Why We Need a Market for Public Goods
Part 1 of this Series “Why we need a market for public goods” will explain why and what Tom Fuerstner and I are doing on the farm. Part 2 “Proof-of-Olive-Tree: Technical Infrastructure” will explain the agricultural decentralized physical infrastructure (DPIN) we are modelling and implementing.
- Biodiversity is a public good
- Clean air is a public good
- (Clean) Water is a public good
- Good soil quality is a public good
- Food quality is a public good
- Heath is a public good
- Wildfire protection is a public good
… yet we have no adequate market incentives to maintain these public goods or common goods. Why?
Our economic systems are designed in a way that markets almost exclusively incentivise the production of private goods, not the provision of public goods or protection of common goods. Let us take the example of farmers & forest owners:
Farmers & forest owners today have two types of revenue streams and productivity measures. They can:
- Sell private goods on more or less regulated markets such as crops, timber & livestock. The productivity of the land is only measured in the total output of crop, timber and livestock and livestock products. In many cases, the proceeds of the sales of these products often fail to cover - or only barely cover - their operational costs, let alone generate profits.
- Receive government subsidies: Farmers and forest owners in many countries receive additional subsidies to cover their costs and subsidize their productivity levels when producing these private goods. In some cases, special environmental subsidies can be collected for sustainable practices. Subsidies are distributed via a bureaucratic process executed by agencies and paid for by taxpayers. The policies and processes are often inefficient, have time lags, and are subject to political good will. In many countries, the systems seems to be skewed towards big farmers who engage in more intense agricultural practices with the aim guarantee food supply — rather than small farmers, who still barely make ends meet, but are usually those who engage in more sustainable practices.
Farmers are not sufficiently incentivised or disincentivized for the positive (or negative) externalities that they create as a result of the farm operation. They cannot monetize their productivity contribution to biodiversity maintanace and other ecosystem services, because these ecosystem services have no adequate productivity measures and no adequate market value.
Modern agricultural practices use agrochemicals, including pesticides and fertilisers and genetically modified organisms (GMOs), and monoculture to increase short to medium term productivity levels. Such productivity measures are not only important for the farm owners, but are also an important factor in term of food security. Unfortunately, they often come at the expense of the environment (ecosystem productivity) and the long term crop productivity on that same piece of land.
The results of such short term thinking is the loss of biodiversity, and as a result soil degradation in the form of soil erosion, the loss of topsoil, and soil organic matter. In other words: the soils ability to hold moisture and nutrients, ultimately affecting long tern crop yields - on top of pesticide and herbicide residues in the soil and water and in the food.
- Chemical Pesticides, for example, if used improperly, often also harm non-target species, including beneficial insects, birds, and aquatic organisms.
- The same is true for the excessive use of fertilisers, which can additionally contribute to nutrient runoff and water pollution, affecting aquatic ecosystems. Phosphate fertilisers in particular can also affect soil quality and disrupt the balance of other minerals, such as calcium and magnesium, which are crucial for plant and human health and affects the nutrient composition of crops and the overall food chain.
- Monoculture, which is another practice of modern industrial agriculture, further contributes to the loss of biodiversity and in particular soil quality.
- Heavy machinery used in intensive agriculture often leads to soil compaction - which negatively impacts soil drainage and root penetration - and therefore water retention and plant growth - and therefore the loss of biodiverisity.
While CO2 capture and climate are a much discussed topic in the context of monocultures and the use of agrochemicals, the effects of agricultural practices on the food we eat - such as the lack of nutrients and how it influences our gut bacteria and physical and mental health, including the costs incurred on global healthcare systems - have not been sufficiently discussed yet in a CO2 centric mission to the “save the planet.”
Sustainable agricultural practices - such as integrated pest management, precision agriculture, organic farming, food forests and similar practices - can reduce or avoid chemical inputs by applying crop diversity and crop rotation - therby increasing or maintaining the quality of soil. They can maintain the long term productivity of the same piece of lands when it comes to the output of private goods, and also maintain our public goods by minimising biodiversity loss and all downstream effects.
Productivity, in economic describes the amount of output produced per unit input used. In the agricultural output products are usually measured by weight, or their market value in proportion to inputs factors such as such as labour, land and investments. Localized and specific measures of productivity are hard in agriculture with traditional technologies, which is why productivity is often measured in aggregate using indices. As previously elaborated, the productivity of a tree is two fold:
- Crop Productivity (has a market price & and might be additional eligible for agricultural subsidies) Crop yield aka productivity is not only a private good also a public good, because food security is a prerequisite for life quality and global peace and on the agenda of most governments. Yet food security faces the trade-off between under production (starving population or growing food prices) and overproduction (food that is never consumed but thrown away and the expense of ecosystem productivity).
- Ecosystem Productivity (No market price! Except for the back door of CO2 credits): Biodiversity maintanace, soil quality, water retention are slowly making their way into public consciousness and also into the equation of carbon certificates and the markets they are sold on. But how does a single tree contribute to our ecosystem services and to which ecosystem services does it contribute how much? Does a single tree contribute more than a group of trees and how can we measure their ecological productivity? These are all questions that need to be answered before we can adequately quantify ecosystem productivity.
Data driven agriculture can contribute to better productivity measurement of crop productivity (private goods). Such data driven practices can also be used to measure the productivity potential of ecosystem services (public goods), which is what we are planning to test and implement.
