Market-Based Incentives: Taking Conservation to the Next Level

Remarks by Bruce I. Knight, Chief, Natural Resources Conservation Service, at 4th Henry A. Wallace Scientific Conference, Centro Agronómico Tropical de Investigación y Enseñanza

Turrialba, Costa Rica
November 3, 200

Thank you, Dick (Rortvedt). I am so pleased that CATIE invited us to come to Turrialba to explore new and innovative strategies for paying for environmental services.

I am here to share some of what’s happening in the U.S. But we are even more eager to better understand the ground-breaking—or maybe I should say ground-restoring—work done here in Costa Rica and elsewhere.

Private sector and market-oriented support for conservation is emerging and evolving in the United States. Many of you, and particularly those in Costa Rica, have more experience with this, and we look forward to following in your footsteps.

NRCS Assistance

As Chief of the Natural Resources Conservation Service in the U.S. Department of Agriculture, I manage a federal agency that this year is celebrating 70 years of helping people help the land. Our agency was created in 1935 when huge dust storms swept across the central U.S. in the wake of severe soil erosion on our Great Plains region.

Our focus is cooperative conservation on working agricultural land. We have 12,200 people in nearly every county to assist rural landowners with their conservation goals. NRCS will invest a little over $3 billion U.S. dollars in conservation this year. Toward that end, we help farmers, ranchers and other local partners to conserve the soil, increase the quality and quantity of water, preserve air quality and expand habitat for fish and wildlife.

We offer landowners three basic kinds of help:

1. Technical assistance—such as designing conservation plans to help them manage their land effectively and developing standards and specifications for conservation practices;

2. Financial assistance—helping pay for conservation practices on private lands that bring public environmental benefits; and

3. Conservation easements—paying to preserve and restore wetlands, forests, range and farmland—permanently or for 10-30 years.

Our programs are open to farmers with operations of all sizes, but we offer some special considerations to limited-resource farmers. First, when we look at the pool of farmers who have asked for and qualified for help, we move limited-resource farmers to the front of the line. Second, when we share the cost of conservation practices, we pay a higher portion of the cost for limited resource farmers—90 percent in many cases.

NRCS has an extensive website at www.nrcs.usda.gov that includes details on all of our conservation standards and practices, a plants database, material on agroforestry and information on invasive species. We would also welcome the opportunity to learn more from you about tropical agriculture.

Moving Beyond Basics

Since passage of the 2002 farm legislation, the U.S. has made significant investments in conservation. But we still have a long list of worthwhile conservation projects that landowners would like to invest in, and that we would like to support, but the funds simply can’t keep pace with the demand.

It’s easy to look at this as a black and white situation—good news and bad news.
It’s good that so many landowners want to preserve natural resources—and bad that we can’t help them all.

But we could look at this problem from a different perspective. We could expand the conservation toolkit by finding innovative ways to stretch our resources, to take conservation to the next level—beyond our budget, beyond the boundaries of farms and ranches and beyond the geopolitical borders of our counties, states and nations.

One strategy is to find other revenue streams to help support conservation on private lands—payment for environmental services. We want to preserve productivity, maintain or enhance the landowners’ livelihoods and also produce public environmental benefits—clean air, clear water, healthy forests, lush wetlands, beautiful vistas, and bountiful wildlife.

This is a challenging prospect. But the opportunities for using the principles of the marketplace to achieve beneficial environmental outcomes are increasing.

We know that markets are more efficient at allocating resources than government regulations or bureaucracies. Markets and their prices reveal collective preferences. Market-based conservation is an evolving concept. It doesn’t replace our current approaches, but it offers the opportunity to expand what we’re doing.

A market is essentially a set of rules for exchanging goods and services. When it works well, everyone has equal access to sufficient information to make good decisions.

