Toha Network Biodiversity Credit System Submission

Recently the NZ Government opened public consultation on the development of a biodiversity credit system for Aotearoa New Zealand. You can read the Toha Network Trust's submission here.

Nov 17, 2023

Read Toha’s submission to:
Helping nature and people thrive – Exploring a biodiversity credit system for Aotearoa New Zealand

1. Key recommendations

Toha strongly endorses the need for a payment that is linked to biodiversity uplift and/or avoided loss of biodiversity. A biodiversity payment is sorely needed to support farmers, landowners and frontline communities to address biodiversity loss, and also to bring coherence to the Government’s policy mix for climate mitigation, climate adaptation and regional economic development.
Toha recognises biodiversity credit markets as a potential instrument to deliver a biodiversity payment, but also Toha recognises that biodiversity credits alone are unlikely to meet all the needs of biodiversity protection and enhancement. Other policy instruments, and other types of public and private investment, will be required. Toha recommends that policy makers remain attentive to the spillover benefits of developing biodiversity credits, because innovation in nature markets (e.g. monitoring technology and MRV protocol) can be redeployed for other purposes.
The development of a biodiversity credit system will be a significantly challenging undertaking. No single entity, including the New Zealand Government, is likely to possess the knowledge, capabilities and legitimacy to successfully develop and implement such a scheme. Thus, we caution the Government against taking a heavy-handed approach to administration of a biodiversity credits system. On the contrary, the central implementation challenge for a voluntary biodiversity market is coordination among multiple agents whose consent in the final system must be secured and sustained.

A general source of tension in the Government’s thinking, as manifest in the discussion document for this below summarises our recommendations in regard to market design. However, further to our discussion in Section 4 on the roles of Government, we believe that many of the questions which relate to system design are premature. Ultimately, the design of a voluntary market should be determined by market participants, not ex ante design choices by the Government. Also, while the Government should play a regulatory role for voluntary markets, this role should be articulated through a process with appropriate governance., is that while the consultation is for a voluntary biodiversity credit market, the Government is seeking advice on design choices and standards as if it were preparing a compliance market. In a compliance market, especially a biodiversity offsetting system, it is vital that the Government sets standards to ensure additionality and integrity. However, in a voluntary market, the Government should largely leave market participants to lead the design of biodiversity credits, with an acceptance that diverse standards and methodologies are likely to emerge. Otherwise, the Government risks undermining market fit and stakeholder buy-in, which a voluntary market relies upon to sustain demand.

A clear delineation should be made between systems that quantify biodiversity improvement for the purposes of contribution claims (i.e. biodiversity ‘credits’) and compensation claims (i.e. biodiversity offsetting). Offsetting schemes, such as regulatory requirements in the National Policy Statement for Indigenous Biodiversity (NPS IB), are a compliance market, which entails higher transaction costs, mandatory standards, and strong government administration. Also, a coupling with biodiversity offsetting would expose biodiversity contribution claims to the public scepticism and reputational risks that are associated with compensation claims (i.e. offsets). Therefore, a linkage to biodiversity offsetting would work against the economics, voluntarism and acceptability that a voluntary market requires.

The discussion document’s risk-opportunity analysis is strong on opportunities but weak on risks. A robust risk analysis should precede any further policy design. This should cover risks to non-Māori and Māori alike, but be attentive to the unique circumstances and needs of each group. To articulate the unique risks to Māori, the Crown should commission a rigorous risk analysis of biodiversity credit markets for Māori interests, which is adequately resourced and draws on expertise in mātauranga Māori, the recommendations of the Wai 262 report, and other relevant matters.
Any biodiversity credit system that attracts open and unambiguous opposition from Indigenous communities is unlikely to succeed, because of the high international expectations for positive outcomes for Indigenous people. Consequently, the New Zealand Government must sustain the support of Māori by enabling equal participation in the design and implementation of any such system, supported by appropriate governance mechanisms.

2. Toha’s position on biodiversity credits

Toha is building an impact payment system to support climate action and regenerative economics, with a specific focus on biodiversity, land use and our food system. This involves the development of digital infrastructure to bridge the existing gap between demand and supply for nature-positive impact. This is being carefully designed as a high-trust system that builds and sustains confidence in the creation, validation and exchange of impact data. On the demand side, impact investors and other funders will have confidence that their investments are delivering the intended impact by receiving high-integrity impact data. On the supply-side, the producers of impact – landowners, mana whenua, farmers, community groups, etc. – will have confidence that associated data will not be misused, and that benefits derived from that data will be recycled back to them. Consequently, Toha’s impact payment system serves as critical infrastructure for new nature markets that deliver funding directly to frontline communities who create change on the ground.

