Florian Hartig

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Conserving biodiversity with tradable permits under changing conservation costs and habitat restoration time lags

Martin Drechsler & Florian Hartig

Ecological Economics, 70(3), 533–541 (2011)
Cite this
@article{drechsler2011conserving,
  author = {Martin Drechsler and Florian Hartig},
  title = {Conserving biodiversity with tradable permits under changing conservation costs and habitat restoration time lags},
  journal = {Ecological Economics},
  volume = {70},
  number = {3},
  pages = {533--541},
  year = {2011},
  doi = {10.1016/j.ecolecon.2010.10.004},
}

DOI: 10.1016/j.ecolecon.2010.10.004
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Abstract

Tradable permits are a common environmental policy instrument that has recently been applied also to the conservation of biodiversity. Biodiversity conservation differs in many respects to the classical applications of tradable permits like emissions control. One particularity is that, even if the permit system maintains a constant total amount of species habitat, habitat turnover (the destruction of a habitat and restoration elsewhere) affects the ecosystem. Another particularity is that the restoration of habitats often takes much time, leading to time lags between the initiation of restoration activities and the time when restored habitat is available for trading. We use an agent-based model of a tradable permit market to study the influence of heterogeneous and dynamic conservation costs and habitat restoration time lags on key variables of the market, such as the costs incurred to the market participants and the amount of habitat turnover. Our results show that there may be trade-offs between these key variables. We also find that restoration time lags can lead to fluctuations in permit prices that reduce the efficiency of the permit market. We conclude that temporal lags deserve a careful analysis when implementing tradable permit systems for the preservation of natural habitats and biodiversity.

What the paper shows and why it matters

(AI-generated)

“Habitat banking” uses tradable permits to protect habitat: destroying a habitat requires a permit, gained by restoring equal habitat elsewhere or bought. For biodiversity, timing matters much more than for greenhouse gases. Each trade destroys a habitat patch and its local populations, and this turnover of habitat can harm species even when the total amount of habitat stays constant. Restoring habitat also takes years, in some cases centuries, so a permit appears long after the decision to restore. Earlier studies of permit markets, mostly on carbon trading, reasonably examined banking and borrowing, but did not consider that changes in management take time and cost money. The paper asks how restoration costs and delays shape habitat permit markets.

The paper argues that in tradable-permit markets for habitat conservation, restoration costs and time lags shape how the market behaves and deserve careful analysis when such markets are designed. It uses an agent-based model with 1000 landowners, one patch each, whose forgone profits (opportunity costs) differ between patches and fluctuate over time; owners decide on the current permit price and costs. With instant restoration the market is stable, and there is a trade-off: dearer restoration lowers turnover, but also raises the total opportunity cost, because restoration then no longer happens only on the sites where forgone profit is lowest. With delayed restoration, owners restore too much, because the price at decision time no longer holds when the habitat is ready. Permits are then periodically oversupplied, and prices, turnover and costs fluctuate like the classic pork cycle, where producers react to today’s price and cause tomorrow’s glut; this raises average costs. With delay, by contrast, dearer restoration can lower the total opportunity cost, because it curbs the excess. In the base setting, total cost is highest at a one-period delay.

The results suggest that restoration time lags can make a permit scheme less efficient than with instant restoration, and that with instant restoration low turnover and low opportunity cost can conflict. Because restoration cost affects turnover, the paper suggests a tax on restoration as a possible instrument to steer turnover, higher for species that react more strongly to turnover, and to dampen excess restoration. It names its limits: owners react to current prices only, permits are not banked and space is ignored.