Economic Framework Perspectives


When economic rules are changed, there is always a perception that the playing field will tilt, and that in the change from the old system to the new system there will be winners and losers. In the case of space loss, as with many other natural assets, the field is already tilted, and the tilt favors those who make money through development. We do not propose to tilt the playing field, but rather to reduce its prior tilt.This economic advantage is set up by accounting1 that ignores loss of natural resources—open space, water quality, wildlife populations, habitat quantity and quality, and many other things . In our opinion, therefore, we are not proposing to tilt the field, but rather to reduce its prior tilt.

New opportunities

An important aspect of the changes that we advocate is that they create new economic opportunities, particularly for those who presently have sufficient resources to operate as land developers and speculators. The extent to which these opportunities may offset losses is difficult to foresee, and the offsets partly depend on the willingness of land developers and speculators to participate in a space market.

Charting changes

Here is a table of differences between the present system, in which space loss is given no financial value, and the system that we propose.

Current situation Recommended situation
Developers and land speculators
  • Space is free (no cost for filling space)
  • May invest in land
  • Pay for space lost as a result of development
  • Pay market price for space
  • May invest in land and in space
Others
  • Lose space
  • May protect space by purchasing or donating conservation easements
  • Lose space where development occurs
  • Gain protected space elsewhere (nearby)
  • May invest in space for financial gain
Space and ecosystem
  • Permanently lose space
  • No compensating space protection
  • No means to target space preservation goals
  • Long term assured limit of space lost (assured quantity of space protected)
  • Compensating protection of space
  • Definitive mechanism to preserve a specific fraction of space

Space is an investment

In the system that we propose, anyone can invest in space and potentially make money from the investment.Anyone can invest in, and potentially make money from, space—a nonrenewable resource just like land. In fact, given that space is a nonrenewable resource with a shrinking supply—just like developable land—, the future value of space is practically guaranteed to rise. How might this work for a developer or a land speculator?

First, a developer with plans for future developments can begin by protecting space, either directly by paying for a conservation easement or indirectly by purchasing space credits within the service area of the local space bank. When the time for development draws near, then the developer owns applicable space credits that were purchased at a discount, so the financial advantage is cost avoidance. Depending on the rate of appreciation of space credits and the time over which they are held, appreciation can compensate for a significant fraction of space costs and potentially provide returns in excess of space costs.

Developers often speculate in land ownership—by purchasing land some time before development, typically at lower prices, thus reducing land investments and assuring access to development sites. Land speculators make the same kinds of investments and then sell land to developers. Space ownership provides developers and land speculators with a viable and relevant option for diversification of pre­development investment.

Comparing space investment to land investment

Will space prices appreciate faster than land prices? Both developable land and space are disappearing, irreplaceable resources—but, as things stand now, only one is governed by supply and demand in a free market. We propose to make both commodities respond to supply and demand. As with all investments, there will be a relationship between risk and reward, with investors who assume greater risk generally enjoying greater returns on investment.

Will land prices or space prices be more volatile? Volatility is one dimension of risk; it is possible that the supply-demand balance for space credits will be more volatile than the supply-demand balance for land. Indeed this seems likely, because the supply of land that can be developed is generally known from zoning, while the supply of space credits depends on space investments. This implies the potential for greater financial gain from investments in space relative to investments in land.

Developers as a group will have some influence over the price of space. The more that they invest in protecting space, the more that they will increase the supply of space credits and drive down the price—if those credits are offered for sale on the space credit market. Developers are, however, only one sector of the space purchasing market; it is equally true that conservationists as a group can increase the supply of space credits and drive down the price. Furthermore, both groups can protect space, thus creating space credits, but withhold those credits from the market—which would drive up the value of space credits. This is how free markets work.

The point that we want to emphasize is this: developers and land speculators already make strategic investments in land, and there is no reason that they could not make comparable strategic investments in space. Developers and land speculators already make stra­tegic invest­ments in land, and there is no reason that they could not make compar­able strategic investments in space.Would that eliminate the cost-of-space addition to development costs? It may not. But developers, and the land speculators from whom they often acquire properties, make money not only from development but also from land appreciation, and the costs and benefits of land investments are considered a fair part of the development enterprise. What is required is a mindset that space costs are comparable to land costs, and that they both have two faces: one of cash outlay and one of investment opportunity.

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Kick start

Publicly owned open space provides an opportunity to create space credits immediately, at the potential cost of delaying land preservation with new conservation easements. This approach benefits developers by providing an immediate source of space credits.

Regulations

The regulatory framework for an economy of space credits and space protection is remarkably simple. It requires compensation for space loss with space protection (space credits), not currency.

1 In economics, these losses that are ignored are said to be externalized. Often, the externalized commodity is owned by the public. Thus, private gain is supported by public loss. Prominent calculations, such as Gross Domestic Product (GDP), count profits made from all economic activities, but do not subtract externalized losses. This casts suspicion on these economic statistics. When a 2% annual GDP growth rate is reported, conservation economists ask “at what cost?” Studies of externalized losses belong to the field of ecological economics.