IDR Team Summary 8

Design a system for international trade that accounts for impacts on ecosystem services.

CHALLENGE SUMMARY

The goods moved from country to country in global trade are associated with changes in ecosystem services in both the selling and buying nations. For example, the United States exports a very large fraction of the soybeans and corn grain that it produces to other countries. The funds derived from this exchange helps the farmers and the national economy. However, there are disservices left behind that are uncompensated. A certain fraction of the fertilizers that went to produce the corn and soybeans end up in the Mississippi River and are related to the dead zone in the Gulf of Mexico. The country that buys the corn and soybeans can reduce the land they use for food, the water that is needed to produce it as well as the fertilizers and pesticides used that end up reducing the value of ecosystem services that could have been provided. A number of other cases of “virtual” or “embodied” ecosystem services have been analyzed. Nations with limited water supplies can purchase water-intensive commodities such as rice or cotton, and thereby shift the impact on freshwater ecosystem services to the seller. Studies of the carbon costs of crops generally show that mechanisms that shift food production from temperate to tropical farms decrease carbon storage. Countries that establish policies to protect forests do not save forest ecosystem services globally, because the supply of forest products merely shifts deforestation to other nations. In many cases, markets for ecosystem services are blind to the side effects of virtual or embodied ecosystem services.

The literature on trade in virtual or embodied ecosystem services is growing, and could be extended to a wider range of types of ecosystem



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IDR Team Summary 8 Design a system for international trade that accounts for impacts on ecosystem services. CHALLENGE SUMMARY The goods moved from country to country in global trade are associated with changes in ecosystem services in both the selling and buying nations. For example, the United States exports a very large fraction of the soybeans and corn grain that it produces to other countries. The funds derived from this exchange helps the farmers and the national economy. However, there are disservices left behind that are uncompensated. A certain fraction of the fertilizers that went to produce the corn and soybeans end up in the Mississippi River and are related to the dead zone in the Gulf of Mexico. The country that buys the corn and soybeans can reduce the land they use for food, the water that is needed to produce it as well as the fertilizers and pesticides used that end up reducing the value of ecosystem services that could have been provided. A number of other cases of “virtual” or “em- bodied” ecosystem services have been analyzed. Nations with limited water supplies can purchase water-intensive commodities such as rice or cotton, and thereby shift the impact on freshwater ecosystem services to the seller. Studies of the carbon costs of crops generally show that mechanisms that shift food production from temperate to tropical farms decrease carbon storage. Countries that establish policies to protect forests do not save for- est ecosystem services globally, because the supply of forest products merely shifts deforestation to other nations. In many cases, markets for ecosystem services are blind to the side effects of virtual or embodied ecosystem services. The literature on trade in virtual or embodied ecosystem services is growing, and could be extended to a wider range of types of ecosystem 85

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86 ECOSYSTEM SERVICES services. However, there has not been comparable progress on policies and regulations to address the hidden costs of environmental damage associ- ated with trade in ecosystem services. How can this complex, emerging and serious problem be addressed by policy makers and trade regulation organizations? Key Questions • How can we transparently monitor the full effects on ecosystem services of international trade? • What policy instruments are available for accounting for virtual or embodied ecosystem services in international trade? • What should be the goal of an international policy for managing virtual or embodied ecosystem services? • How could a policy for virtual or embodied ecosystem services be integrated with existing structures that regulate international trade? • If policies were established to address virtual or embodied eco- system services in global trade, how could the effectiveness of those policies be assessed? How should such assessments feed back into the evolution of policies for global trade? Reading Burke M, Oleson L, McCullough E, and Gaskell J. A global model tracking water, nitrogen, and land inputs and virtual transfers from industrialized meat production and trade. Environmental Modeling and Assessment 2008;14:179-193. Galloway JN, Burke M, Bradford GE, Naylor R, Falcon W, Mooney HA, McCullough E, Oleson KLL, McCullough E, and Steinfeld H. International trade in meat: the tip of the pork chop. AMBIO 2007;36:622-629. Hoekstra AY and Hung PQ. Globalisation of water resources: international virtual water flows in relation to crop trade. Global Environmental Change 15 2005;15:45-56. MacDonald GK, Bennett EM, Potter PA, and Ramankutty N. Agronomic phosphorus imbalances across the world’s croplands. Proc Natl Acad Sci 2011;108:3086-3091. Meyfroidt P, Rudel TK, and Lambin EF. Forest transitions, trade, and the global displacement of land use. Proc Natl Acad Sci 2010;107:20917-20922. Peters GP and Hertwich EG. CO2 embodied in international trade with implications for global climate policy. Environ Sci Technol 2008;42:1401-1407.

