What is a biodiversity offset?

Biodiversity offsets are a type of market-based instrument utilized by governments in an effort to preserve healthy biodiversity within their communities. Essentially, the biodiversity offsets work by forcing firms to compensate for any losses in biodiversity that result from infrastructure or development projects that they choose to embark on. Typical biodiversity offset markets are made up of the trading of biodiversity credits between firms in addition to the matching between losses and gains in the biodiversity of the community. This trading system has been allowed since at least 2004 in Germany, and it can allow for storing of “offset credits” so that efficient planning can be carried out to accomplish the proper amount of biodiversity offsetting.

Biodiversity offsets in Germany

Since the 1970s, Germany has implemented a tax in order to offset the negative effects of projects that impact biodiversity. It is referred to as Impact Mitigation Regulation (IMR). It’s goals are to achieve no net loss of biodiversity and certain ecosystem services. It fulfills this goal through ecosystem restoration. There have been some revisions of this tax, including habitat banking (allowed since 2004) and amendments in 2002 and 2009 that relaxed the requirement for restoration compensation offsetting to be on-site and in-kind.^[1] These amendments were made so that offsetting was more common and feasible. Biodiversity offsets are defined as conservation outcomes that result from a compensation for adverse impacts to biodiversity after prevention and mitigation measures have already been attempted. ^[2]

At first, Germany's IMR policies were rolled out regionally in some states before being implemented on a national scale in Articles 13 to 19 of the Federal Nature Conservation Act.^[3] These laws along with other IMR functions help to ensure the avoidance of significant negative environmental effects from projects in addition to the enforcement of compensatory requirements from adverse effects on Germany’s natural assets due to project development. Importantly though, the impact of the IMR excludes agricultural, fishery, and forestry activities from its jurisdiction. It is often thought that this tax was introduced in order to respond to concerns over the destruction of Germany’s landscapes during the rapid urbanization of the 1960s. The Council called for legislation that didn’t only apply to protected areas so that biodiversity could be protected everywhere. There has previously been concern from NGOs that offsetting might be counterproductive as it might result in damage that shouldn’t have happened in the first place.

The "No Net Loss" Principle

The goal of the specific biodiversity offsetting program is to achieve "No Net Loss" in biodiversity through new development projects within the country, as the polluting firms will be forced to compensate for their projects by funding things such as ecosystem restoration. In Germany, this is known as the polluter pays principle, as the polluter is responsible for the offsetting costs. According to a study published in the IEEP report, these costs amount to 2.5 billion euros each year as polluters attempt to compensate for the environmental impacts of their development projects.

In general, the IMR sets out general legal obligations that are implemented through state-level regulations that also provide considerable flexibility to local authorities. As a result, offsetting practices vary considerably. The first goal, for project proponents to avoid significant negative biodiversity effects, is strictly followed within IMR’s mitigation hierarchy. The impacts that do result are then evaluated for compensation. Impacts are assessed by their effect on species and habitat types.^[4] Every state has lists of certain species and habitats that should be taken into consideration. Offsetting happens through actions such as habitat creation or enhancement. Risk aversion is not considered offsetting.

Project proponents must submit proposals that set out impact mitigation and offsetting. The project proponent is the one who bears the burden as Germany follows the “polluter pays principle.” Oftentimes the paying party is a local authority or public body. If some impacts cannot be offset then compensation can be made through monetary means, however this is a last resort. This payment is then measured as the average costs of a hypothetical offset measure.^[5] The money must be used for the appropriate nature conservation.

Nonprofit organizations and the public have a highly involved place in the IMR system. All proposals are published for the public to see and consult on. Plans and project proposals must set out their expected impacts and proposed offsetting measures. NGOs play an important scrutinising role. They check impact assessments, spatial plans and the adequacy and suitability of planned offset measures.^[6] This public scrutinization has leads to many changes in the FNCA. Eco-accounts have become one of the important subtopics of biodiversity offsetting as a more innovative way of implementing offsets. These accounts deal with offset credits, making them comparable to habitat banks.

How the "No Net Loss" Principle Works in Practice

The "No Net Loss" principle in addition to the other tenants of the German biodiversity program are further illustrated in the figure below:

As can be seen in this figure, the bars demonstrate increasing action and mitigation as the graph of the mitigation principles invoked by the IMR is viewed from left to right. First, the dashed bar shows the potential maximum effects of a proposal without any considerations of the biodiversity impact, but then different segments and colors of the bars represent the mitigation impacts of different parts of the German Biodiversity program. The overall goal of the program is to create "No Net Loss", meaning that the overall impact on biodiversity and ecosystem services (shown on the y-axis) will be greater than or equal to 0. However, the proposal of a new project will generally have anticipated negative effects so actions must be taken to achieve a "No Net Loss" if the proposal is to be developed. First, deterrence stops the most damaging aspects from occurring. Avoidance also allows firms to change location or change other aspects of their proposal to avoid a more significant biodiversity cost. Next, minimization actions can be accomplished by the firm in order to lessen their impact through acts such as effective project management. Finally, after the project is completed, firms are able to spend money to rehabilitate and restore the impacted areas such that the value in biodiversity can be replenished. Now, after all of these actions have been taken, a firm is left with its residual impact (the yellow bar) and must find a way to offset this impact in order to reach a "No Net Loss" outcome through the program. Firms in Germany can look to accomplish this by pursuing either on-site or off-site projects, meaning that their impact can be offset by either replenishing the area that they harmed or by replenishing another area, although on-site compensation is still preferred by the German regulation. This enables firms to find the most efficient offsetting solution, something that classical economists would be fond of, as they will naturally look to find or pay someone else to find the cheapest way to offset the biodiversity costs of their project.

