, Cecil and Vibrant Planet are building tools that can help landowners and project developers better manage their natural assets, including more standardized and automated data collection to help scale up the implementation of nature positive programs.
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8. Looking to the future
Our environment contains millions of complex entities, and finding ways to sustain it requires us to step back and take a systems approach to management. Going forward, as we build new on-chain facilities for carbon markets, we can focus on building systems that more holistically value ecological health.
Web3 is well suited to address this unique complexity, while being fluid enough to continually adapt to rapidly growing tools and evolving scientific frameworks. Now, by being active in the market, we can play a role in building out the infrastructure and standardizing and accelerating the current momentum. Over time, the initial on-chain carbon market is likely to become the infrastructure for measuring, evaluating, and incentivizing the healthy regeneration of the planet's ecology.
