Recognizing Ecosystems Services as A New Asset Class
A new source of water is created when a barren land in Badui is reforested. Picture courtesy of Yayasan Garuda Nusantara.
Nature provides services to us. So far for free. But it shouldn’t be that way forever as the services are currently depleting and preserving nature’s capacity to provide its services have been costly. We have to start thinking of nature’s services to us as a part of a supply chain.
The set of services to us have been known as either Ecosystems Services, Ecological Services, or Environmental Services (ES), defined as follows (as defined by WRI, 2011):
Ecosystems services are the benefits that people obtain from ecosystems. Examples include freshwater, timber, climate regulation, protection from natural hazards, erosion control, and recreation.
When the World Bank, a long while back, introduced the term “natural capital,” and when sustainability was defined as sustainability from the social and environmental as well as economic elements, there has already been the understanding that nature, or ecosystem, provides services that serve as inputs to development process. Lacking which, development cannot continue. And growth cannot be created. This admittedly economistic definition of ecosystems services has given rise to the mainstreaming of environmental protection in developmental discourse. Ecosystems services affect development as development affects the ecosystems. Methods to measure and define these intertwining relationship have been devised.
Take water as an example. Jakarta is always flooded on a yearly basis. In most cases, this is due to the depletion of the forested area in the water catchment area in Bogor and its surrounding due to the massive development there. The forests in Bogor provides ecosystems services in the form of hydrological control. But Bogor also has options. One of these options is to not care about its water catchment role, to continue deforestation, and to let Jakarta continue to flood every year. This option may even be more financially rewarding. For the people in Jakarta, when they want the water catchment in Bogor, they should be willing to pay for stopping Bogor to deforest, and to compensate for the opportunity costs of the deforestation.
If we believe that ecosystems contribute to growth creation, then we should believe that in the long run, investment in the production of ecosystems services should yield (financial) returns, even in the long term. Ecosystems services are a natural capital. And as a capital, it is an asset class. Problem is, not all recognized it as an asset class. Indonesia is no exception.
So long as the ecosystem services are not a recognized asset class, very limited kinds of transactions can be done to it domestically. One example is that of carbon credits. Carbon credits are created through a standard procedure (either by the United Nations in the compliance markets or by the industry, such as the Voluntary Carbon Standard or VCS in the voluntary markets) that demonstrates reduction of emissions of carbon and other greenhouse gases. Reduction of emissions leads to protection of the climate system, which is an ecosystem service. Carbon credit is therefore an asset class. But as Indonesia has not yet recognized it as an asset class, it cannot be easily traded domestically, including through the Indonesian Stock Exchange or Indonesian Commodity Exchange. It cannot be used as collateral. No derivative products can be developed. As a result, Indonesia can only enjoy the primary price, around $7 – 8. The secondary price, at up to $20, is enjoyed overseas, and most of the value added of $10 or more per credit is expatriated. But when carbon credits are a recognized asset class, then some, if not most, of the value added from primary to secondary prices can be retained domestically in Indonesia. And this can be significant to the tune of some hundreds of millions of dollars.
As ecosystems services are more than carbon, and they include biodiversity, water supply, clean air, recreational, and nutrition, then recognizing these asset classes can start a significant size of new markets for conservation. As it should not be difficult to get rules to recognize these new asset classes — some say that it is as simple as having the Securities Commission, BAPEPAM-LK, to recognize it — then there is no reason not to start now.