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87 IDR TEAM SUMMARY 8 IDR TEAM MEMBERS • Kimberly M. Carlson, Yale University • David C. Cook, Department of Agriculture and Food, Western Australia • Jessica A. Dempsey, University of British Columbia • Justin Kitzes, University of California, Berkeley • Claire Kremen, University of California, Berkeley • Fernando A. Milano, Facultad de Ciencias Veterinarias, Universidad Nacional del Centro (National Univ.) • Beth Marie Mole, University of California, Santa Cruz • Nathalie F. Walker, National Wildlife Federation IDR TEAM SUMMARY Beth Marie Mole, NAFKI Science Writing Scholar University of California at Santa Cruz IDR Team 8 was asked to design a system for international trade that accounts for the economic impacts on ecosystem services. To address this challenge and identify areas for future work, they used palm oil production as a practical framework because it is particularly damaging to ecosystems rich in biodiversity and often spans multiple countries. Palm oil represents one of the few global commodities responsible for a large share of negative effects on ecosystems, thus a useful example for new policy. The palm oil in a store-bought birthday cake in the United States, for example, is often farmed in a foreign, relatively poor, country on a large- scale palm plantation where a rainforest previously stood. Raw pulp is harvested from the palm tree fruit and shipped off to a second, often moder- ately wealthy, country where it is refined and processed in a smoke-spewing factory. On the last leg of its journey, the finished product is sent to the United States where it is added to cake mix and sold. The same international trade transactions also occur for palm oil that ends up in other foods, such as granola bars, ice cream, frozen pizzas, and candy, as well as other products such as in beauty products, biofuel. Each time palm oil changes hands, the hidden costs of production are being traded as well. That palm plantation in the first country is replac- ing a biodiverse, functional ecosystem that once had pollinators, native plants and animals, carbon storage, and nutrient cycles. Now, in its place

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88 ECOSYSTEM SERVICES is a plantation with fertilizers, pesticides, topsoil run-off, and no place for a backwoods hike. When the second country receives the raw palm oil, it is importing a product while, perhaps unthinkingly, exporting the loss of ecosystem services. But the second country, which processes the oil, has also cleared an ecosystem to make way for a factory that puts out industrial waste. By the time the palm oil gets to the United States, the process has damaged a series of ecosystem services that are not factored into the transac - tion costs or the price of the birthday cake purchased at the supermarket. Accounting for the Ecosystem Services that Count In order to account for those lost ecosystem services, the team first grappled with the definition of ‘services’. Generally, ecosystem services span the range of benefits that ecosystems can and do provide society. These in- clude, but are not limited to, services such as cleaning water, easing floods, cycling nutrients, providing places for recreation and homes for pollinators that ensure that crops bear fruit. Scientists have so far tried to account for the negative effects on eco- system services by focusing on individual resources—proxies for overall ecosystem services. These include the amount of clean water, carbon sequestration, and nutrients such as phosphorus and nitrogen that are cycled or accumulated. But these resources are difficult to value since they’re dependent upon each other. For instance, without nutrient cycling, there might not be successful vegetation that can store carbon. Thus, accounting for multiple services may involve counting proxies multiple times. While considering the possibility of redundancy in placing a dollar value on ecosystem service proxies, the team also acknowledged the need to consider trade-offs. Disrupting some ecosystem services may be worthwhile in order to produce crops or meat, provide jobs for local communities, and establish an industry that will bolster the overall local economy. These issues, which account for the importance of ecosystems on local and global scales, are new questions that will need to be addressed on a case- by-case basis. A policy of ecosystem service valuation will greatly increase the nature of policy regarding international trade of ecosystem services. So, what are those possible policies? With the uncertainty of how trade-offs could be assessed, the team interpreted “policy” loosely to include policies by governments, campaigns

