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What Is Environmental Finance?

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  • Written By: B. Miller
  • Edited By: Andrew Jones
  • Last Modified Date: 17 August 2014
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Environmental finance is not a term that is often used; however, it refers to the process by which conservation and economics can be beneficially combined, generally to encourage more people to behave in an ecologically sustainable way. Land trusts are the most prominent example of environmental finance, and the way conservation and economics can become partners rather than adversaries. Carbon credit trading is another example of environmental finances that takes place on a much larger scale, and is used to regulate carbon emissions around the world.

Because land trusts are the prime example of environmental finance, it may help to explain more about them. A land trust, sometimes also referred to as a conservancy, is a nonprofit organization that holds pieces of land in trust, generally by placing a conservation easement on the land. This easement restricts the type of activity that can take place on the land, and as such, protects it from being developed in perpetuity. An easement might restrict things such as commercial development, but it may allow uses such as agriculture, recreation, timber management, or natural resource extraction, among others. The specific facets of the easement are determined in partnership with the landowner and the land trust.

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When a landowner puts an easement on his or her land, she is often then entitled to a tax deduction, a reduction in state income taxes owed, and, or, a reduction in estate taxes paid on the property. This type of environmental finance encourages people to protect and preserve land, and gives them a financial incentive for doing so. Of course, land trusts are not the only example of environmental finance; they are simply the most common.

Towns, cities, or any municipalities will often conduct an environmental impact assessment, or an environmental impact statement, before undertaking any changes in land use. This can help to identify areas where changes can be made to protect the environment and to save money. Of course, that is the ideal goal; sometimes saving money becomes more important than protecting the environment.

Carbon emissions trading is yet another example of environmental finance. Businesses that are low emitters of carbon might have additional carbon credits as part of a cap-and-trade system that they can then trade with other businesses who emit more carbon. This is a very basic description of a cap-and-trade carbon emissions system, but it is frequently used around the world to encourage businesses to develop better technology to reduce emissions. A similar system may be used for water pollutants as well.

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