Biodiversity credits are a potential use-case for Toha’s impact payment system. However, biodiversity credit markets are only one kind of nature market and therefore only one of many possible uses of Toha’s digital infrastructure. Toha is already piloting a range of projects that operate across a spectrum of potential nature markets:

Toha is already establishing Climate Innovation Markets for verified impact, which includes our first end-to-end pilot transaction for verified avoided nitrous oxide emissions from reduced fertiliser usage and changes to feed management.
Toha has deployed its impact payment system to create the East Coast Exchange (ECX), which enabled a community-led emergency response after Cyclone Gabrielle by recognising recovery-related activities and redistributing grant funding to the frontline.
Toha has launched a Biodiversity Mission through the ECX which enables open collaboration across a portfolio of nature market trials, where innovation and funding partners are invited to make strategic, technical and commercial contributions to challenges faced by frontline communities.
Presently, Toha is developing building-block digital credits that enable environmental work to be properly valued and paid for, and data rights and access to verification to be transferable, traded and priced. These credits enable participants and partners to share the costs of market development, and to spread the costs of verification over the lifetime value of the biodiversity data.

Consequently, Toha is agnostic about which specific products, including biodiversity credits, should be issued via its infrastructure. Ultimately, product-level choices will emerge as a consequence of market development, which shall depend on whether biodiversity credits meet the needs of investors, suppliers and other stakeholders. This will depend not only on the market fit of biodiversity credits, but also the credibility of market architecture, such as whether market design and regulation is likely to deliver intended outcomes and appropriately manage risks.

If, however, biodiversity credits are validated by the market with the potential to scale, then Toha is ready to utilise its digital infrastructure for high-integrity issuances. By building on this infrastructure, these biodiversity credits would benefit from Toha’s deep R&D into indigenous data sovereignty, network governance, incentive design, token economics, measurement and data innovation, cybersecurity, digital identity, and measurement fraud detection through relationship-based network trust models. This infrastructure is being developed in anticipation that a range of New Zealand-based schemes and issuers are likely to emerge, similar to the evolution of voluntary carbon markets (VCM). The greatest challenge is ensuring that nature markets do not reproduce the well-known vulnerabilities and integrity challenges of carbon markets.

Toha is closely tracking domestic and international developments in biodiversity credits as a potential instrument for delivering nature-positive outcomes in Aotearoa New Zealand and elsewhere. Toha acknowledges that there is growing international momentum for biodiversity credits. Biodiversity credit markets are identified as a way to rapidly advance on supporting the targets and goals of the Kunming–Montreal Global Biodiversity Framework (GBF) and the Sustainable Development Goals. Biodiversity credits are also potentially a transparent, robust mechanism for businesses to respond to and report upon commitments under the Taskforce on Nature-related Financial Disclosures, which released its final guidance in September 2023. For example, businesses could disclose their acquisition of biodiversity credits to demonstrate their performance against targets and goals to manage nature-related dependencies, impacts, risks and opportunities (as per TNFD’s Recommendation 4C).

There are also important connections to trade and finance which are underanalysed in the discussion document. This includes the inclusion of provisions on biological diversity, climate change and Indigenous rights in the EU-NZ FTA. Additionally, the EU Parliament recently voted to adopt the European Sustainability Reporting Standards (ESRS) which are an integrated set of standards covering areas such as climate change, worker rights, and business conduct, and will apply to over 50,000 companies both in Europe and internationally. The ESRS are designed for interoperability with the International Sustainability Standards Board (ISSB), Global Reporting Initiative (GRI), and other standards. This has implications for exporters who want to trade in the EU market. Biodiversity credits that align with international standards are one way that New Zealand companies can demonstrate compliance with nature-positive expectations and retain market access.

To contribute to the development of robust international standards for biodiversity credits, Toha is a member of the Biodiversity Credit Alliance (BCA), a partnership facilitated by UNDP and UNEP FI which is working to bring clarity and guidance for the formulation of a credible and scalable biodiversity credit market under global biodiversity credit principles. As a Māori-led organisation, Toha is also a member of the BCA’s Communities Advisory Panel (CAP) which aims to fully and effectively engage Indigenous peoples and local communities (IPs & LCs) in the design and development of BCA principles and products, and to secure full respect of their rights in future markets.