Market-oriented approaches to conservation can include:

• Using economic approaches, such as auctions and cap and trade

• Applying business practices, such as precision marketing or fostering customer loyalty

• Encouraging competitions, such as bidding for grants or offers to pay for a greater share of the cost

• Providing data to inform the conservation investment decisions of others

• Focusing on monetary and non-monetary incentives

• Implementing performance-based conservation—enhancement payments

• Fostering knowledge-based conservation

Cooperative Conservation

This past August, President Bush sponsored a cooperative conservation conference that featured many success stories of locally-led, collaborative efforts to benefit the environment. It was an opportunity for everyone to see how well incentives and partnerships can work in accomplishing environmental goals. The conference emphasized voluntary approaches that recognize that economic prosperity and environmental stewardship go hand-in-hand.

We can be successful with agricultural conservation only when we are able to demonstrate that the practices we recommend bring benefits to those who live on and work the land as well as others in the community. There’s a clear link between managing crop residues, nutrients, irrigation water, manure and other agricultural inputs and outputs and environmental benefits such as water quality and quantity.

U.S. Secretary of Agriculture Mike Johanns has said quite clearly, “…today there's consensus that conservation and economic success don't have to be mutually exclusive.” A number of our partnerships demonstrate the direct connection between a strong commitment to conserving the land and economic benefits for landowners.

USDA Policy on Market-Based Environmental Stewardship

When the public or corporations or nonprofit groups benefit from conservation on private lands, it makes sense for them to contribute to the cost of maintaining or enhancing these environmental services. In the U.S., 70 percent of the land is privately owned. In the past, farmers, ranchers and timber producers have provided vital environmental benefits for the public to enjoy at no cost to the public. As a result, society has often taken those benefits for granted.

At the White House Conference on Cooperative Conservation, Agriculture Secretary Johanns announced a new U.S. Department of Agriculture Policy on Market-Based Environmental Stewardship—DES by a different name. The goal is to broaden the use of markets for environmental and ecosystem services through voluntary market mechanisms. These mechanisms may include environmental credit trading, insurance, mitigation banking, competitive offer-based auctioning, eco-labeling—and more.

We believe that market-based environmental stewardship can encourage competition, spur innovation and achieve environmental benefits, while helping landowners—and others—comply with environmental regulations. The intent of this new policy is to make a deliberate, determined effort to help bring producers and consumers together and to develop innovative tools to quantify environmental impacts.

Our agency has an ongoing dialog with the U.S. Environmental Protection Agency about the value of market-based approaches to environmental improvements. At the White House conference, EPA Administrator Steve Johnson said, “…conservation just makes sense for revitalizing local environments and local economies.” He also echoed the call of other American conservationists to “both protect our resources and develop our future.”

Where We are Now

In the U.S., market-based incentives are evolving. Until the last few years, in the U.S., most of the incentives for conservation have been provided by government through sharing the cost of conservation practices on private lands because these practices also have public environmental benefits.

The market approach that is now gaining acceptance began in the environmental arena through the “cap and trade” system. Regulated industries had the flexibility to find the least cost avenue to comply with emissions limits—and found it cheapest, at times, to trade with others to improve environmental quality.

The New York City Watershed Agricultural Program is a great example of a complementary municipal and agricultural partnership. Local farmers and agribusiness worked with the city to address water quality issues on nearly 500,000 acres of farmland in the watershed that supplies New York with drinking water.

Today, U.S. landowners are beginning to draw support from:

• environmental groups who care about conservation,
• municipalities that benefit from clean air and water,
• private organizations that promote an abundant supply of wildlife, and
• businesses that depend on natural resources.

But credit trading, efforts to preserve farmland and projects to ensure biodiversity are just the first steps. We need to expand the current opportunities nationwide, and we need to apply some ingenuity and more “thinking outside the box” to create additional opportunities.

Where We Hope To Go

As we move forward, our goal is to

• encourage broader participation in market-based efforts,
• build the infrastructure to support expansion of this approach, and
• develop measurement tools that demonstrate the effectiveness of various conservation practices.

The key to an effective market-based system of compensation for ecosystem services is information. Both farmers and economists call this price discovery.
If I know the price of corn in Chicago, Illinois, I can calculate what my corn at my ranch in South Dakota will bring.

