Biodiversity in the Digital Age Part 4D

So far Article 4 has offered an overview of the system to enable value transfer between nature and the digital world looking specifically at the principles, function and design of both the supply (4A and 4B) and demand (4C) sides. In this final section for Article 4 I explore the movement of money through the system, by looking into pricing, funding and financial flows.

Let’s follow the money!

To consider pricing in biodiversity credit markets, it’s essential to first understand the state and structure of the current market as this offers important context for how prices are being determined.

The first component to consider is that biodiversity credits operate in a voluntary space. As a result, demand for credits is low and the market is currently small. In their recent review on the State of Voluntary Biodiversity Credit Markets Pollination identified the approximate total value of credits sold to date was in the range of US$325,000 to US$1,870,000, representing between approximately 26,000 and 125,000 hectares of positive biodiversity outcomes.

Given the nascency of the market, and questionable demand from the corporate sector, it is not surprising that most biodiversity credit schemes are commencing with cost-based pricing incorporating a small margin. Costs to be covered with this approach include on-the-ground conservation efforts, land management, monitoring, administrative expenses, and sometimes the opportunity costs of land use (e.g. forgone agricultural income). The idea is that by covering these costs, suppliers are financially compensated for the work they’ve done to preserve or enhance biodiversity.

Cost-based pricing stands in contrast to value-based pricing which considers the broader ecological, social and economic benefits of conservation efforts, rather than just covering project costs. Value-based pricing is a more desirable approach, offering an opportunity to command higher prices from buyers and representing an aspirational progression as markets mature. The benefit of higher prices and sustained demand is that it further stimulates the supply side of the market which then drives an expansion of the area under management and restoration. Despite being a predominantly cost-based market at present, Pollination found that most suppliers were trying to incorporate multiple factors into their pricing scheme, including more value-based pricing considerations based on the buyers’ willingness to pay.

The second component to consider is that biodiversity credits are emerging in the shadow of the well-established carbon credit market, which often sets an anchoring price point for nature-based credits. As a result, the carbon market may be setting a baseline for buyers, who often expect biodiversity credits to be priced similarly to carbon credits, despite their broader scope. In addition, price anchoring may be occurring because of biodiversity outcomes being stacked, stapled and bundled with carbon generating projects.

A requirement to now unbundle the concept of biodiversity co-benefits from carbon offset projects into stand alone, and non-offsetting biodiversity credits further inhibits pricing clarity, potentially reducing the opportunity for effective pricing in the market.

All of this reflects in the vast price variation being achieved in the market, with Pollination identifying that the price being achieved for one-hectare standardised biodiversity credits ranges from between US$2 and US$60,000. Despite this range, most credits that have been sold were priced at US$25 per credit or less.

While cost-based pricing may seem logical, its impact on supply-side incentives can be complex, influencing the behaviour of market participants in both positive and negative ways.

Cost-based pricing ensures the sustainability of biodiversity conservation projects by guaranteeing that they can at least cover their expenses, making them financially viable in the long term. This assurance provides landowners and organisations engaged in these projects with a baseline incentive to continue or expand their conservation efforts.

Additionally, by directly linking the price of credits to the costs of producing them, this pricing model promotes transparency, allowing buyers to see that their investments are tied to specific conservation outcomes and reflect tangible efforts on the ground. Furthermore, cost-based pricing can encourage smaller or community-driven biodiversity projects by ensuring that their unique conservation efforts receive the necessary support, which can help diversify the supply side of the market and attract a broader range of participants.

One major issue with cost-based pricing, however, is its disconnection from market demand and the perceived value of biodiversity outcomes. In a voluntary market with low demand, pricing credits solely based on costs may lead to prices that exceed what buyers are willing to pay, limiting the uptake of credits and reducing financial incentives for project developers.

Additionally, if cost-based pricing fails to account for true opportunity costs or undervalues the risks and long-term efforts required to maintain biodiversity, it may lead to under-investment in projects (Figure 1). Those with high up-front costs, long timelines, or uncertain returns may struggle to secure adequate compensation, deterring participation and limiting the scale of biodiversity protection efforts. Suppliers are also more likely to select lower-cost projects with predictable outcomes to ensure they cover expenses, which can skew conservation efforts toward cheaper, short-term activities, ultimately limiting the market’s ecological impact. Furthermore, and not necessarily undesirable, cost-based pricing is likely to incentivise protection and stewardship projects over restoration projects that typically have higher cost requirements.

