Markets for Ecosystem Services

The paper explores the creation of markets for ecosystem services (MES) to address the decline of nature's regulating, supporting, and cultural services. It argues that while provisioning services are easily priced via property rights, indirect services are often public goods requiring government intervention and innovative valuation. The author proposes that multilateral environmental agreements (MEAs) can provide the necessary institutional structure and trading platforms to implement pro-poor MES, potentially bundling services like carbon sequestration and biodiversity conservation to reduce transaction costs and align with Millennium Development Goals.

• Nearly two-thirds of the provisioning, regulating, supporting and cultural services provided by nature are in decline worldwide, which may hinder developing countries from achieving the Millennium Development Goals (MDGs).
• Market failures contribute to ecosystem degradation when markets fail to allocate correct prices for environmental effects, when property rights are lacking, or when services exhibit public good characteristics.
• Regulating, supporting, and cultural services are typically public goods characterized by non-excludability and non-rivalry, making the assignment of private property rights difficult or immoral.
• The author proposes eight criteria for designing market-based instruments for environmental policy: jurisdiction, environmental effectiveness, economic efficiency, demand and supply distributional effects, harmonization with other instruments, incentives, competitiveness, and institutional efficiency.
• Market-based instruments can exacerbate poverty if local populations are excluded from services they previously accessed for free, as seen in the 1991 establishment of a national park in Uganda's Bwindi forest.
• Multilateral environmental agreements (MEAs) can serve as institutional frameworks for MES because they are legally binding and can provide trading platforms, such as type II funds or clearing-house mechanisms.
• There is potential for MEAs to pool resources and create 'bundled' markets for multiple ecosystem services (e.g., water regulation, biodiversity, and carbon) to reduce information and maintenance costs.
• Existing examples of MES include Costa Rica's FONAFIFO, which pays forest owners for various services, and the Clean Development Mechanism (CDM) under the UNFCCC.

APA

Duraiappah, A. K. (2006). Markets for Ecosystem Services. International Institute for Sustainable Development. https://www.iisd.org/system/files/publications/economcs_markets_eco_services.pdf

Chicago

Duraiappah, Anantha Kumar. Markets for Ecosystem Services. International Institute for Sustainable Development, 2006. https://www.iisd.org/system/files/publications/economcs_markets_eco_services.pdf.

Wikipedia

{{cite report |last1=Duraiappah |first1=Anantha Kumar |title=Markets for Ecosystem Services |publisher=International Institute for Sustainable Development |date=August 2006 |url=https://www.iisd.org/system/files/publications/economcs_markets_eco_services.pdf |access-date=23 October 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{duraiappah2006markets, author = {Duraiappah, Anantha Kumar}, title = {{Markets for Ecosystem Services}}, institution = {International Institute for Sustainable Development}, year = {2006}, month = aug, url = {https://www.iisd.org/system/files/publications/economcs_markets_eco_services.pdf}, urldate = {2026-10-23}, note = {Indexed by Climate Insights Directory} }