Challenges of CO2 Markets
At the time of writing, the only public good that has some kind of market is “climate” through the backdoor of carbon certificates aka carbon credits, state mandated CO2 off-stetting practices, and the voluntary carbon markets that are a result of a growing ESG awareness. But these markets are too CO2 centric and often corrupted or inefficient. Underlying productivity data are often based on rough estimates:
Problem 1: Carbon centric accounting: As previously elaborated, the loss of CO2 capture is only one of many a downstream effects of biodiversity loss. Current accounting methods are not holistic. The data they rely on is limited to measuring only one downstream factor - CO2 capture. We need more holistic sustainability certificates that measure the productivity of biodiversity protection & other ecosystem services that affect carbon capture.
Problem 2: CO2 emission's are not meaningfully disincentivized. Companies and communes can only offset their emissions by funding projects that capture carbon or sequester carbon via state mandated or voluntary markets.
Problem 3: Carbon markets have a centralisation problem. Voluntary markets in particular have a quality management and corruption problem, especially voluntary markets that are not certified. Issues are often:
- Quality problems aka “Greenwashing”
- Carbon bandits
- Double Accounting
This centralisation problem can be resolved by managing carbon certificates on blockchain networks, which is what many ReFi (Regenerative Finance) protocols have already started to do. While this is a great first step, it does not resolve the problem of carbon centricity in the first place.
Problem 4: The narrative is based on reversing negative impacts instead of enforcing positive impacts. CO2 markets are about eliminating CO2, offsetting CO2 emissions, instead of creating positive narratives of biodiversity conservation, O2 creation, water prodction and water retention, soil quality protection etc. Words carry a lot of power and how we use them also impacts the effects of what we want to achieve, so IMO - we need a new narrative.
The Power of Farmers & Forest Owners
Depending on their choice of agricultural practices, famers and forest owners have a lot of power to influence the maintenance of biodiversity and food quality and all downstream effects on climate and health, as they govern a great deal of the total land mass globally - at least in theory. In reality however they are not incentivized to do so, because we lack the data and the practices.
If we could find a way to measure not only the productivity of agricultural products, but also the productivity of the natural ecosystem managed and create markets around these services, we could provide a new income stream into any current agricultural operation while giving farmers and forest owners adequate incentives to engage in sustainable agricultural practices that maintain so-called “ecosystem services.”
The term “ecosystem services” is a term that became popular with the Millennium Ecosystem Assessment by the United Nations in the early 2000s. It refers to the maintenance of balanced ecological systems - both the organisms and the physical environment with which they interact. When the biological balance of these ecosystems change - agroecosystems, aquatic ecosystems, grassland ecosystems, or forest ecosystems - often starting with biodiversity loss, this has negative effects on the conditions and quality of life of human beings, by impacting the provision of clean air, water, waste decomposition, climate stability, and food quality.
While ecosystem services also encompasses the ability of CO2 to be captured by plant-life, animal life and in geological formations, CO2 is only one of many factors next to soil quality, water retention, water quality, biodiversity maintenance and many others.
As of today, only CO2 has a market, but certain standardization bodies such as “Verra” - one of the leading standardization bodies for CO2 certificates on voluntary markets - are starting to include so-called “biodiversity offsets” into the equation when issuing CO2 certificates.
Using this logic, farmers could measure, certify and sell positive externalities of the farm operation, if the productivity of the land is also measured by its potential to create ecosystem services.
Let us look at the numbers: In Portugal, agricultural land and forests accounts for approximately 78–86% of Portugal’s land area, of which around 20–25% are protected (national parks, nature reserves, and conservation areas). Sealed landmasses such as cities, smaller residential areas, industrial areas, highways, roads and other infrastructure account for only 8–12%. Water bodies such as rivers or lakes make up approximately 1–2%. I would assume that other countries with a similar population density have similar statistics.
While natural forests & natural water bodies worldwide have the highest biodiversity rate, their numbers are decreasing. They are often government owned or and protected. The rest of the land that is not sealed is mostly privately owned, but these forests and agricultural lands are more and more subject to above mentioned monoculture and chemical fertilisation.
Though regulation against cutting trees and killing animals have tightened over the last decades worldwide, the market incentives for private agricultural goods counteract any government regulation, and government regulation is always subject to the goodwill and political principles of the people in government (see the example of Brazil).
Unfortunately, the general notion of our economic system is that private goods are provided by the market, public goods are provided (or at least regulated) by governments, and common goods exist naturally (and apparently endlessly).
The fact that nature has to be maintained and not only exploited hardly has a market value, except for occasional and inadequate government subsidies and the defunct carbon certificate market. As a result, farmers and forest owners are not sufficiently incentivised by the private market to engage in sustainable agricultural practices. The additional prices that consumers pay for eco-friendly products and services barely cover the additional costs of many farmers to engage in eco friendly practices. Apart from the fact that eco-labelling has also been subject to fraud and greenwashing practices.
While we know all this, we lack precise and sufficient data on the internal and external effects of organic farming and other sustainable agricultural practices on our common goods. Productivity data on biodiversity protection and other ecosystem services barely exist, and without such data, markets around the protection of public goods and common goods cannot build.
To bridge this gap, we started a new venture in Portugal where we are setting up a techno-economic prototype to start providing the data needed to create a market for such ecosystem services.
Read more about how we are solving this problem in our next blog post:“Proof-of-Olive-Tree: Technical Infrastructure.”
As of today, farmers are not sufficiently incentivised or disincentivized for the positive (or negative) externalities that they create as a result of the farm operation. They cannot monetize their productivity contribution to biodiversity maintanace and other ecosystem services, because these ecosystem services have no adequate productivity measures and no adequate market value.