Toha sees opportunities for biodiversity credits to improve the policy landscape, especially for agriculture’s response to the challenges of climate mitigation and climate adaptation. Biodiversity credits could create new revenue streams for the protection and creation of natural habitats and small-scale sequestration on New Zealand farms. A biodiversity credit system could serve as a prerequisite market mechanism that precedes the implementation of agricultural emissions pricing, which enables recognition of small-scale sequestration without creating incoherencies in target accounting (see Section 5.2 for further discussion). Internationally, there are several nature payment schemes for farmers and landowners.

Toha also has interests in biodiversity credits in regard to the recovery from Cyclone Gabrielle and other extreme weather events. The Ministerial Inquiry into Land Use recommended that Government work with Toha’s East Coast Exchange as a delivery mechanism for a regional pilot for a biodiversity market trial (R35) and, relatedly, a co-investment pilot for whenua Māori (R31-33). Toha is working with the Government to implement these recommendations.

However, Toha also recognises that the emergence of biodiversity credit markets at scale is neither necessary nor inevitable. For example, commitments under the TNFD framework can be achieved by the use of individual metrics and indicators, rather than a standardised tradeable unit such as a biodiversity credit. Biodiversity credits are also not likely to be sufficient to achieve nature-related policy objectives, because market-based schemes involve trade-offs with investability which are likely to result in funding gaps and distributional impacts. Consequently, a comprehensive biodiversity strategy will involve funding and financing from public as well as private sources, and therefore a variety of economic instruments which might include sustainability-linked debt (e.g. loans, GSS+ bonds), payment for ecosystem services, ecological fiscal transfers, and subsidies.^,, Toha’s digital infrastructure could serve the impact verification needs of these economic instruments too.

Also, as the international experience of VCM has shown, there are risks associated with market instruments that must be taken into consideration. Internationally, carbon markets have sometimes resulted in land alienation, exploitation of local knowledge and resources, and unfulfilled promises of economic opportunity for local communities.^, Advocates of biodiversity credits have rightly called for lessons to be learned from the VCM experience, and not to be repeated in the design of biodiversity markets. However, the process of policy implementation is unavoidably political and uncertain; thus, there are no guarantees that schemes will be implemented in practice the way they are conceived in theory, nor that unexpected challenges will emerge.

Consequently, Toha’s support for a biodiversity credit system in Aotearoa New Zealand is conditional on its final design and implementation – which cannot be ascertained at this stage of the consultation. The recommendations in this submission are intended to support the design of a system that corresponds with Toha’s own commitments to trust, transparency and nature-positive outcomes.

We have a vision of a biodiversity credit system which is integrated with a national biodiversity data system that:

Separates property rights of land from environmental data rights;
Separates data ownership rights from data access with transferable rights to verify;
Separates data acquisition through climate action and work in service to nature, from data reuse to measure and verify outcomes;
Accounts for and values all verifiable climate action and work in service to nature;
Ensures attribution of work and impact through best-in-class digital identity technology;
Operationalises rights of nature by activating digital payments for verifiable work in service to nature;
Protects against commodification and pricing of nature itself;
Enables full data sovereignty for all New Zealanders and New Zealand registered organisations;
Protects and upholds all IP rights associated with mātauranga Māori, measurement of the state of the environment, and frontline solution methodologies;
Encourages capital cooperation amongst public and private capital providers;
Facilitates blended finance through grants, debt and equity;
Trusts market participants to collectively govern their shared interests;
Supports cooperative ownership of technology platform;
Separates technology ownership from data governance;
Facilitates market oversight by independent science;
Encourages frontline cooperation through climate and environmental data sharing; and
Protects the privacy of citizens and landowners.

This reflects Toha’s core assumption that data cooperation is the central implementation challenge for credible climate and environmental policy, now and into the future. New Zealand’s domestic economy is too small for multiple regulatory data management systems – for freshwater improvement, farm management, agricultural emissions and/or biological sequestration – that track measurement, reporting and verification of land use and associated outcomes. With new technology now readily available, it is possible to design and implement an open and unified public digital infrastructure that incentivises and rewards data sharing across our economy, without undermining our competitive norms. An open, distributed biodiversity data system can support regionalised community markets for nature-based work and measurable outcomes. It can also support diverse, place-based, product-level innovation which ensures that biodiversity credits are responsive to bioregion, land type and historical, present and target land-use.

3. Governance

The fundamental issue for the Government to resolve is governance.

The current consultation raises many technical issues in its discussion paper, which Toha has partially addressed in its answers to the consultation questions (see Section 6 below). However, these technical issues are secondary to the fundamental question of governance. Indeed, final decisions on technical issues should only be undertaken with the right governance in place. Unilateral decisions on fundamental design issues will likely undermine the legitimacy of any resulting system at its very foundations, which may be difficult to resolve.

