Subnational Nature Offset Markets. Balancing National and Local Public Goods

Cathrine Hagem ()
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Cathrine Hagem: Statistics Norway, http://www.ssb.no/en/forskning/ansatte

Discussion Papers from Statistics Norway, Research Department

Abstract: Environmental restoration as a compensatory mechanism for the development of previously undisturbed land can play a significant role in fulfilling nature conservation objectives. Numerous local authorities have adopted spatial planning frameworks that incorporate nature targets, such as “no net loss” (NNL) often operationalized through net area or net biodiversity principles (i.e., area neutrality, or no net loss in biodiversity). This study employs a simplified analytical economic model to evaluate the welfare implications of both local offset schemes and coordinated offset strategies across adjacent regions, accounting for ecosystem services that benefit the local community. We show that a standalone offset market generally fails to achieve the first-best outcome as an offset market designed to ensure NNL in developed land will typically diverge from the welfare-optimal level of net development. However, an advantage of the offset market is that restoration can be achieved without any public transfers. Interregional cooperation in achieving NNL targets can improve overall welfare compared to isolated regional strategies. If the target is set to NNL, the offset market ensures that this target is achieved in a cost-effective manner as marginal cost of restoration equals marginal profit from development. However, an offset markets targeting net gain or net loss result in inefficient levels of both development and restoration. Furthermore, we suggest that implementing a permit system based on environmental value metrics rather than strict area-based neutrality (ambient permits), may mitigate some of the inefficiencies inherent in area neutrality frameworks.

Keywords: Environmental restoration; Nature degradation; Offset markets; Public goods; Biodiversity targets; Ambient permit (search for similar items in EconPapers)
JEL-codes: D47 D61 Q26 Q51 Q57 Q58 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2025-12
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Persistent link: https://EconPapers.repec.org/RePEc:ssb:dispap:1029

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