As economists and ecologists seek to build intellectual bridges between their disciplines, economic incentives are already being used to protect the natural environment and the ‘services’ it provides to society. These incentives take many forms, from the tourist dollar to tradable pollution permits. All are becoming more effective as natural amenities become scarce — and therefore more highly prized.

Perhaps the most straightforward example of ‘doing well by doing good’ is ‘ecotourism’. For example, the South African company ConsCorp (Conservation Corporation) has agreed with local landowners to restore several hundred thousand hectares of farmland to their original state and to stock the land with animals. Land that yielded $25 to $70 per hectare a year for ranching or farming now yields $200 to $300. Visitors pay a premium to see (and hunt) lions and leopards, so there is a great incentive to maintain the ecosystem needed to support these pinnacles of the food chain.

Clean water cheaply

Conservation can also lead to the avoidance of costs that would otherwise be incurred. For example, protecting watersheds from development is a relatively cheap way to provide clean, abundant water for downstream users.

New York City avoided paying more than $6 billion for a water filtration plant (plus running costs of about $300 million a year) by investing $1-$1.5 billion in restoring the soil ecosystems of the Catskill mountains watershed (see Nature 391, 629; 630; 1998). By buying land in the Catskills and restricting its use, the city government was able to preserve the water filtration capabilities of the watershed, instead of replacing this ‘service’ with a more expensive, engineered solution.

Extended globally, there could be an economic justification for conserving up to 13 per cent of the world's land area for its watershed value to urban water supplies, according to Walter Reid, a visiting fellow at the World Resources Institute in Washington DC.

In these examples, an economic incentive exists for preserving an ecosystem because it supports goods or services with a clear market value. These goods and services have the property of ‘excludability’ — it is possible to exclude people from consuming them, and so make people pay for such consumption.

Most of the services provided to humans by ecosystems, however, have a non-excludable character; that is, they provide benefits to people who may never set foot in the ecosystem, or even be aware of its existence. Such services include the retention of soil and prevention of flooding by vegetated landscapes, and the role of birds and insects in pest control and pollination. In the most extreme example of a shared benefit, the sequestration of carbon by a hectare of forest benefits all humans by offsetting greenhouse-gas emissions. The owner of land supplying such services does not receive any compensation for them, and so has no economic incentive to conserve the resource.

The economist's solution to the problem of non-excludability takes the form of assigning an appropriate kind of property rights, in the same way that patents and copyrights protect knowledge. In the environmental realm, examples include grazing rights, fishing quotas and water rights.

Pressure point: tradable emissions permits offer one answer to public demands for clean air. Credit: AP/ JULIA MALAKIE

For maximum economic efficiency, these rights should be ‘tradable’, giving them a market value and creating incentives for conservation. The US government has addressed many of its air pollution problems by means of emissions permits. One notable success has been the programme of tradable sulphur dioxide emissions allowances set up by the Clean Air Act amendments of 1990. In this programme, the targeted emissions reductions have been exceeded, saving $1 billion a year compared with non-market-based ‘command and control’ policy alternatives.

Largely as a result of pressure from the United States, the Kyoto Protocol on climate change goes further, providing not just for tradable carbon dioxide emission permits, but for permits to be given to countries that contrive to sequester an equivalent amount of carbon — for example, by reforestation.

This could profoundly affect the economics of forest conservation, especially as the protocol's Clean Development Mechanism would allow developed countries to pay for forest conservation in developing countries. Geoffrey Heal, of Columbia University's Graduate School of Business, estimates that growing forests might earn carbon sequestration credits at a rate of $70 to $800 per hectare per year. This compares favourably with maximum annual profits from ranching in Costa Rica of $100 to $125 per hectare.

Not everyone is enthusiastic about tradable emissions permits, which some environmentalists characterize as “licences to pollute”. Robert Costanza of the University of Maryland prefers pollution taxes, on the grounds that these give polluters an incentive to reduce emissions “all the way down to zero”. But others say a tax encourages polluters to reduce emissions only to the point where the cost of further abatement exceeds the cost of the tax. So the choice between tradable permits and taxes rests on politics and philosophy, rather than economics.

Market-based conservation

Admittedly, many ecosystem services are not yet scarce enough to lend themselves to a market-based conservation mechanism. In other cases, appropriate institutions (or regulations) do not yet exist to assign and enforce the relevant property rights.

But, at least in the United States, where the climate for markets is particularly favourable, there is a wealth of activity in ‘enviro-capitalism’. For example, in a trade brokered by the Washington-based Environmental Defense Fund (EDF) in 1993, a large farm in Oregon agreed to lease its rights to divert tens of millions of cubic metres of water from the Snake River to the Bonneville Power Administration (BPA), a federal agency that markets hydropower generated by government-owned dams. The BPA was required by the Endangered Species Act to increase flows at certain times of year to improve conditions for threatened salmon populations. After a three-year pilot project, the trade was made permanent in April 1997, when the Department of the Interior acquired the water rights.

Now the Environmental Resources Trust, a sister organization of the EDF, is marketing the electricity generated by these and other “fish flows” on the Snake and Columbia Rivers as “clean power”.

Another straw in the wind comes from elsewhere in the US energy industry. The Electric Power Research Institute (EPRI), a research consortium for the energy industry, is helping one of its member companies, Allegheny Power, to incorporate the principles of ecological resource management into a land management plan.

Another EPRI member, Southern California Edison, has decided to go into the “conservation banking” business: by agreeing not to develop an ecologically significant site, it earns the right to sell development credits to other parties. So in this industry, at least, economic incentives for conservation are starting to have an effect.