The first question of governance relates to how the Crown can act in accordance to te Tiriti o Waitangi in its enablement and/or administration of a biodiversity credit system. In this regard, the Crown must navigate between two types of risk:

On the one hand, if the Crown takes a hands-off approach to voluntary biodiversity markets, there is a risk that private markets will evolve in such a way that they exploit Māori assets and resources. Consequently, the Crown may fail to actively protect Māori interests.
On the other hand, if the Crown takes a hands-on approach to market administration where the majority of decisions are undertaken centrally, then it will exclude the exercise of rangatiratanga in developing a system that is intimately related to Māori interests. Consequently, the Crown will fail to exercise a partnership approach in good faith.

To fulfil its kawanatanga duties, there is no avoiding that the emergence of voluntary biodiversity markets will create new regulatory responsibilities. Even if it takes a hands-off approach, the Crown must protect the interests of Māori and non-Māori alike from the risks of otherwise unregulated markets (see Question 15 in Section 6 for a discussion of risks). However, the Crown has special duties that relate to Article Two of te Tiriti o Waitangi to ensure tino rangatiratanga over whenua, kainga and taonga. Insofar as biodiversity credit markets pose risks to Māori in this regard, these must be anticipated and articulated, with appropriate safeguards put in place to prevent further breaches of te Tiriti o Waitangi.

The lack of robust analysis of risks to Māori interests is a major shortcoming of the current consultation. Given the lack of capacity among some whānau, hapū and iwi to engage in the many overlapping consultations that relate to environmental management over the last few years, it is unreasonable for the Government to use this consultation alone to fill that knowledge gap. To fulfil its duties as a Treaty partner, the Crown should commission a risk analysis of biodiversity credit markets for Māori interests, which is adequately resourced and draws on expertise in mātauranga Māori, the recommendations of the Wai 262 report, and other relevant matters. This risk analysis should precede any further policy design.

More fundamentally, however, the Crown needs to implement a partnership approach to the governance of the policy process. Māori participation in the policy process will help to avoid omissions such as the lack of an adequate risk analysis. The responsibility to enable and empower Māori decision-making will increase in proportion to the Crown’s intention to take a hands-on approach to market design, market shaping and market administration. The more authority the Crown chooses to assume over market development and implementation, the more it needs to enable and enhance rangatiratanga to fulfil its duties as a Treaty partner.

The meaningful involvement of Māori in the governance of a biodiversity credits system is essential for international credibility and legitimacy. All goals and targets within the Kunming-Montreal Global Biodiversity Framework (GBF) have links to Indigenous Peoples and Local Communities (IP & LCs). These are underpinned by human rights-based approaches, including effective participation and Free, Prior, and Informed Consent (FPIC). Furthermore, the GBF was born amidst a shift in narratives in global conservation policy – from IP & LCs as ‘vulnerable’ and ‘dependent’, to strength-based narratives that instead highlight the opportunities for Indigenous institutions and local knowledge to guide more effective conservation. As an example, the Integrity Council on Voluntary Carbon Markets is committed to including representatives of Indigenous Peoples in all of its deliberations. Consequently, any biodiversity credits scheme that is obviously operating without the consent of Indigenous peoples, or that violates Indigenous rights and interests, is likely to face major reputational and investment risks.

Critically, these risks are likely to manifest through market demand, which is vital for the success of a voluntary market. The companies most likely to proactively engage in a biodiversity credit market for the right reasons (i.e. to improve biodiversity outcomes) are also the least likely to tolerate negative impacts on Indigenous communities. As noted recently by the Biodiversity Credits Alliance: ‘[I]nvestors should be prepared to work more closely with IPs and LCs to ensure that their traditional knowledge and practices, and objectives are incorporated into conservation and restoration projects, and consider how they can lend, invest (e.g. through purchase of biodiversity credits) or insure in new ways to support the creation and management of Indigenous and Community Conserved Areas (ICCAs).’ Investors will not want to engage in any biodiversity credit market that, by design, brings them into extractive or exploitative relationships with Indigenous communities. However, any system that succeeds in enabling and empowering Indigenous peoples to participate and succeed in conservation and restoration, without undermining their self-sovereignty or control of resources, is likely to attract investment.

