Incentivising biodiversity net gain with an offset market

Most programmes that incentivise the supply of public goods such as biodiversity conservation on private land in Europe are financed through the public purse. However, new ideas for how to fund biodiversity conservation are urgently needed, given recent reviews of the poor state of global biodiversity. In this paper, we investigate the use of private funding for biodiversity conservation through an offset market. The environmental objective is to increase some measure of biodiversity in a region (‘net gain’) despite the loss of land for new housing. Farmers create biodiversity credits by changing their land management and then sell these credits to housing developers who are required to more than offset the impacts of new housing development on a specific indicator of biodiversity. Combining an economic model of market operation with an ecological model linking land management to bird populations, we examine the operation, costs, and biodiversity impacts of such a (hypothetical) market as the target level of net gain is increased. A general result is established for the impacts on price and quantity in the offset market as the net gain target is made more ambitious. For a case-study site in Scotland, we find that as the net gain target is increased, the number of offsets traded in equilibrium falls, as does the market-clearing offset price. Changes in the spatial pattern of gains and losses in our biodiversity index also occur as the net gain target is raised.