Heather Grabbe is a senior fellow, Bruegel

Europe’s plans for nature credits must go hand in hand with greater incentives to encourage demand for nature-positive assets

At a glance

  • The European Commission this week launched a “roadmap towards nature credits”

  • The commission should connect its nature credits agenda with bolstering the credibility and predictability of the EU’s sustainable finance framework, which could become the most important source of demand for nature-positive assets. Demand based on philanthropic or reputational motivations will only yield a marginal amount of finance

  • Policymakers should not cut public funding on the assumption that markets will replace it. There are inherent limits on markets for nature projects because financial returns are generally low

The European Commission’s “roadmap towards nature credits”, published on Monday, starts with a rightly cautious approach of setting up an expert group to work on vital technical issues for the supply and demand sides of nature markets. 

In moving forward, the commission should connect its nature credits agenda with bolstering the credibility and predictability of the EU’s sustainable finance framework, which could become the most important source of demand for nature-positive assets. Demand based on philanthropic or reputational motivations will only yield a marginal amount of finance.

What would really scale up these markets is greater incentives to hold nature-positive assets to reduce businesses’ biodiversity and/or climate risks, and to balance investors’ portfolios with greener assets.

If tax incentives and regulation favoured the holding of these assets as part of risk-reduction strategies for individual businesses and for the economy as a whole, that would create a much bigger market. 

A nature-positive economy will require a realignment of incentives in the public and private sectors. Nature credits could a play a useful role, as long as their potential is not overestimated.

It is especially important that policymakers do not cut public funding on the assumption that markets will replace it. There are inherent limits on markets for nature projects because financial returns are generally low.

The great benefits of nature restoration and conservation come in the form of ecosystem services, such as pollination, clean water and reducing the impact of floods and higher temperatures. These benefits save a great deal of money, and they are extremely expensive (or impossible) to replace with human technology.

However, these ecosystem services are largely unpriced, and markets reward making money rather than saving money. This collective action problem can only be tackled with public finance.

So far, nature markets are very small and their potential scale is under-researched. The total volume of transactions in nature credits worldwide was less than $1mn in 2024. The World Economic Forum and McKinsey have made different projections of future demand that range from $760mn in 2030 to $7bn a year by 2030, but the scenarios for growth depend on near-universal adoption of nature-positive targets.

Even under the most transformative scenario, this is far from the $200bn needed every year according to 196 countries that signed the Kunming-Montreal Global Biodiversity Framework. 

Moreover, the scale of private finance is dwarfed by nature-harming subsidies, on which governments spend about $500bn every year. The EU spends €48bn annually on harmful subsidies, particularly in agriculture, fisheries and transport. If even a portion of these funds were reallocated towards nature-positive actions, the EU could close its €18bn annual financing gap to meet its biodiversity goals without increasing total public expenditure. 

Need for a robust and reliable regulatory framework

Private finance is a valuable complement to public funding. For nature markets to scale up, a robust and reliable regulatory framework will be needed to build supply and demand.

The EU could play a vital role in establishing a framework that aligns markets with environmental policy objectives and that works for nature markets in Europe and in regions of more abundant biodiversity, such as African, Asian and Latin American forests. 

We set out the main priorities for developing nature markets in a forthcoming Bruegel policy brief. The first is to establish consistent standards on what a nature credit or share represents, how it is measured and whether it delivers additional ecological benefits.

The EU should encourage the development and application of outcome-based metrics to ensure that nature credits result in real, measurable benefits on the ground and fund technological improvements in measuring biodiversity.

The commission also needs to explore ways to reduce transaction costs, which commonly amount to 40 per cent of the sale price of nature projects. 

One of the thorniest issues is the rules around the use of nature credits as offsets. Unlike greenhouse gases, which are globally distributed in the atmosphere, biodiversity is location-specific and context-dependent, and so there is not ecological equivalence between different areas of nature.

Any use of offsets should adhere strictly to local-to-local and like-for-like principles, meaning any biodiversity loss must be compensated for with gains of the same type and in the same geographical region.

That is the only way to ensure nature credits avoid the pitfalls encountered by voluntary carbon credits and ensure high-quality credits that offer additional, durable finance.