Andrew Ireland l Palladium - Jun 05 2023
Closing the Finance Gap for Nature-Based Solutions in the United States – A Response

In November 2022, the Biden Administration released its official “Nature-Based Solutions Roadmap” as part of a suite of new policy announcements at COP27. The Roadmap lays out five main categories of action through which it will scale and mainstream Nature-based solutions (NbS) throughout the country. Through these initiatives, the White House aims to ensure that the billions of dollars earmarked for forests, agricultural lands, and wetlands in the recent infrastructure law and Inflation Reduction Act can be deployed efficiently and effectively.

One pillar of the strategy is to “Unlock Funding” for NbS, not only through government policies and actions, but also from the private sector. At the global level, the annual financing gap for NbS is about US$230 billion per year, and is expected to increase to US$330 billion a year by 2030. Any hope of bridging this gap will require private companies and financial institutions to embrace NbS as viable and attractive investment opportunities.

The White House’s Roadmap acknowledges the importance of private sector investment, and proposes several solutions: innovation challenges, low-premium insurance, green banks, low-interest rate loans, and embedding NbS into available benefit-cost analysis tools.

These actions will all certainly help engage the private sector, increase their awareness of NbS as an investment opportunity, and help them define and evaluate the various costs and benefits of each kind of NbS. “However, the U.S. should take this opportunity to tackle some of the more systemic obstacles preventing private sector NbS investment from reaching its full potential,” notes Andrew Sutherland, Palladium Director of Nature-Based Solutions. “These barriers include continued funding for activities that degrade nature, the lack of stable markets for carbon and other ecosystem services, and payments that reward inputs rather than concrete climate outcomes.”

Reducing Public Financing of Unsustainable Land Use

According to the UN Environmental Programme, “public financial support for nature-negative activities range from US$500 billion to US$1.1 trillion per year, three to seven times larger than current investments in NbS”.

What exactly does that mean? NbS opportunities are not yet operating on a level playing field in terms of competing with traditional land use approaches, such as conventional large-scale agriculture or pasture for cattle, because the latter are subsidised at a much greater scale.

A good starting point would be to analyse annual appropriations bills to identify the current scale of funding that promotes nature loss in the U.S. Sutherland recommends reviewing the use of agricultural subsidies that pay to keep land productive, especially marginal land, as this disincentivises NbS even in areas where that might be the best use of the land. The tax code can similarly tilt the scales against NbS.

“In the United Kingdom, for example, agricultural land use receives a variety of tax benefits that NbS investments do not, discouraging transitioning from the former to the latter,” explains Sutherland. “The U.S. should analyse its tax code for similar impacts and propose reforms to policies that act against NbS investments.”

Creating an Enabling Environment For NbS Markets

“Many of the benefits that nature-based solutions provide fall outside of conventional economic accounting systems and methods. As these benefits are not openly traded in a market, economic systems and tools often miss their significance, biasing decisions in favour of marketed options,” notes the Roadmap. This is also true of many negative environmental impacts: they do not pose a direct cost to the business generating them, so there is little incentive to mitigate them beyond the regulatory minimum. So while voluntary markets for carbon credits and biodiversity credits do exist, current prices in these markets are generally too low to fully reverse the status quo.

"The U.S. should take this opportunity to tackle some of the more systemic obstacles preventing private sector NbS investment from reaching its full potential."

“To help level the playing field, the government must create the economic frameworks that push companies to incorporate these costs and benefits into their financial decision-making,” adds Sutherland. “This could include putting a price on carbon via a carbon tax or cap-and-trade systems, and setting mandates like the UK’s “biodiversity net gain” rule.”

While a divided Congress will make any federal legislative action unlikely, the administration could help support incorporation of NbS into such initiatives at the state or regional level, including cap-and-trade systems in California, Oregon, and Washington state as well as the Regional Greenhouse Gas Initiative on the East Coast. On the international stage, the administration could promote efforts to set a global price floor for carbon, to address concerns that national carbon prices make it harder to compete in the world economy.

In the meantime, the world must rely on voluntary markets, which have their own scaling challenges. For example, in many countries, carbon credits cannot be sold until the projects are complete. This hampers the development of NbS projects, which require high up-front costs to design and install.

In the UK, however, NbS developers can sell “provisional” woodland carbon credits based on expected sequestration, generating early revenues to help recoup those initial investments more quickly. Palladium and the UK National Parks have partnered to establish the Revere platform to help landowners take advantage of this progressive market opportunity, along with growing domestic markets for peatland carbon credits and biodiversity credits. The Biden Administration can help import these kinds of innovations from abroad and support subnational markets to integrate them into existing market mechanisms.

The next step, Sutherland says, is to “enable revenue stacking of ecosystem services so that nature stewardship can truly become a competitive land use strategy vis-à-vis agriculture.” A portion of the Roadmap’s proposed challenge funds could go towards supporting municipalities, counties, or states to develop market rules for water quality, biodiversity, soil retention, and any other ecosystem benefits as well.

Improving How Public Funds for NbS are Administered

“While working overtime to reduce counterproductive subsidies and incorporate environmental costs and benefits into traditional business models, the U.S. should still dedicate funds to help jumpstart NbS in the country, given the urgency of climate change," Sutherland recommends.

The Roadmap acknowledges that public funding can distort markets, and proposes “to evaluate existing subsidies and provide guidance on how to anticipate whether subsidies will be effective at crowding in private NbS financing.” Sutherland notes that public funding can best be used to create certainty in the market, such as by seed-funding innovation, providing guaranteed offtake of credits and other services, or contributing to payments for environmental outcomes. Such blended finance approaches will help ensure that public funding does not displace private investment.

In addition, the Roadmap proposes making access to funding simpler and easier, including by increasing coordination across agencies, and streamlining and standardizing application processes. One proposal is to coordinate funding “around geographies or climate risks, like drought, flooding, wildfire, and urban heat”. Revere has recommended this approach in the UK as well, finding that “ one-stop shop” NbS funding facilities at a landscape level, with standard requirements, would lower the barriers to project development.

The Roadmap also mentions that outreach and technical assistance to communities will increase use of available funds. “Revere plays this role in the UK, and has developed regenerative business models for landowners and managers while also partnering with funders and offtakers including Santander UK, Estée Lauder Companies, Capita, Respira, and Southern Co-op,” adds Sutherland. “Similar partnerships between federal agencies and program managers like Palladium could help unlock NbS funding at scale in the United States as well.”

The Biden administration has made clear that nature-based solutions are a core tool in the toolbox in addressing the climate crisis. The challenge now will be to translate all those benefits into terms (financial and otherwise) that landowners, land managers, companies, and investors can understand. Luckily, the U.S. can look to the UK and elsewhere to see what is working so far, and apply those lessons to the forests, farmlands, lakes, grasslands, and coasts that millions of people and species call home.

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