Natural capital market design

Renewable natural capital—terrestrial and marine ecosystems, fisheries, biodiversity, and fresh water—is in decline around the world, affecting the livelihoods of millions of people. Natural capital market design uses economic theory and analysis to develop practical solutions for maintaining, restoring, and improving natural capital. Many successful natural capital marketplaces (e.g. for emissions reduction, fish harvesting, and wetland restoration) focus on efficient trading of property rights. But many other natural capital markets (e.g. for carbon sequestration offsets, water quality, and water rights) are characterized by heterogeneity and high transaction costs that make trading difficult. We argue that, in order to fix many natural capital market failures, policy-makers should instead pay more attention to the allocation of property rights during marketplace design: this is particularly crucial in many markets for ecosystem services (e.g. biodiversity conservation and watershed protection) which exhibit strong ecological complementarities. We propose several promising designs for natural capital marketplaces which could fairly and efficiently allocate and redistribute property rights over different ecosystems.