Ecosystem Service Market Development: The Role and Opportunity for Finance

This report is laid out as a progressive exploration of how the economics of ES production interacts with finance, broadly construed, in actual credit transactions. The inquiry proceeds in several steps. First, the economics of ecosystem services production is explored to provide critical context for potential financing approaches. This section examines dynamics of production under a number of incentive mechanisms currently employed to produce ecosystem services and also considers how economic incentives affect policy goals. The paper next turns to the role of finance in ES production, examining project cash flows and how financing directly enables development of ES credits through on-the-ground projects. The following section considers the breadth of sources for project finance, with a particular focus on how project design and characteristics shape access to government, philanthropic, and private capital sources. With this framework established, financing tools and recommendations are explored with an emphasis on how different approaches can influence key drivers of access to project funding. Input from stakeholder and financier interviews, as well as workshop findings, are integrated throughout. A brief conclusion completes the report