Another governance issue is data sovereignty. Biodiversity credit markets will generate and rely upon a diverse range of data for measurement, reporting and verification (MRV). Because biodiversity data will relate to taonga species, this is directly relevant to Māori interests, as affirmed by the Wai 262 report. Consequently, there are important issues of Indigenous data sovereignty to ensure that data for and about Māori is safeguarded and protected, and that Māori data should be subject to Māori governance. This issue also extends more broadly to data sovereignty issues for all New Zealanders, because biodiversity data is likely to derive from private as well as public sources. For instance, Trust Alliance New Zealand (TANZ) is developing a trusted digital framework to share data in a secure way, which enables farmers and growers to capture, manage and share their data while also controlling and protecting it. Self-sovereignty will be a critical principle for sustaining trust in a biodiversity credit system which benefits those on the ground who create data by measuring and reporting nature-positive actions and outcomes. To ensure that data is used in ways that are open and empowering, rather than manipulative and extractive, good governance is vital.

Toha’s strategy for the governance of its own emerging nature markets is to create decentralised autonomous organisations (DAO). These are self-governing, peer-to-peer networks whose members are working toward a shared mission, independent of third-party intermediaries. Governance structures are typically operated as token-based incentive systems, where members earn ownership shares by earning credits from participation. Toha’s token system is under development, which will enable new ways to exercise rangatiratanga through a DAO structure. This is a plausible way forward for voluntary biodiversity markets, which will enable and empower market participants to assume most of the costs and responsibilities of market administration.

4. The roles of Government

Based on Toha’s combined experience, research and market testing, we strongly believe that the New Zealand Government could not, and should not try to, unilaterally design and implement a voluntary biodiversity credit system. This is likely beyond the capabilities and internal capacity of any single entity, including the New Zealand Government. Moreover, unilateral decision making on foundational design issues is likely to create problems of system legitimacy that are potentially irresolvable.

The fundamental challenge of developing any voluntary nature market is one of coordination among multiple agents whose consent in the final system must be secured and sustained.

This is not primarily a challenge of ex ante design – and to mistake it as such will set the policy development process off on the wrong foot. To be sure, elements of a voluntary system will need to be intentionally designed ex ante by regulators and relevant experts, but this must occur within the context of appropriate governance which ensures that design choices have legitimacy (see Section 3 on governance). Meanwhile, other essential elements of the system must be designed with the active involvement of various agents, such as whānau, hapū and iwi, relevant ecological experts, credit issuers, and standard setters.

A co-design and co-development approach is essential for voluntary markets for at least two reasons, one epistemic, the other practical. Firstly, co-design and co-development ensures that the eventual system is shaped by, and continually responsive to, knowledge and mātauranga that cannot be realistically held, or authentically given, by the New Zealand Government. Secondly, co-design and co-development ensures that the eventual system has legitimacy among the people who directly participate in it, and whose interests are indirectly affected by it. Without ongoing engagement, the system will lack social licence, which means that participation can only be assured by shifting toward a compliance market rather than a voluntary market.

This informs Toha’s perspective on what roles that Government should play to support a voluntary biodiversity credit system. The consultation focuses on two roles:

Market enablement: where Government provides policies and guidance for the development and uptake of voluntary schemes in New Zealand, and potentially funding for system development as the market is established
Market administration: where Government establishes and manages a voluntary biodiversity scheme and is active in the ongoing management and administration.

When a nature market is voluntary, the Government should play only a limited role in market administration. In essence, this should be limited to regulatory responsibilities to protect participants from bad behaviour such as fraud, misrepresentation, corruption and market abuse, and to prevent negative social and environmental outcomes from market-related activity. Although this regulatory role is limited, it is nevertheless vital – i.e. the objective must be a well-regulated market rather than an unregulated market.

Beyond this, however, if the Government takes on more of the burdens of market administration, it will increasingly foreclose opportunities for co-development and therefore may undermine the preconditions for voluntary participation. Consequently, the biodiversity credit system will depend increasingly upon compulsion to ensure market demand. This is analogous to the NZ ETS, a compliance carbon market, which involves high levels of government administration, but also a high level of compulsion by imposing surrender obligations on participants and the threat of punishment for non-compliance. In such a system, the Government claims the right to impose its own design choices on the system, but to impose such choices on a voluntary system is likely to deter voluntary participation. Furthermore, for mandatory offsetting schemes, there are minimum design standards (e.g. fungibility, additionality) which must be adhered to, in order to ensure that offsetting transactions result in net-neutral or net-positive outcomes (e.g. the carbon removal is equivalent to the emission it permits, or the biodiversity enhancement is equivalent to the biodiversity loss it permits).

This trade-off is represented in Figure 1 below. Toward the voluntary end of the spectrum, a limited administrative role for the Government is required to regulate bad behaviour and negative outcomes. However, as the level of compulsion increases, so too does the level of government administration.