My agency is committed to facilitating and increasing the flow of information and making our own programs and approaches as transparent as possible. We are developing fact sheets that discuss key issues and solutions to engaging in market trades to help our customers with frequently asked questions about such issues as water quality credit trading, greenhouse gas sequestration and wetland or endangered species habitat banking. We’re also working with a private sector partner to create a handbook that specifically focuses on environmental credit training.

We will be strengthening our own Performance Results System—a database that we now use to report results of conservation practices installed under our conservation programs. And we hope to enable and encourage others in the private sector who complete conservation projects using our standards and practices to share their results through this system so that we have a national record of accomplishments in conservation. Our database can help others manage conservation projects and provide reports of activity. It’s another way we can facilitate the market for environmental services.

Conservation Innovation Grants

Over the past couple of years, we have sponsored a number of pilot projects through Conservation Innovation Grants that are testing market-based incentives.
For example:

• In Virginia, we are trying environmental credit trading with 100 farmers to improve water quality in the Chesapeake Bay.

• In Pennsylvania, we are demonstrating a reverse auction system for farmers to offer to install best management practices to reduce nutrients.

• In Florida, we are working with the World Wildlife Fund and ranchers to reduce phosphorous in Lake Okeechobee.

• In Rhode Island, we are seeking to develop a consumer market for nesting bird habitat on hayfields.


Beyond the Obvious

As we move forward, we should think of market-based incentives in the broadest possible sense—beyond cap and trade and water quality credits. For example, “the market” presents us an excellent opportunity right now—with the increase in fuel and fertilizer prices—to promote no-till. This is conservation in the best interest of the landowner—getting the focus off yields and onto profits. And it is conservation in the best interest of the public by conserving fuel, reducing greenhouse gases and cutting nitrogen runoff.

Let me give you a couple of creative examples. Right now, near Wichita, Kansas, farmers’ and ranchers’ commitments to maintain marginal land in grass are expiring. That grassland helps keep the water that winds up in Cheney Reservoir—the water source for Wichita—clean and clear.

The city is concerned about maintaining its water supply—and asked the farmers what help they would need to keep land in grass instead of putting it back into cropland. As a result, the city is paying for up to two miles of perimeter fencing for producers who agree to maintain grasslands—and with the fences the producers will be able to run cattle on the land. Everyone wins.

In another case in Minnesota, wildlife watchers are willing to pay as much as $150 a day to visit a farmer’s restored wetland just to look at and photograph wildlife. So ecotourism is now coming to the U.S. as well.

As a result, our state conservationist in Minnesota is now thinking about ways to connect wildlife lovers with producers—and perhaps encourage wildlife groups to share the cost of wetlands restoration in exchange for developing public observation areas.

We’re also looking at incentives internally for the conservation programs we administer. For example, we’ve reserved some of our funds for our largest program (EQIP) to be distributed as a performance incentive to states that have done a particularly good job of administering the program by reducing transaction costs. We’re expanding this incentive approach to five additional programs in 2006.

Voluntary Approach

The key to market-based incentives is that they are voluntary and transparent Our goal is to help establish the infrastructure that provides information to willing buyers and sellers that can be used as a mechanism to help them find each other so they can make the deals that bring environmental benefits to both parties—and others as well. We are looking at expanding our understanding of the incentives that encourage conservation and studying how the principles of the marketplace can support voluntary conservation.

I am excited about what we are doing today and the prospects ahead. I see a bright future for increasing conservation as we help those who have shared in the environmental benefits help absorb the cost.

Conclusion

My favorite conservationist is Teddy Roosevelt, the 26th President of the United States. Nearly 100 years ago, he said, “To waste, to destroy, our natural resources, to skin and exhaust the land instead of using it so as to increase its usefulness, will result in undermining in the days of our children the very prosperity which we ought by right to hand down to them amplified and developed.”

As a farmer myself, I want to build up, not tear down, the land that I hold in stewardship for the next generation. I bring that philosophy to administering the U.S. government’s private lands conservation agency.

I believe the best way to support and encourage others to do the same is through voluntary, market-based incentives. And I am looking forward to working with those in the U.S.—and here in Costa Rica and throughout the world—to foster these cooperative and mutually beneficial approaches.