The policy decisions we make around whether ecosystem markets are best structured as a system of bundled, unbundled, multi-credit or stacked credits should be based on sound scientific principles, empirical justification, and political realities. In this presentation I tried to describe underlying theoretical (economic) justifications for bundling or stacking, and what might be some of the issues and challenges of such a structure. Specific points made in the presentations include:

• The definition of ES - products of functioning ecosystems, that benefit people often at no direct cost to beneficiaries - gives rise to the challenge on how to best structure and define these products in the absence of observed prices. An ES market consists of all the buyers and sellers of the ES; it is an economist's jargon for the set of people that engage in these transactions. An ES credit is a unit that is exchanged in this market; how one defines and aggregates the multiple types of ES that is then offered up in the market is the crux of the matter.
• Literature has provided studies on valuing (i) a single ES service - which would translate into a single, unbundled service, (ii) multiple ecosystem services which could provide many unbundled services that could be marketed as separate credits or could be aggregated into a bundled, stacked, multi-credit unit, and (iii) full ecosystem valuation accounting (this may be more akin to true bundling) . Each of these approaches is designed to place an "implicit" price on the value of an ES or set of services however that base unit is defined.
• The presentation discussed examples under which each type of study was undertaken and the pros/cons/limitations/justifications of each.
• One economic justification for bundling relates to the degree of substitution or complementarity of the services, jointness in the production of the services from a specific ecosystem on a spatial and intertemporal scale.
• If a single bundled ES credit is desired, an issue relates to how this composite good is constructed. Here economics can provide some guidance on the construction of an ES "index" which is basically what a composite good becomes
• A bundled credit could retain its distinct, identified components and sold as a single unit (bundled in the sense that if you buy a shirt, you must also buy a tie) or sold separately but with price discounts for tied components. Both have implications for potential buyers and the choice to bundle or not relates to the demand side parameters as well.
• Difficult to bundle if the bundling contains ES that have both private and public good characteristics, and the benefits accrue to local (identifiable) populations as well as global. For example, a utility may be interested in purchasing carbon credits (to offset CO2 emissions) but less willing to purchases a carbon credit that is bundled with other services and presumably more expensive.
• Research is needed to develop overarching criteria on when it is advisable to bundle or stack the credits: economic factors may include relative transactions costs in quantifying separate or joint production functions, demands of potential buyers of ES credits. Support for further research is evidenced by the new office within USDA - Office of Ecosystem Services and Markets.

The policy decisions we make around whether ecosystem markets should be developing bundled, unbundled or stacked credits is constrained in the short term by the realities of market development. However, this should not keep us from identifying the optimal long term outcome and working towards that end point. The following are some of the considerations Kevin touched on with regard to whether we should be moving towards bundled ecosystem credits:

• In the short term, markets are developing credit measures that are an unbundled selection of the functions that provide necessary ecosystem services. These markets are merely the reflection of the narrow legislative mandate that created the regulation in the first place. There are dangers in allowing this condition to continue. These markets can (and arguably already are) providing perverse incentives to take mitigation actions that are not necessarily in the best interest of our ecosystem. The system is also incredibly inefficient and will make some market types unviable.
• Stacking provides a potential temporary means of addressing some of these concerns - broadening the consideration of site values to more of an "ecosystem" level. However, while stacking can at least create incentives for considering a more expansive ecosystem perspective, it is still an imperfect step. First, crediting a bigger list of benefits does not make an approach truly ecosystem based - nature is arguably more than the sum of its parts. Second, even though we would consider more of the ecosystem in a stacked approach, we will still inevitably miss aspects of nature that are not regulated or subject to voluntary markets.
• Bundling provides a better means of moving towards a more truly ecosystem approach. Unfortunately, there are currently limited market drivers and incentives being provided to create "ecosystem credits". Until we reform our environmental regulation, bundling will remain a great idea with no practical application.
• As we move as a society through these prospective market forms, we will inevitably be forced to improve the way we measure specific debiting and crediting activities. Neither bundling nor stacking can occur without these good systematic approaches. Good work is being done to develop measuring tools that evaluate the landscape's ability to perform ecosystem functions and processes. Further, an entire federal agency was created in January 2009 that is charged with bringing standardization to our measuring approaches (USDA - Office of Ecosystem Services and Markets).
• Of bigger concern perhaps is development of measuring systems that will evaluate, in an equivalent manner, the landscape's ability to also perform economic functions (transportation, renewable energy production, commercial/industrial production, etc.) and social functions (recreation, education, hazard management, etc.). Until we can measure the bigger sustainability equation, we will not really know our target. Markets are effective and efficient tools, but if we are going to use them, we better be certain we have them pointed in the right direction.

Providing practical examples of over forty years of market creation experience, Louise reported on the experiences of the Department of State Lands (DSL). Removal and fill permits have been the basis for wetland banks. Most removal and fill permits involve wetlands. The State's private wetland banks have created a market for the mitigation, restoration, enhancement, and protection of wetlands. Oregon currently has 20 mitigation banks. All are private except for the West Eugene Wetland, which is public. The average 2009 price for an acre of mitigated wetland is $80,000. Private wetland banks have been created mainly out of grass land fields that have been put back into wetlands. Much of the Willamette Valley has wetland soils.

While wetland banking is an unbundled credit, we can learn much from the development of these markets. Initially, the measure for wetlands was just acreage. More recently, more attention is being paid to function and quality. Until the 1990s, ecosystem services were viewed as externalities and not valued as important contributions to society. This is changing. One example is in the area of vernal pools. In one case, DSL, the Corps of Engineers, and the Fish and Wildlife Service are negotiating a vernal pool protection plan that includes endangered species protection of fairy shrimp along with the wetland functions of vernal pools. A developer is proposing a wetlands mitigation bank, to be known as the Rogue Valley Mitigation Bank, as a mechanism to protect the pools. A second vernal pool action is by The Nature Conservancy in the Upper Table Rock area of Southern Oregon. Here vernal pools are in conservation ownership between TNC and the Bureau of Land Management. In addition to ecosystem services provided by these lands, there are cultural and natural area, historic, scientific, and public values associated with the purchase.

In Elliot State Forest, DSL is managing for longer rotations to increase protection for endangered species like the spotted owl and marbled murrelet, better riparian habitat, forest products, and other forest uses (see http://www.oregon.gov/ODF/STATE_FORESTS/elliott.shtml). DSL's primary objective is good stewardship and management under the conflicting constraints of the Endangered Species Act, Clean Water Act, and their mandate to obtain revenue for the Common School Fund wherever possible.

The currency issue in bundling ecosystem services has us paralyzed. We need to look more at ecosystem functions, but we have to take some risks and not wait until a common currency has been developed. The Oregon State Senate is currently trying to provide ecosystem market place legislation (SB 513 - http://www.leg.state.or.us/09reg/measpdf/sb0500.dir/sb0513.a.pdf). The Bill charges The Sustainability Board to work on this issue. It is a piece of permissive legislation like that which created watershed councils.

For more background on ecosystem service markets.

• Overview
• Carbon Markets
• Water Rights, Markets, and Trading