Figure 1: The trade-off between market administration and voluntary participation.

Consequently, there is a fundamental tension throughout the discussion document: although the consultation is ostensibly for a voluntary biodiversity credits system, the Government is seeking advice on design choices and standards as if it were preparing a mandatory system. Yet if the Government takes a strongly administrative approach to a voluntary system, it is likely to undermine the factors that will determine its success, such as innovation, market responsiveness and stakeholder buy-in. Furthermore, it is likely that the complexity and costs of market administration will rapidly outpace the Government’s capacity to fulfil this role. Consequently, it is prudent for the Government to resist centralising more functions than it is capable of effectively exercising, and instead taking a partnership approach that delegates relevant design choices to appropriate agents – e.g. credit design to issuers, mātauranga Māori to Māori organisations, MRV to research institutions and specialist experts. Indeed, by enabling a decentralised development process, the Government can expect to benefit from various knowledge spillovers (e.g. the creation of MRV systems, environmental monitoring technologies, data infrastructure) that will help the Government to implement nature-related policy in the future, including future compliance schemes which would require a strong administrative role from the Government.

Consequently, if the purpose of this consultation is a voluntary market, then the Government should err away from strong market administration. Furthermore, where the Government does play an administrative role, Toha recommends that this tends toward upstream administration. To be specific on a few key issues identified in Table 3 of the discussion document:

The Government should not perform verification and certification, but it could regulate those entities that provide those services to ensure that verification is robust and competently administered, and to ensure that verifiers are incentivised to only approve impact claims that are true and justified.
The Government should not regulate disclosure and reporting of claims, but (like it already does for voluntary carbon markets) it should publish clear and unambiguous guidance on how disclosure and reporting relates to existing regulations, such as the Fair Trading Act 1986.
The Government should not approve methodologies directly, but it could play a role in ensuring that robust scientific procedures are used in their development, enabling publicly-funded researchers to contribute to such processes, and ensuring that domestic and international standard setting bodies are adequately governed.

Because Toha sees the fundamental implementation challenge as the coordination of multiple agents, then also Toha sees a proactive role for the Government on market enablement. Government can play a vital role in accelerating and shaping the development of a biodiversity credit system to ensure alignment with its own policy objectives (e.g. Aotearoa New Zealand Biodiversity Strategy) and long-term creation of public value. Market enablement is especially important for a novel market structure which focuses on maximising value that is largely externalised by the prevailing economy. Such a market will face a variety of barriers and incumbency biases that will hinder its capacity to scale. Thus, the Government can play a critical role in strategically accelerating its development.

A crucial aspect is to enable the creation of a biodiversity-related data system. This is an important foundation for a well-functioning biodiversity credit system, but could also serve other purposes such as environmental monitoring and reporting, climate adaptation strategy, environmental taxation, targeting of subsidies, and so on. This data system ought to be designed and delivered as critical public infrastructure, so as to support a diversity of locally governed projects and/or project ecosystems. It also needs to be trusted by a wide set of stakeholders, so that the market has confidence in the fundamental integrity of underlying data claims and instead can focus on the differentiated advantage of product offerings.

To be specific on a few key issues identified in Table 3 of the discussion document:

The Government should, as suggested, provide funding to collectively develop and adapt open-source methodologies for data collection, which should include support for farmers to advance MRV protocol for small-scale sequestration on-farm and associated biodiversity and resilience benefits, as well as targeted funding to support Māori to investigate and advance the use of mātauranga. It could also support peer-review of such methodologies to ensure their scientific rigour.
The Government should not regulate credit projects to provide data for national data sets, but it should invest in data that has public value. The creation of such data is an important spillover benefit from the emergence of nature markets (i.e. a positive externality). The purchase of biodiversity data helps to correct the existing market failure whereby such data is unpriced and undervalued, and therefore helps to build a self-sustaining momentum for nature markets.
The Government should work in partnership with market developers to create a registry that enables market coordination, especially to avoid regulatory issues like double-counting of biodiversity claims. The Government could enable this critical infrastructure to enable self-regulation and appropriate governance.

Market enablement should also involve an explicit market shaping role which directs the biodiversity credit market toward the creation of long-term public value. Market shaping refers to ‘the public sector setting a direction and public purpose for private and public actors to collaborate and innovate to solve societal problems.’ In other words, it produces a sense of directionality to innovation and market processes in order to enhance their contribution to long-term value creation. In the context of biodiversity credit markets, this could include targeted R&D investments to accelerate activity in areas of urgent policy need, such as to address knowledge gaps for critically endangered species or habitats. It might also involve the public procurement of outcomes, such as the purchase of biodiversity credits that signify biodiversity uplift or avoided loss for species or habitat types that the market is not serving well.

