Incentivising biodiversity net gain with an offset market

We investigate the use of private funding for biodiversity conservation through an offset market. The environmental objective is to increase some measure of biodiversity in a region (“net gain”) despite the loss of land for new housing. Farmers create biodiversity credits by changing their land management, then sell these credits to housebuilders who are required to more-than offset the impacts of new house building on a biodiversity. A general result is established for the impacts on price and quantity in the offset market as the net gain target is make more ambitious. Combining an economic model of market operation with an ecological model linking land management to bird populations, we then examine the impacts on equilibrium price and quantity of offsets as the target level of net gain is
increased for a case study site in Scotland. Changes in the spatial pattern of gains and losses in our biodiversity index are also shown.