August 2007  
The Innovator: Can Lars Christian Smith Take Protected Areas to Market?
by Cameron Walker

On a trip to Africa in 2003, business professor Lars Christian Smith spent four weeks in Tanzania, exploring the bush with hunter-gatherers. Along the way, he met up with conservation officers at wildlife parks and preserves and heard a repeated lament. Small conservation areas were suffering from low funding. Two national parks, Ngorongoro Crater and Serengeti, subsidized all of the country's other parks.

According to a 2003 study in the Proceedings of the National Academy of Sciences, of the estimated $6 billion that is spent annually to manage protected areas, less than 12 percent goes to biodiversity-rich, cash-poor developing countries—even though conservation programs in developing countries often get more bang for their buck than programs elsewhere. Larger national parks can generate more revenue from visitors and tend to catch the attention of big international donors—but can also suffer from tourism levels that damage the ecosystems the park wants to protect. Smaller areas with fewer visitors often struggle to stay afloat on donations but often provide important refuge for local wildlife. "This sort of stuff should be self-sustaining," says Peter Jones, who owns and manages Ndarakwai Ranch, a conservation area in Tanzania. "If it depends on wealthy people reaching into their pockets after a good conservation pitch, someone's eventually going to drop the ball."

So Smith started wondering: how could smaller conservation areas in Africa and elsewhere generate more revenue to keep themselves up and running; and how could larger areas capitalize on their popularity without ramping up people's impact on wildlife and wild lands? His answer: a novel idea to increase funding for conservation areas through a system of tradable quotas. This system would put daily visitor entry permits into a trading market, with each conservation area's visitor carrying capacity limiting the number of permits sold. As demand for a limited number of permits in a popular conservation area swells, prices rise, generating more money from permit fees for those who still choose to come, while encouraging visitors turned off by the price to explore more remote areas with less expensive permits. Revenues from the trading scheme could then boost biodiversity conservation in each participating area.

In developing countries, these protected-area tradable quotas (known as PATVIQs, for Protected Area Tradable Visiting Quotas) could be used to increase revenue for under-funded parks, and mitigate pressure on overcrowded ones. By requiring biodiversity tallies from member parks, more money could also be channeled to protected species. Last but not least, Smith hopes that along with raising money for conservation, the proposal could also involve local communities, who are too often the losers when it comes to protecting natural areas.

From Iceland to the Congo


Born in Denmark and educated in the U.S. and eastern Africa, Smith is well acquainted with the African landscape. He spent eight years doing field research and environmental consulting in Tanzania and Kenya. He then went on to start a computer company in Luxembourg and eventually moved into academics. He's now the director of the graduate program in finance at CERAM Business School in the French Riviera.

Last spring, Smith started a blog as part of a CERAM course in conservation finance. In his research, he came across the Icelandic fishing quota system, in which an overall catch quota was established based on recommended catch limits, and then fishermen were allowed to buy, trade, and sell shares of the quota. What particularly intrigued him was that sport fishing groups bought up some of these commercial fishing quotas and retired them, reducing pressure on the fish. Even though oceans separate Iceland's fish and Africa's parks, the two ideas came together: why not set up a similar quota system that could address terrestrial conservation projects?

If quotas were set on park entries, international conservation groups—and interested individuals—could contribute to biodiversity monitoring and reduce visitor impact on a park by buying and retiring some of its quotas, as the sportfishers in Iceland did with salmon. This could be especially helpful for protected areas off the beaten tourist path. "You can buy them and retire them," Smith says, "if you want to support the bonobo and you don't want to go to the Congo."

For protected areas interested in participating in this program, a cap—or total number of allowed daily visitor entries—would be used to limit the number of permits sold. "If you look at any well-managed park, they already have a carrying capacity," Smith says. "One of the benefits will be that we'll get parks that are not well-run to think about it."

In the proposed system, permits would be sold through an online auction in which price would be determined by demand. Interested buyers logging in to buy tickets to a favorite park would pull up a screen that looks similar to online air travel sites: a list of ticket prices offered by different protected areas. "The trick is to keep the whole thing simple," Smith says.

While the system would be simple for prospective buyers to use, these buyers would also be able to access detailed information about how the park distributes funds to protect biodiversity. "We basically want to make it visible to everyone buying an entrance ticket or quota [tradable permit] to see where the money is going," says Tames Rietdijk, a member of the PATVIQ Exchange advisory board.