Finally, it is worth noting that, over time, especially if biodiversity decline accelerates, then the Government might need to increase the level of compulsion of biodiversity credit systems to increase the scale of impact (see our answer to Question 9 in Section 6). Thus, voluntary schemes could be substituted by, or modified to become, mandatory schemes. This might take a number of forms:

Compliance biodiversity markets: a system of tradeable certificates that represent biodiversity uplift and/or avoided biodiversity loss, where participating business or sectors must surrender enough obligations to fulfil an annual quota.
Environmental footprint tax: a tax levied per unit area of land or privately owned coastal area, where the rate of the tax is set to reflect the ecological impact of activities occurring on that land or coastal zone. The revenue raised would be hypothecated toward the protection, restoration and creation of native biodiverse ecosystems.
Ecological fiscal transfers: essentially a tax-and-transfer mechanism which uses government fiscal transfers and revenue sharing schemes to improve ecological indicators in target areas, such as protected areas or catchment management areas.

At the current point in time, however, these policies may be difficult to implement, because the metrics and indicators for biodiversity measurement, monitoring, reporting and verification are unavailable or uncertain. This is one reason to support innovation in nature markets, especially the development of methodologies for biodiversity credits, because these MRV frameworks can stimulate policy innovation. New methods and new technologies can help governments to monitor the impacts of policy and to convey the benefits to the public. If voluntary biodiversity markets fail to scale up, the same infrastructure can nevertheless be redeployed by the Government to serve alternative policy instruments.

5. Biodiversity and carbon markets

One important justification for the creation of a biodiversity payment, such as a biodiversity credit system, is to address the incoherency of the current policy mix. This is skewed by the presence of the NZ ETS, a compliance carbon market, which creates a strong bias towards carbon sequestration in the absence of equivalent economic instruments for biodiversity and climate adaptation. The implementation of such instruments could ‘reset the balance’ toward biological carbon sinks with high biodiversity value and ecological resilience.

Climate mitigation, climate adaptation and reversing biodiversity loss are profoundly interconnected issues. This means that any single policy instrument, such as the NZ ETS, is likely to have implications for numerous policy objectives. Similarly, a biodiversity credit system cannot be evaluated solely in relation to, say, Te Mana o te Taiao – the Aotearoa New Zealand Biodiversity Strategy. Rather an integrated approach to policy evaluation is needed which is attentive to implications for various policy objectives, such as net emissions reductions, landscape resilience, regional economic development, freshwater quality and so on.

Here we discuss the policy intersections with climate mitigation, specifically how the biodiversity credit system might relate to existing efforts to encourage carbon dioxide removals through the protection, restoration and creation of biological sinks.

5.1. New Zealand Emissions Trading Scheme

Toha takes the view that biodiversity credits, or some other payment system for the non-carbon benefits of forests and other nature-based sinks, would support a more coherent long-term strategy for the NZ ETS. This is explained in our submission to the ETS Review (see Appendix 1), which we summarise here.

Toha supports a sequential pathway where New Zealand (1) reduces its current reliance on forestry removals to deliver net emissions reductions by (2) transitioning to a more discerning use of removals for hard-to-abate emissions only, and (3) a successive decoupling of forestry sequestration from offsetting so that an increased share of forestry removals contribute to the drawdown of excess carbon dioxide from the atmosphere (i.e. negative emissions). This is consistent with the IPCC AR6 WG3 position on the role of carbon dioxide removals, and it sets New Zealand on track to eventually achieve a net-negative position where sinks outweigh sources.

However, Toha recognises that the phasing down of carbon offsetting in New Zealand’s mitigation strategy will have serious implications for some forest owners. This will also disproportionately impact Māori and therefore exacerbate the mistreatment of Māori interests throughout the development and implementation of the NZ ETS.

Consequently, a payment for the non-carbon value(s) of forests, such as biodiversity and/or adaptation value, is critical for enabling the structural separation of forestry removals from gross emissions in the ETS. Biodiversity credits are a plausible mechanism for delivering such a payment, especially if demand is secured by Government procurement of credits, or mandatory purchase obligations by businesses. Critically, by creating a financial incentive that is not linked to the issuance of a carbon credit that signifies a right to emit, a biodiversity credit (or other non-carbon payment) will enable the carbon dioxide removal to contribute to emissions reduction targets as a pure negative emission. In other words, a removal which is sold through an offsetting transaction will be neutralised by the emission it permits, but a removal which is sold for its biodiversity value will not.