Further preferential selection of biodiversity credit projects is likely to be influenced by economies of scale, which tend to favour larger projects over smaller, community-driven initiatives. Larger projects can often achieve lower costs per unit of biodiversity outcome, making them more attractive under a cost-based pricing model. This could result in smaller projects, which may have valuable localised ecological or social benefits, being overlooked due to their higher per-unit costs.

Additionally, the availability of land plays a critical role in determining which projects go ahead, as land scarcity or competing land uses can restrict opportunities for biodiversity conservation, particularly in densely populated or agriculturally intensive areas. Other factors, such as the regulatory environment, accessibility to financing, and technical capacity for monitoring and verifying outcomes, can further influence which projects are pursued.

Collectively these constraints may cause a bias toward projects in regions with favourable land conditions, larger financial backing, or established conservation infrastructure, potentially leaving high-need areas or innovative conservation methods underfunded.

Finally, cost-based pricing may inhibit innovation, as it provides little motivation for suppliers to explore more effective or impactful conservation methods. Without the incentive to innovate, the adoption of new technologies or more ambitious biodiversity projects that offer higher returns on ecological investment could be significantly slowed.

Given that value-based pricing is a more desirable approach, a preferred strategy would be to incorporate it into the biodiversity credit system through a hybrid model that blends cost recovery with market-driven factors. This model would ensure that conservation projects can recover their costs while also reflecting the broader ecological, social, and economic value that biodiversity outcomes provide. By incorporating both the actual costs of conservation and buyers’ willingness to pay, this hybrid approach would bridge the gap between financial sustainability for project developers and the market demand for biodiversity credits. Such a system would also incentivise investment in high-impact, long-term conservation efforts while ensuring that credits are priced in a way that aligns with the market’s perceived value of biodiversity, making the market more robust and attractive to both suppliers and buyers.

In Article 4A I identified that two stages of finance are required to get the biodiversity credit market up and running on the supply; an ex-ante implementation payment (covering stakeholder engagement, planning and design, baseline measurement and on ground management activities), and an ex-post credit purchase (which incorporates the expense for monitoring, verification, governance and reporting). In addition to this in Article 4C I identified that the demand side offers an opportunity to engage with consumers through the process of tokenisation, fractionalisation and a nature-backed rewards scheme. Structurally I believe that this segmentation offers an opportunity to implement both cost-based and value-based approaches for pricing, and subsequent funding, in the system.

Commencing on the supply side of the system there is a requirement to establish an initiation fund that provides up front capital to community groups seeking to protect and restore biodiversity. Within the system I term this fund the Regenesis Fund.

The purpose of the Regenesis Fund is to enable the ex-ante implementation payment to allow community groups to commence with project planning and management and facilitate the initial implementation of on ground management activities that will ultimately result in a measurable improvement in biodiversity over time.

Rather than being an investment fund, the Regenesis Fund is structured to provide capital without expectation of financial return or claim on any future biodiversity credits created. This structure is preferred as it allows the manager of the Regenesis Fund (typically an organisation with conservation objectives) to prioritise maximising ecological and social outcomes without being constrained by financial returns or cost minimisation pressures. It also avoids preferential selection of short-term, lower-cost projects that may not have the same long-term ecological impact as more ambitious, higher-cost initiatives.

Investments seeking financial returns are also more likely to exacerbate eco-colonialism structures by reinforcing imbalanced power dynamics, particularly in regions rich in biodiversity but vulnerable to exploitation. By financing conservation projects with an expectation of future returns, investment funds are more likely to prioritise the interests of investors — often from wealthier nations or regions — over the needs and rights of local communities who depend on the land and ecosystems for their livelihoods. Although certifications and standards attached to crediting projects can help avoid these outcomes, the presence of an underlying financial driver brings influence over decision-making processes and introduces an underlying tension to how biodiversity is managed.

Moreover, the focus on financial returns can pressure conservation efforts to align with profit-driven goals, which might prioritise marketable biodiversity credits over meaningful, context-specific conservation practices that benefit local ecosystems and communities. This approach risks commodifying nature in a way that overlooks the cultural, social, and ecological significance of biodiversity for indigenous and local peoples, deepening historical patterns of exploitation and control.

To establish and perpetuate sustainable funding (i.e. non-government and non-philanthropic) of the Regenesis Fund there is an opportunity to leverage impact-driven business models, which are reflective of a class of enterprise that combine commercial outcomes with a built-in mechanism for social good. Well know examples of this type of business include TOMS, Warby Parker and thankyou. However, rather than focusing on producing material goods a more fitting solution for a digitally native infrastructure built for biodiversity markets is to focus on building an impact-driven business for digital assets and media and entertainment IP. The benefit of this approach is that the assets can be created with minimal physical footprint on nature and are highly scalable — once created, they can be distributed globally to vast audiences with minimal additional cost or environmental impact. The vehicle I have created to enable this is NovelEco.

