Technical requirements for an area-based biodiversity unit

A unit is an abstraction that enables rapid communication about a standardized measurement. Trade is built on units — as are the physical sciences, and the rest of modern society. Identical units are a prerequisite to the formation and efficient functioning of markets.

Both carbon and biodiversity are emerging markets. We know from research on innovation that emerging or frontier markets stabilize and form according to a standardized curve of the Gartner Hype Cycle (26). In this context, carbon markets would be at the “trough of disillusionment” stage, and biodiversity markets would be at the “innovation trigger” stage. The speed with which any market achieves optimization or “productivity” is dependent on several factors, one of which is perfect competition.

The main principles of perfect competition are that products or services in the market are exchanged in terms of identical units, the market is large enough that no single participant has influence over the pricing, there are no barriers to entry or exit for market participants, and all market participants have complete information available (8). The absence of any one of the conditions for perfect competition results in price distortion and market failure, rather than optimal value and wealth creation (27).

In the ideal market, all activity is measured in terms of standardized identical units in order to avoid inefficiencies and support buyers in comparing the relationship between price and value. But the current biodiversity market more closely resembles a yard sale, with boutique purchases and individuals haggling (28). Currently, the number of proposed biodiversity ‘units’ numbers nearly as high as the number of active schemas which is currently fifty-two and increasing daily (29, 30).

Therefore, a viable unit would need to reliably work for at least the majority of these schemas, all stakeholders, and also accurately abstract path-dependent data (ecosystem-specific data) for a global context (30). In particular, it would need to function in measuring conservation, restoration (pollination, uplift, eradication of invasive or alien species), and impact (disclosures of degradation or avoided degradation) actions.

As most of these schemas explicitly or implicitly intend, in order for the biodiversity credit market to utilize similar market structures as the carbon credit market, it must also be a commodity (28). Commodities markets have rigorous regulations regarding product expiration and universal tangibility and do not accept scoring systems and calculations that do not have real-world corollaries. They could, for instance, sell one ton of live meerkats with a ‘grade’ of 4.5, but they could not sell 4.5 stars that had been awarded to live meerkats. The first is a physical dimension, the second is an intangible score whose value is arbitrarily based on the reputation of the awarding party.

This is not such a bad requirement. Human concepts mean nothing to Nature, which is nothing if not tangible. Thus, the more tangible a unit is, the more likely it is to truly measure, and account for, natural systems. Reduced abstraction also leads to reduced opportunities for gaming or manipulating a unit from its intended use.

There remains some debate around area-based units. While there are certainly biodiversity actions which fall outside of area-based activities, the vast majority of schemas can utilize an area-based structure. Certainly, one could argue that biodiversity never exists outside of an ecosystem, or habitat. Therefore, an area-based unit could cover the emerging market adequately with the stipulation that future units may emerge.

Ideally, a properly designed unit will also be aligned with the International Sustainability Standards Board (ISSB) accounting standards International Organization for Standardization (ISO) Guidelines and a number of emerging international market controls on natural capital accounting (31, 32).

Currently, carbon commodities markets have a multi-party structure, which is rapidly replicating itself for biodiversity markets (30). A clear understanding of this structure dramatically reduces common technical confusions about the unit, which is too frequently conflated with other market functions and structures such as validation of claims, standardization of metrics and methodologies, price, sales, and origination (see Figure 1 ).