This is a part of the bite-sized series of explainers for biodiversity credits.
The logic of biodiversity credits (BC) is incomplete without understanding the revenue side of the equation. Revenue is based on the multiplication of the price per BC by the total quantity of BCs generated. This short piece seeks to introduce the diverse methodologies employed by different developers to ascertain the number of credits generated and their pricing structures.
In Wallacea Trust’s methodology[1], the quantity of credit generated is translated from the increase of a biodiversity score, which is based on a set of “at least five place-specific ecological indicators” that entails both “ecological structural indicators” and “non-structural indicators”. Examples of structural indicators include canopy coverage rate, kelp occupation rate, and rugosity of reefs; examples of non-structural indicators may include indicator species and their relative abundance. By tracking and comparing the change in scores over time, verifiers calculate the percentage increase of the score, and then derive the quantity of verified and issuable BCs. This methodology determines the issuable quantity of BCs based on ecological factors.
Unlike Wallacea Trust’s methodology, Terrasos’ model[2] predetermines the maximum issuable units of BC for a project site and then sets context-dependent managerial and ecological milestones that, if met, progressively actualize potentially available BCs. Examples of those milestones include completing land acquisition, reaching agreements with owners, replacing artificial and degraded covers with natural covers, and strengthening the ecological connectivity. The maximum quantity is calculated by a multiplication of factors, including the size of the project area, IUCN threatened status of the species, ecosystem connectivity, intervention methods, and timespan—a combination of both ecological factors and management efforts. As the project meets the milestones (both ecological and managerial), proportions of maximum BCs will be verified accordingly and therefore “delivered”, or ready to be sold. In addition to the biodiversity gain, managerial achievements are also factored into the BC quantification.
The South Pole methodology devises a similar formulation, integrating ecological factors such as species richness, and abundance for identified key species with managerial factors such as project area, timespan, and intervention methods to determine the maximum quantity of issuable credits. The South Pole methodology makes additional adjustments to the total available credit quantity based on climate change scenarios[3].
ValueNature’s model also sets a predetermined maximum available pool, but by using an even simpler multiplication: project area and project timespan, both of which are not related to ecological indicators. Instead, ecological-related considerations are reflected in BC pricing, not quantity. To be specific, ValueNature’s pricing has a floating component in addition to a fixed base. The fixed base indicates the cost of management, representing the breakeven baseline at the outset of a project, say $10 / hectare for 10-year conservation. During the project lifetime, as the project achieves biodiversity gain indicated by the Ecosystem Integrity Score[4], the floating component will inflate to reward the actualization of conservation results. The Ecosystem Integrity Score is developed by Single.Earth considers ecosystem structure, function, and composition to ascertain integrity.
ValueNature stands out in its biodiversity credit pricing strategy, as most others employ a fixed pricing strategy based on the breakeven point. Take the South Pole as an example, BC pricing is a reverse calculation to account for the cost of management design, implementation, maintenance, monitoring, and required return, in addition to an accrual for economic incentives for local communities and land managers, as introduced by Liliana Sarmiento from the South Pole[5].
Interestingly, practitioners’ pricing strategies for biodiversity credits, as introduced above, are different from those devised by economists for natural capital. While pricing for BCs in practice is mostly cost-based, economists deploy a different logic to consider the dividend flow (monetized income, such as eco-tourism income), change in species population (implied capital gain), discount rate, and population growth rate of, say, grizzly bears[6]. From an economist’s perspective, setting the price for BC without knowing the value of all its component species seems impossible. Relatedly, this perspective points toward a stacking rather than bundling approach to account for all species in the given project site.
This page reflects the author’s perspective. For further discussion and feedback, please contact Jinsui Song jazzy.song@yale.edu.
[1] https://wallaceatrust.org/wp-content/uploads/2022/12/Biodiversity-credi…
[2] https://en.terrasos.co/_files/ugd/cfa1dc_5af4fd0405c04e4a85c59dc9a3e329…
[3] Personal Communication with Liliana Sarmiento and Santiago Vivero, November 28, 2022
[4] https://www.single.earth/blog/introducing-ecosystem-integrity-index
[5] Personal Communication with Liliana Sarmiento and Santiago Vivero, November 28, 2022
[6] https://media.business-humanrights.org/media/documents/RE_LATAM_final_E…, Pg. 6