Additionally, by linking the payment to non-carbon values such as biodiversity and long-term resilience, this addresses the shortcomings of current policy design by enabling better integrated policy outcomes for forestry removals. The NZ ETS was designed to serve the policy objective of least-cost emissions reductions; however, the inclusion of forestry has had significant implications for other important policy objectives, including biodiversity, climate adaptation and regional economic development. These effects were not well-anticipated or well-signalled in advance, which has resulted in significant public debate and resistance once the trade-offs became apparent through land use trends, actual and expected. By creating incentives for biodiversity and forest resilience, however, there is an opportunity to improve land management outcomes, without resorting to regulatory restrictions on what people can do on their land.

Specifically, biodiversity credits could create the right economic enablers for the Permanent Forest Category to deliver well-integrated outcomes, rather than exclusions that might otherwise stifle innovation in silviculture, interfere with landowners’ agency, and reduce economic potential. Biodiversity credits would further reduce the need to adopt novel and inherently risky models like transition forestry, because biodiversity credits could provide the upfront cashflow that fast-growing exotic nurse species provide for transition forests.

For further discussion, see Appendix One which includes Toha’s submission to the ETS Review and Permanent Forest Category.

5.2. Nature-based removals outside of the ETS

The Government has signalled an interest in expanding ETS eligibility to include types of nature-based removals that currently are ineligible. This includes small forests that do not meet the current forestry definition. For example, in its response to recommendations of He Waka Eke Noa, the Government declared that it ‘agrees the NZ ETS is the most appropriate mechanism to reward all forms of eligible sequestration from vegetation in the long term… Recognition for on-farm sequestration would instead be funded by fossil fuel–emitting sectors participating in the NZ ETS, via the purchase of NZUs. Farmers and growers would receive the full NZU price as a reward for qualifying sequestration.’

However, this is inconsistent with the Government’s wider climate mitigation strategy. Small-scale sequestration is not eligible for target accounting, so the Government cannot count these removals toward achieving international targets, such as NDC1, our first Nationally Determined Contribution under the Paris Agreement. If emitters are permitted to offset target-consistent emissions with target-inconsistent removals, this creates a liability that the Government will need to bridge by securing equivalent emissions reductions from elsewhere. Essentially, this shifts the cost of emissions from the agricultural sector onto taxpayers, which is unacceptable. It is also inconsistent with the Government’s need to decouple removals from the ETS, so that the ETS can better manage gross emissions (this is discussed further in Appendix 1).

A biodiversity payment, however, provides an elegant solution to the role of small-scale sequestration in agricultural emissions strategy, which has proven a significant hurdle for the He Waka Eke Noa process. A biodiversity credit system would reward farmers for values that small-scale forest is especially good at providing, such as ecological connectivity in pastoral landscapes and greater landscape resilience. One of the fundamental flaws of He Waka Eke Noa was that its terms-of-reference restricted it to emissions (i.e. climate mitigation) in isolation of other issues, especially climate adaptation and biodiversity. The prospect of biodiversity credits, or some other non-carbon payment, presents an opportunity to take a more holistic approach. Biodiversity and/or adaptation value would serve as the basis for payment, which would offset the impact of agricultural pricing (the payment could be funded by general funds, or by hypothecating revenue from an agricultural pricing mechanism). The carbon value from small-scale sequestration, although not eligible for target accounting, would serve as a co-benefit of the biodiversity payment. Although it is unlikely to constitute a significant volume of carbon, it will nevertheless serve as a contribution to the global public good of removing carbon dioxide from the atmosphere, and a partial compensation for the historical deforestation that agriculture has benefited from.

The Government is also exploring the potential to extend the scope of the ETS to include other forms of removals, such as carbon sequestration in soil or wetlands. However, Toha endorses the tone of caution that the Government has expressed elsewhere: ‘The main problem relates to the allocation of removals for removal activities. If the removals do not count towards our NDC, but emitters can use them as part of their surrender obligations, Aotearoa would effectively be paying for removals that do not help us meet our NDC. This is a significant obstacle to expanding the scope of the NZ ETS to recognise a broader range of removal activities.’ Again, a far better option is to incentivise these removals by a non-carbon payment, such as a biodiversity and/or resilience-related payment, so that subsequent removals are a contribution to the global public good of reducing atmospheric carbon, rather than a source of carbon credits whose negative emissions will be neutralised by offsetting.