The Services and Function of Nature Markets

Ralph Chami

CEO & Co-founder: Blue Green Future

In this video, Ralph explores the shortcomings of our current economic model, emphasising its environmental impact and the impending threat to biodiversity. He introduces the concept of nature markets, innovative tools that assign monetary value to nature's services, creating a vital link between ecological priorities and economic incentives. Breaking down the structure of nature markets into categories such as 'Intrinsic,' 'Credit,' 'Asset,' and 'Derivative' markets, he further reveals their staggering current worth of $9.8 trillion, equivalent to 11% of the global GDP.

Sector and Region Transition

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The Services and Function of Nature Markets

11 mins 15 secs

Key learning objectives:

Understand the limitations of the current growth system
Understand the concept of nature markets and their structure
Outline the current state of nature markets as well as their potential

Overview:

Our current growth-focused economic model often overlooks the repercussions on our environment, leading to issues like potential species extinction. To counter this, nature markets are gaining traction, serving as tools to assign a monetary worth to the irreplaceable services nature offers, creating a connection between ecological priorities and economic incentives. These markets originate from identifying and appreciating 'ecosystem services', ranging from tangible benefits like carbon absorption by trees to intangible ones like mood-boosting landscapes. Transitioning to mature markets requires a quantification of these services. Nature markets manifest in several forms, encompassing 'Intrinsic' markets, 'Credit' markets aimed at conservation incentives, and the more intricate 'Asset' and 'Derivative' markets. By 2023, their influence cannot be ignored, with nature markets achieving a staggering value of $9.8 trillion. This underscores the untapped economic reservoir embedded in conserving and appreciating our natural environment.

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Summary

What are the limitations of our current economic system?

Our current economic system is criticised for its focus on unrestricted growth, prioritising the production and consumption of goods and services while often disregarding the detrimental impacts on the environment. This disregard has led to irrevocable ecological damage, exacerbated climate change, and now threatens the extinction of a vast number of species. The Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services has highlighted the dire consequences of these activities, underscoring the need for an urgent reassessment of how nature is valued within the economic paradigm.

What types and structures do nature markets take?

Nature markets have been envisaged to address the undervaluation of nature in traditional economic systems by monetising ecosystem services, which are classified into four main types. 'Regulating' services encompass natural processes like carbon sequestration by forests and pollination by bees. 'Provisioning' services refer to tangible outputs such as crops, timber, and water. 'Cultural' services include non-material benefits like recreational inspiration and spiritual enrichment from natural environments. Lastly, 'supporting' services are fundamental processes like soil formation and nutrient cycling that underpin other services.

Within this framework, nature markets are structured into four types: 'Intrinsic' markets for direct natural products; 'Credit' markets for conservation efforts; 'Asset' markets for rights to ecosystem services; and 'Derivative' markets for financial products tied to the value of these services. This classification allows for a systematic approach to valuing and trading the multifaceted benefits nature provides, aiming to foster conservation and sustainable management through economic incentives.

What is the current state of nature markets?

The current valuation of nature markets suggests a significant economic breakthrough, with an estimated worth of over $9.8 trillion. This figure, which constitutes about 11% of the global GDP, reflects the growing recognition of the economic utility of ecosystem services. Despite being in nascent stages, nature markets are making strides in altering traditional economic perspectives, advocating for sustainable resource utilisation, and contributing meaningfully to combating climate change and biodiversity loss. The emerging market dynamics underscore the interdependence of economic health and ecological preservation.

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Ralph Chami

Ralph Chami, a 32-year-old financial economist, has been at the International Monetary Fund for 23 years and is currently the Assistant Director of the Institute for Capacity Development. He founded Blue Green Future, a strategy to combat climate change and biodiversity loss, focusing on species like whales and elephants as allies. Ralph has experience working with low-income and fragile states, providing policy advice, training, and capacity development on macro-financial economic policy. His expertise includes remittances, inclusive growth, financial markets development, banking regulation, and valuing natural capital.

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