This is the first blog in the series Financiando a la Biodiversidad en el Perú. This series explores how economics, public policy, and financial innovation can work together to turn conservation into a service with recognized value. We will analyze from the economic theory that explains why ecosystems degrade to new instruments that seek to correct this failure: Mecanismos de Retribución por Servicios Ecosistémicos (MERESE) in Peru, biodiversity credits, habitat banks, and other operational conservation mechanisms; as well as international disclosure frameworks such as the TNFD (Taskforce on Nature-related Financial Disclosures).
The paradox of conserving what belongs to everyone
Ecosystems provide essential benefits: clean water, breathable air, climate regulation, pollination, and protection against natural disasters. These benefits, known as ecosystem services, sustain society.
However, in almost all cases, ecosystem services do not have mechanisms that reflect their value in monetary terms (dollars, soles, etc.). In almost all cases, no one pays directly to breathe pure air or for the constant flow of a river. And when something has no price, society tends to undervalue its importance.
In market terms, this means the amount of ecosystem services society receives is less than what would be socially desirable. In other words: we conserve less than we need. This is the central dilemma of conservation: ecosystems function as public goods—everyone benefits, but there is no incentive system to preserve or increase them.
Public goods and externalities
In economics, a public good is one that is non-excludable and non-rivalrous.
- Non-excludable: it is not possible to prevent someone from using it (for example, a forest that regulates regional climate).
- Non-rivalrous: use by one person does not prevent others from benefiting as well. This condition generates the free rider problem: everyone enjoys the benefit, but no one wants to pay to maintain it.
At the same time, many productive activities generate negative externalities—environmental costs that are not reflected in the prices of the goods or services produced by the activity. When a company pollutes a river or deforests a forest, it shifts that cost to society, but the prices of the goods or services produced do not incorporate that environmental damage. The company may show a strong financial statement, although it hides the costs borne by society.
The result is a structural imbalance:
- what generates public benefits (conservation) has no economic value;
- what generates environmental costs (degradation) is usually profitable.
Conservation as a public service
For decades, conservation has been seen as a state responsibility, financed with taxes. However, public resources are limited and environmental demand grows: more protected areas, ecosystem restoration, deforestation control, watershed management, among others.
Facing this gap, there is a need to create incentive systems that recognize the economic value of conservation and turn it into a public service also financed by direct and indirect beneficiaries.
For example, urban users who consume clean water benefit from the silent work of communities conserving the headwaters. If part of that payment for water is directed to finance conservation, a virtuous circle of sustainability is generated. This is the basis of the Mecanismos de Retribución por Servicios Ecosistémicos (MERESE) applied to coastal watersheds, which we will develop in the next blog.
From conservation as a cost to conservation as an investment
Reversing the loss of ecosystems implies moving from an assistance-based approach to one based on incentives and results. The idea is to seek that conservation stops being a state expense and becomes an investment with social, environmental, and economic return.
To achieve this, it is necessary to build institutional mechanisms that connect those who use ecosystem services (companies, cities, farmers) with those who provide them (communities, landowners, natural areas).
In the next articles, we will explore how Peru has been a pioneer in institutionalizing a national incentive system through MERESE, and how this model generates the regulatory basis for the development of biodiversity credit projects and habitat banks, articulating with new global frameworks such as the TNFD.