Effectiveness of Biodiversity Offsetting

However, recent studies have shown that a large number of offsetting projects have been unable to reach their goals and thus have resulted in the "No Net Loss" principle being left unsatisfied. It is hypothesized that this failure to offset the costs of a project has been the result of difficult location restrictions coupled with lax requirements for monitoring the long term impacts of the offsetting projects. Offset implementation has improved more recently with the addition of new requirements, but even still many offsetting projects are thought to not reach a "No Net Loss" outcome. A 2010 study showed that of offsetting projects, only 2/3 were implemented while only 1/3 actually accomplished their compensation goals. Despite these efficiency downfalls of the biodiversity offsets in Germany, the IMR programs still do seem to have a tangible impact on mitigating the environmental biodiversity cost of development projects to some degree, even if they are unable to reach an overall "No Net Loss".

In general, there have not been a lot of studies on the cost and benefits of this tax which makes it hard to determine the effectiveness. Total costs of offsetting under the IMR aren’t documented which makes it difficult to compare results with resources. However, a European Commission study estimated that the total annual costs of offsetting in Germany are approximately EUR 2.5 billion (1.1 – 3.4 billion). ^[7] In most cases offsets only aim to achieve no net loss of biodiversity, or a modest gain. However, planned gains may just be a contingency because a lot of offsets do not fully achieve their goals. Because of this, we can make the assumption that the overall payments made by project proponents aren't making substantial gains in improving biodiversity overall but they are assumed to be achieving no net loss.

Skepticism on this tax is not unfounded. A study in 2010 showed that only ⅔ of the proposals were implemented and only ⅓ of them actually achieved their goals.^[8] Studies found some offsets were not implemented or weren’t achieved because of a lack of suitable land (due to the limitations before the new less strict requirements) and a lack of clarity on responsibilities. Many have argued that eco-accounts are more efficient. There has been no impact assessment or overall study of the effectiveness of the IMR, so the overall magnitude and extent of its impacts cannot be quantified but as of now, Germany’s biodiversity offsetting measures have made significant impacts on habitats and species and Germany. And if the German government is able to continue to implement more clarity in its monitoring and regulations as well as potentially expand to include the biodiversity losses caused by the currently excluded industries of fisheries, forestries, and agriculture, then Germany should only be able to further solidify the positive steps it has taken to prevent biodiversity loss within the country.

Notes

[1] Tucker, Graham. “Biodiversity Offsetting in Germany.” IEEP, Dec. 2016.

[2] “Biodiversity Offsets.” 2016, doi:10.1787/9789264222519-en.

[3] Tucker, Graham. “Biodiversity Offsetting in Germany.” IEEP, Dec. 2016.

[4] Tucker, Graham. “Biodiversity Offsetting in Germany.” IEEP, Dec. 2016.

[5] Tucker, Graham. “Biodiversity Offsetting in Germany.” IEEP, Dec. 2016.

[6] Tucker, Graham. “Biodiversity Offsetting in Germany.” IEEP, Dec. 2016.

[7] Tucker G M, Dickie I, McNeil D, Rayment M, ten Brink P and Underwood E (2016) Supporting the Elaboration of the Impact Assessment for a Future EU Initiative on No Net Loss of Biodiversity and Ecosystem Services. Report to the European Commission. Institute for European Environmental Policy, London.

[8] Sperle, T (2010) Evaluation der Umsetzung von Ausgleichsmaβnahmen von Bebauugsplänen. Bericht im Auftrag der Landtagsfraktion Bündis90 / Die Grünon Baden-Württemberg.

Works Consulted

“Biodiversity Offsets.” 2016, doi:10.1787/9789264222519-en.

Sperle, T (2010) Evaluation der Umsetzung von Ausgleichsmaβnahmen von Bebauugsplänen. Bericht im Auftrag der Landtagsfraktion Bündes90 / Die Grünen Baden-Württemberg.

Tucker G M, Dickie I, McNeil D, Rayment M, ten Brink P and Underwood E (2016) Supporting the Elaboration of the Impact Assessment for a Future EU Initiative on No Net Loss of Biodiversity and Ecosystem Services. Report to the European Commission. Institute for European Environmental Policy, London.

Tucker, Graham. “Biodiversity Offsetting in Germany”. IEEP. December 2016. https://ieep.eu/uploads/articles/attachments/e121d600-5e85-44d4-86e4-02a05348164a/DE%20Biodiversity%20Offsetting%20final.pdf?v=63680923242

Koh, Niak Sian, et al. “How Much of a Market Is Involved in a Biodiversity Offset? A Typology of Biodiversity Offset Policies.” Journal of Environmental Management, Academic Press, 4 Dec. 2018, www.sciencedirect.com/science/article/pii/S0301479718313458

Underwood, E., et al. A Review of Recent Biodiversity Offsetting Practice in Germany. Edited by W. Sheate et al., IEEP, Feb. 2014, randd.defra.gov.uk/Document.aspx?Document=12533_BiodiversityOffsettingreportfromGermanyDec2014.pdf