Looking Out for Locals


The program would target parks and conservation areas in developing countries. Many parks in Europe and North America, with free admission or a mandate to provide equal access to public resources, would not be good candidates for a program like this. But in developing countries with private conservation areas and severely threatened public protected lands, a program that could increase revenue through trading could be an enormous boon, Smith says. Parks that suffer from hordes of snap-happy (and wildlife-stressing) tourists could let their popularity increase the ticket price to get consistent income with fewer visitors.

Smith and the team of advisors he's now assembled to test his idea hope that their system could help local people as well. In many biodiversity hotspots, the protected areas to which foreign tourists flock are less popular with local residents. And with good reason: for a subsistence farmer in Africa, the photogenic elephant that's sheltered by a conservancy can shatter livelihoods, even lives, when it tramples a crop-filled field.

Communities aren't usually compensated when land that they've traditionally been able to access gets walled off behind protected area boundaries. Protected land often rises in value, while nearby villagers have a smaller area in which to farm, collect firewood, or gather plants.

In a system where parks have a number of quotas to sell, local villages could get a certain percentage of the quotas to offset the loss of land access. The villages could then sell quotas for income, retain quotas as investments, or set up tourist-aimed businesses—guide services, for example—that use the quotas.

Smith says that distributing the quotas to local communities isn't a guarantee that locals will suddenly become conservationists. In the 1990s, he was involved in a company that gave generous stock options to an acquired company's management. The management acted as if they'd won the lottery. "But if PATVIQ ownership is given as compensation for lost land, for example, who are we to tell people what they should do?"

Proof of Concept


Rietdijk, the chief technology officer at carbon emission credit trading organization New Values, is setting up the technical and legal framework for the trading system. The group plans to set up several pilot sites as a proof-of-concept. Then listing requirements and a rulebook would be developed so that other areas could start using the same system.

The proposal's initial phase will begin with five pilot sites—most likely in Africa, where there's growing awareness about conservation and biodiversity, Smith says. He'd like to start with small, private areas, because they can make decisions quickly if the system needs to be adjusted.

Ndarakwai Ranch owner Jones will potentially supervise one of these testing hotbeds. In his 11,000-acre conservation area, cheetahs roam the hillsides, Mt. Kilimanjaro gleams in the distance, and once night falls, elephant and hyena calls fill the air. But protecting these lands, which form a key migratory corridor between two national parks, has been a constant struggle, Jones says.

Jones and others like the PATVIQ concept because it would give small areas the chance to wean themselves from complete donor dependence, and possibly expand their work. Ndarakwai Ranch (www.ndarakwai.com) has provided employment in an area where there weren't many livelihood options before. The sustainable practices Jones has tried to put in place on his land have been echoed in nearby villages he says—after the ranch put in a fishpond, five local families installed their own. Money from visitor entry quotas on the open market could boost these programs, and also go toward conservation efforts for specific species, such as the rare lesser kudu that roams this area.

Unknown Unknowns


If trading protected area quotas is to become a multi-park system that benefits both conservation and local livelihood, the plan will have to endure trial-and-error tweaking. There are, Smith says, "a lot of unknown unknowns here, because no one's ever done this before."

One concern is that, in a situation where demand makes ticket prices skyrocket, locals wouldn't have access to parks. Smith and his colleagues think that, like a company on the stock market, the protected area would only make a percentage of its quota available on the market, so that other entries could be used as the park wished.

Other questions arise when it comes to how entry quotas can help locals, too.

Often, says Georgia State University economist Paul Ferraro, tourism business goes not to locals, but to others who move into a developing tourist area and have more resources to set up tourist-friendly businesses. Local tourist businesses, too, might not look favorably on a system in which overseas conservationists can buy quotas without visiting the park (and the restaurants, hotels, and other attractions nearby). And if quotas can be bought and retired, what's to stop a park from boosting its carrying capacity in order to sell more?

Smith and his colleagues want to monitor the system carefully, with regular audits of the carrying capacity. And, despite the questions, Ferraro and others-- including a development bank in Asia and a Latin American foundation--think the concept has promise. Since Smith posted the idea in April 2006, he's had interest from at least three continents. "The problem with most conservation efforts is that they're one-off, small projects," he explains. A market that supports a number of protected areas could provide more consistent support—and on a larger scale.
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