Once measured and certified improvements in biodiversity have been achieved and converted into a credit, a second fund, the Growth Fund, will be established to purchase these from the community. Initial funding for the Growth Fund will be facilitated through NovelEco with the proceeds being preferentially distributed to the Regenesis Fund to commence on-ground actions, and in consideration of the time available before credits are ready for purchase. The purchase price for credits through the Growth Fund will be cost-based, with the resultant funds being circulated back into group operations to assist with continuing biodiversity management activities that will ultimately create future credits — see Figure 2 and further information below.

All credits purchased through the Growth Fund are converted into Eco+ tokens (i.e. registered on the blockchain) and held in a pool which continues to grow over time. Given that credits will be purchased across a range of prices (reflective of the cost-base for various conservation, protection and stewardship projects across a range of ecosystems with a range of threatening processes) there is an opportunity to target cost averaging within the larger pool. This approach spreads the financial risk by balancing high-cost credits with lower-cost ones, ensuring that the overall cost of the credits is smoothed out over time. It also enables higher-cost conservation projects to be pursued by distributing the financial impact across the entire pool. Ultimately this approach will encourage a more diverse range of conservation activities to be pursued, supporting broader and more significant ecological outcomes.

The conversion of the credits into digital rewards offers an opportunity to introduce value-based pricing into the system, with the pricing of the reward reflecting both the origin of the credit and the utility of the reward point in the reward scheme.

Access to the Eco+ token pool is enabled through a smart contract (the Ecobit contract) which allows partnering Digital Asset Creators (Creators) to set a ‘burn rate’ (i.e. the number of Eco+ tokens taken from the pool) on digital asset purchases (also known as ‘minting’) or secondary sales. Each mint or secondary sale triggers Eco+ tokens to be pulled from the pool and then fractionalised into Ecobits (cost averaging of the tokens would be automated). The rate at which Eco+ tokens are fractionalised into Ecobits is calculated per token and based on the cost to area ratio of the underlying credit. The fractionalised Ecobits are transferred to the Consumer, an equivalent number of Status points are created and transferred to the Creators, and the parent Eco+ token is retired.

The processes triggered via the Ecobits contract result in money being returned to the Growth Fund, most typically at the scale of a micro-payment, in exchange for releasing and retiring the Eco+ tokens. This money originates from a proportion of the revenue received from mint and secondary sales as set by the Creator via the ‘burn rate’ in the Ecobits contract.

The Consumer can redeem the Ecobits for goods, services, discounts and experiences offered by the partner network. Redeeming Ecobits involves retiring them in a process that returns Status points to the Consumer, which when accumulated offer the Consumer access to exclusive terms within the network. Importantly, all Ecobits and Status points maintain referential integrity with the parent Eco+ token location and biodiversity data so both the Consumer and the Creator can see what biodiversity improvement projects they have contributed to.

An overview of the system is given in Figure 2 below.

Given that the Growth Fund is achieving a premium on the cost basis of the credits by converting them into a reward there is an opportunity to bake in a return for investors supporting the fund. This could be achieved by capturing the rate of return in the margin between the credit cost and the reward conversion rate.

Once the token pool grows over time and has been shown to achieve a premium over the cost base there is an opportunity to activate the combined asset base of the pool for securitisation or other financial instruments. For example, structured financial products like biodiversity credit-backed securities could be developed, allowing investors to gain exposure to the appreciation of these tokens. The pool could also be leveraged to create biodiversity credit funds or green bonds tied to the future performance of the token pool. The pool of Eco+ tokens could also be used as collateral for borrowing under favourable rates from social impact funds, providing money that could then be used to support kickstarting more projects under the Regenesis Fund and purchasing more credits via the Growth Fund.

Additionally, there is also an opportunity for corporate philanthropic donations to be incorporated into the system via either direct contributions to the Regenesis Fund or through collaborations with NovelEco on digital art releases. These art releases are anticipated to coincide with the onboarding of new community groups, with the art being digital, generative and linked to baseline biodiversity data derived from the project.

Congratulations! You’ve made it through the last part of Article 4 of the Biodiversity in the Digital Age series.

The next article will close out the series by exploring the downside of relying on digital infrastructure and assets to build a system for protecting biodiversity and conclude by outlining how any potential negative impacts and outcomes can be avoided.

Mint this article as an NFT!