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89 IDR TEAM SUMMARY 8 by nonprofits and other organizations, and mechanisms instituted in the private sector that would help account for or mitigate ecosystem service losses. In addition, with the compounding factors of different priorities from different governments, ecosystems, and social impacts, policies would likely not be a one-size-fits-all matter where win-win situations are always possible. There is already a variety of mechanisms available that could start accounting for ecosystem services tied to traded goods. These include • Taxes and subsidies: The government of a country importing palm oil could tax that transaction if the oil was coming from a country/company that isn’t sustainably producing the oil. Likewise, the same government could provide subsidies for imports that are coming from responsibly pro- duced oil. • Market based instruments: Countries where palm oil is being made could allow quotas of individual ecosystem service proxies, such as carbon, and provide tradable credits for companies that don’t reach their limits. • Private sector activities: Companies producing palm oil can willingly institute their own policy to reduce ecosystem service loss. • Financial pressures: International-banking agencies can alter a palm oil company’s access to loans and credit in return for responsible environ- mental policy. • Outreach programs: By having companies put labels on their prod- ucts that boast that their palm oil came from a sustainable plantation, public awareness and purchasing trends could persuade companies to reduce their damage to ecosystems. While these approaches provide a framework to start accounting for impacts on ecosystem services attached to goods that cross the globe, they still don’t comprehensively account for individual ecosystem service costs and trade-offs. Moreover, some ecosystem service effects are felt at different time and space scales. For instance, palm oil plantations that provide work for local community members tomorrow, may contribute to greenhouse gas emissions that will affect generations years to come and reduce the bio- diversity of a regional ecosystem. A new mechanism to address valuing trade-offs in ecosystem services is to bundle them by valuing multiple proxies. In countries with palm plantations, the ecosystem services of the original rainforest could bundle the attraction of tourists to rainforests and a diversity of tropical wildlife.

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90 ECOSYSTEM SERVICES Bundled ecosystem services can then be balanced or compared with con- trasting aspects of ecosystem service impacts, such as the production of a commodity, in this case, palm oil. Policies in Practice How will regulators know that these policies account for or reduce the impacts on ecosystem services in the production of internationally traded palm oil? Governments, companies, or other international agencies will have to accurately measure and monitor the ecosystem service impacts on local and global scales. This requires some measuring tools that aren’t developed yet. While scientists can continue to monitor proxies for local ecosystem services, as of yet there is no mechanism for measuring some ecosystem services on a global scale. IDR Team 8 suggested that part of this problem could be dealt with by setting up a system to monitor the effect on ecosystems throughout the supply chain, which can reassess cumulative ecosystem service effects of palm oil as it travels through the three countries. Possible watchdogs and judges While many institutions and structures, including the World Trade Organization, already exist to monitor trade, IDR Team 8 was uncertain whether current regulatory bodies could take on the new role of ecosystem service impact monitoring or if new entities need to be established. How- ever, the team acknowledged that current national policy bodies could provide a starting point for monitoring impacts linked to trade. When developed countries import any goods, they usually perform a risk assessment to determine if it’s worth importing, rather than making the goods within its own borders. The risk assessment takes into account threats such as the likelihood that the trade will also import hitchhiking invasive species. The risk model could be expanded to include ecosystem damage and social impacts of production. If, upon review of preexisting structures, no current institutions seem appropriate for coordinating and monitoring new policy, the team sug- gested the creation of an international institution to step in and launch global ecosystem service impact policies. One means by which to sustain a new institution would be for it to have authority of taxing global traders that were determined—using ecosystem service impact monitoring—to be “worst offenders.” A worst offender classification would apply to compa-

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91 IDR TEAM SUMMARY 8 nies that create particularly harmful effects on the ecosystem services. An example would be companies that clear out rainforests to make way for large-scale oil palm plantations, versus a company that repurposes land. The funds provided by this tax could also be invested, through international banking institutions, into companies that provide positive ecosystem service impacts. Although many questions and unknowns remain about how exactly to monitor ecosystem service impacts that accrue during international trade, the IDR Team 8 agreed that the more countries committed to addressing the challenge, the better.

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