Environmental Science
articles by Will Kemp

Markets for ecosystems service provision


According to traditional economics theory, the market is a system through which prices are set according to how much a product costs to produce and how much consumers are willing to pay. However, in this scheme, ecosystem services are considered to be “externalities” and therefore have little or no effect on the market price of a product. This problem is exacerbated by the “public” nature of many ecosystem services (Turner et al 1994). History shows that relying on market forces to preserve biodiversity is ineffective – mainly because environmental destruction does not have an immediate economic effect (Gowdy & McDaniel 1998).

However, market based approaches can be developed which help overcome the environmental limitations of the traditional market economy. Market based incentives, such as auction contracts for conservation, have been used with some success in Australia over the last decade or so. One such program in Victoria was shown to have produced considerably more biodiversity than a fixed price scheme (Pascual & Perrings 2007).

Conserving biodiversity

Biodiversity makes an essential contribution to human wellbeing. It provides economic benefits, such as pollination, pest control, water quality regulation, and soil fertility, as well as cultural benefits (Swinton 2007). However, these “ecosystem services” have traditionally been undervalued and treated as “externalities” when setting a price for the products of primary industries and manufacturing. This neglect has led to a general decline in biodiversity and the degradation of services which are vital for the sustainability of our society (Turner et al 1994).

The main challenge of biodiversity conservation is the fact that biodiversity is mostly a public ‘good’ and the whole of society benefits from conserving it. However, because most land is privately owned, the responsibility for managing it in a way that helps conserve biodiversity falls to the landholders. As such management either costs money or entails the loss of potential earnings, very few landholders take it on voluntarily – and even if they are prepared to do it voluntarily, they may not be able to afford it without financial assistance (Bruner et al 2010).

There are a number of ways to encourage landholders to engage in biodiversity conservation: suasion, regulation, public provisions, and market based schemes. Suasion includes propagation of information, extension, and the development of skills. Regulation includes acts of parliament which govern things like natural resource management and native vegetation. Public provision includes government funded research and the dedication of national parks. Market based approaches include incentives, offsets and market improvements (Pascual & Perrings 2007, O’Connor 2014).

Payment for ecosystem services

Historically, protecting the natural environment was considered to be the responsibility of governments and mainly took the form of setting aside parcels of land as protected areas. Approximately 60,000 protected areas have been established worldwide, but creating and managing these reserves has become less sustainable in recent years due to funding cutbacks. Because of this, governments and environmental organisations have begun to look elsewhere for ways of conserving biodiversity (Scherr et al 2010).

Many important areas of biodiversity are found in agricultural landscapes, outside the limits of protected areas, and their conservation requires a different approach. Biodiversity is best viewed as the property of a landscape which includes both agricultural land and protected areas. Conservation of biodiversity in an agricultural context may be achieved cheaply and effectively if landholders can be persuaded to participate (Bruner et al 2010, Scherr et al 2010).

Regulation is one option for such persuasion, but it is not popular with landholders or politicians. Landholders usually need to maximise the profitability of their land and conserving biodiversity often reduces their income – particularly in the short term. Offering landholders financial incentives to protect biodiversity, which competes with income from conflicting land uses, can provide a solution to this problem (Bruner et al 2010, Scherr et al 2010).

Such schemes, known as “payments for ecosystem services” (PES), come in a variety of forms. Tax incentives and subsidies are two PES methods which have been tried. However the purchasers of the services do not have knowledge of the cost of its provision, and such information asymmetries can make these approaches inefficient and ineffective. Market based schemes such as reverse auctions or competitive tenders can overcome the information assymetries and conserve biodiversity more effectively and cheaply (Pascual & Perrings 2007, OECD 2010, Reeson et al 2011).

Market based incentives

BushBids, in South Australia, is a biodiversity conservation incentive scheme which operates through a competitive tender process. It allowed landholders to set their own prices for protecting and improving biodiversity on their property. Landholders determined which management services they would need to provide to achieve a particular aim and how much they would need to charge to provide that service. Bids from all participating landholders were compared and contracts were awarded to those landholders offering the best value for money (DEH 2006).

BushBids ran two tender rounds, in 2005 and 2006, with sucessful bidders contracted to manage the biodiversity of 2256 hectares in 70 sites, on 39 properties, for a period of ten years. Management processes contracted included grazing reduction, track closure, revegetation, weed and feral animal control. The objectives of the BushBids contracts are to protect and enhance biodiversity, improve native vegetation, increase the area of actively managed native vegetation, and increase the area of long term protected native vegetation. One endangered species, one vulnerable species, and 17 rare plant species are protected by this program (O’Connor et al 2008, DEWNR 2013).


Because biodiversity is essential for the wellbeing and survival of our society, its conservation is of vital importance (Hanley et al 2009). The traditional approach of creating protected areas has mostly reached its limits and governments are looking for new and more effective methods of ecosystem protection (Scherr et al 2010). Competitive tendering for biodiversity management by private landholders offers a cost effective means of achieving these aims (Reeson et al 2011). The South Australian BushBids scheme has used a reverse auction system to conserve and improve the biodiversity of 2256 hectares of native vegetation, protecting endangered, vulnerable, and rare plant species in the process (O’Connor et al 2008).


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O’Connor P, Morgan A, and Bond, A 2008, BushBids: Biodiversity Stewardship in the Eastern Mount Lofty Ranges, Murray-Darling Basin Natural Resources Management Board, Murray Bridge, SA. Retrieved from http://www.naturalresources.sa.gov.au/files/e34a2322-2269-4918-8de3-a1b300fc2384/emlr-bushbids-rep.pdf on 1/9/14.

O’Connor, P 2014, ‘Markets for ecosystems service provision: concepts, prices and limitations’, seminar presented at the University of Adelaide, 20th August 2014.

Pascual, U and Perrings, C 2007, ‘Developing incentives and economic mechanisms for in situ biodiversity conservation in agricultural landscapes’. Agriculture, Ecosystems & Environment, 121, 3, 256-268.

Reeson, AF, Rodriguez, LC, Whitten, SM, Williams, K, Nolles, K, Windle, J, and Rolfe, J 2011, ‘Adapting auctions for the provision of ecosystem services at the landscape scale’, Ecological Economics, 70, 9, 1621-1627.

Scherr, S, Milder, JC, and Shames, S 2010, ‘Paying for Biodiversity Conservation in Agricultural Landscapes’, in S Lockie and D Carpenter (eds) Agriculture, biodiversity and markets: Livelihoods and agroecology in comparative perspective, Earthscan, London, UK.

Swinton, SM, Lupi, F, Robertson, GP, and Hamilton, SK 2007, ‘Ecosystem services and agriculture: cultivating agricultural ecosystems for diverse benefits’, Ecological economics, 64, 2, 245-252.

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