Silver bullet or fools' gold? A global review of markets for forest environmental services and their impact on the poor

Market-oriented approaches to environmental management are increasingly common in all sectors of the economy. Forestry is no exception. As forestry sectors around the world open their doors to growing private sector participation, governments have been increasingly attracted to market-based instruments as a new set of tools for guiding private investment. Of the many
instruments available to policy-makers, by far the most ambitious to date is the development of markets for forest environmental services, such as carbon sequestration, biodiversity conservation, watershed protection and landscape values. Markets are thought to offer an efficient mechanism for promoting and financing forest protection and sustainable forest management.
However, policy-makers’ enthusiasm for market development is not matched by practical understanding. Very little guidance is available on the mechanics of market evolution, or on the consequences of markets for human welfare. Unanswered questions abound. What drives market development? How should markets be established? What costs are involved? Will markets improve welfare? Will some stakeholders benefit more than others? How does performance vary between market structures? What is the role for governments?
Of particular concern is the lack of knowledge related to what market creation means for poor people. The critical question is whether markets for forest environmental services can contribute to poverty reduction, while at the same time achieving efficient environmental protection. In short, do markets for forest environmental services offer a “silver bullet” for tackling economic,
social and environmental problems in the forestry sector, or are they simply “fools’ gold”?
Drawing on ideas in New Institutional Economics and recent thinking on forests and poverty, this paper attempts to shed light on these questions through (1) the development of a conceptual framework for guiding research; and (2) the application of this framework in a global review of emerging markets for carbon sequestration, biodiversity conservation, watershed protection and
landscape beauty. In total, 287 cases are reviewed from a range of developed and developing countries in the Americas, the Caribbean, Europe, Africa, Asia and the Pacific. For each service, the paper considers six central questions:
•What form do markets take? Markets vary tremendously between locations and services sold. This review considers seven key features to help describe market form: the commodities, the characteristics of participants, the level of competition, payment mechanisms, the geographical extent of trading, the level of maturity and the degree to which markets are embedded in broader
institutional contexts.
• Why do markets evolve? Markets evolve in response to changing demand and supply conditions. Understanding what is driving changes in demand and supply is a critical first step in developing strategies in market creation.
• How do markets evolve? Institutional development tends to be slow, iterative and path dependent. It is closely intertwined with shifting power relations and changing incentive structures. Understanding the complex processes through which change occurs is essential for those wishing to foster market development.
• What does market development mean for human welfare? With market development driven by certain individuals and/or groups, there can be no presumption that markets will improve social welfare. Economic, social and environmental impacts need to be measured. Transaction costs associated with establishing and running market mechanisms must also be considered.
• What do markets mean for poor people? Impacts on poor people are of particular concern. To help guide this assessment the review considered how markets are impacting on assets (including financial, human, social, physical, natural and political) held by these groups.
• What are the key constraints to market development? Lessons on constraints to market development need to be drawn out from answers to the above questions. Ultimately this is critical as a basis for identifying prerequisites for welfare-enhancing markets.