The interconnected climate and environmental crises affecting our planet are the greatest challenges of our time. According to the Living Planet Index, on average, wildlife populations have declined by 73% in the past 50 years, and we are on the brink of an extinction crisis. Yet despite growing awareness, the policy and funding needed to protect nature remain insufficient, with the gap being close to US$577 billion. Among the emerging tools under discussion are nature credits, a market-based mechanism aimed at mobilizing private investment for biodiversity. But can they truly deliver?
Funding gap
At the COP15 Biodiversity Summit held in 2022, 196 countries adopted the Kunming-Montreal Global Biodiversity Framework (GBF), which sets global targets to be achieved by 2030 and beyond to safeguard biodiversity. Achieving this goal requires the mobilization of an additional US$700 billion annually, of which US$500 billion is expected to come from the elimination or reform of subsidies that encourage unsustainable environmental practices, while the remaining US$200 billion should be generated through contributions from governments, the private sector, and innovative financing mechanisms such as biodiversity credits and green bonds.
Currently, global biodiversity spending stands at approximately US$154 billion a year, leaving an estimated financing gap of US$577 billion. In the EU, the biodiversity funding gap is estimated to be €37 billion per year, and in the new budget proposal, funds that were previously earmarked for the environment (the LIFE program) are being merged into a broader competitiveness fund, risking competition with industrial projects under the Green Deal.
While COP29 on climate and COP16 on biodiversity failed to close their respective financing gaps, momentum is growing to increase private sector participation in both the voluntary and compliance markets for carbon, water, and biodiversity.
Nature credits
Against this backdrop, in early July 2025, the European Commission (EC) unveiled its Nature Credits Roadmap, with the aim of developing standards and certification, and will be receiving feedback from interested parties until 30 September 2025. The first pilot is expected to be launched by 2027.
Nature or biodiversity credits are a verified, measured unit of long-term positive environmental outcome that is in addition to that which would have occurred without intervention.
The core concept is that nature credits can help to mobilize private finance to complement public funding by linking conservation and restoration projects with businesses and investors. Put simply, certified credits offer a way to monetize positive biodiversity outcomes. For example, nature credits could be generated through restoration activities carried out by farmers and sold to institutions or individuals seeking to support local ecosystems.
The nature credits market is still in its early stages, and growth projections vary widely, with the most optimistic scenarios typically tied to strong policy support and coordinated corporate action. A report by the World Economic Forum projects that annual demand could rise to as high as US$69 billion by 2050 in an optimistic scenario (Figure 1).
Figure 1: Three demand scenarios: contributions by use case ($ billion by 2030 and 2050)
Source: Biodiversity Credits: Demand Analysis and Market Outlook
Challenges ahead
It is reasonable to assume that biodiversity credit markets will face some of the same challenges that have troubled carbon markets, particularly around transparency, integrity, and accountability.
These issues may not only undermine trust in the system but also lead to high transaction costs, thereby limiting accessibility and the overall effectiveness of such mechanisms. In contrast to carbon and other commodities, biodiversity does not have a standardized unit of measurement. As a result, methodologies differ widely, thus complicating efforts to establish consistent and reliable crediting systems.
From a project development perspective, several factors could undermine conservation outcomes, most notably additionality, which means that biodiversity credits can only be granted for conservation efforts that go beyond what would have happened without the project. Consequently, those areas already engaged in conservation would not meet the additionality criteria and thus be ineligible for biodiversity credits. Conversely, regions not yet under protection may delay conservation efforts in the hope of future credit eligibility and create a disincentive for nature conservation and restoration.
Putting nature onto the balance sheet is not an easy task. If nature is valued for its utility to markets, profit incentives may override conservation priorities. Assigning different market values to ‘ecosystem services’ risks introducing both ethical dilemmas and practical complexities, particularly when market-based valuations overlook the intrinsic, non-economic value of nature.
The narrative of a nature funding gap has faced criticism from civil society in light of the substantial volume of environmentally harmful subsidies that could instead be redirected to support nature conservation and restoration. A report by WWF estimates that EU Member States allocate between €34 billion and €48 billion of European subsidies annually into activities that are harmful to nature, mainly in the fields of agriculture and rural development.
Another key concern is the potential misuse of nature credits by corporations to justify or compensate for environmentally damaging activities. This is of particular concern given the strong scientific consensus that biodiversity losses are, in most cases, irreversible and cannot be offset in any meaningful way.
Bruegel, a European think tank, believes that these types of projects are unlikely to be sufficiently profitable, limiting the overall capitalization of private-sector markets for nature credits. As a result, compliance markets will be necessary to achieve larger-scale funding. The EC’s Nature Credits Roadmap makes it clear that compliance demand will play a significant role:
“At the policy level, Member States could, for example, use nature credits to recognize individual contributions to national targets and obligations under the Nature Restoration Regulation.”
(EC, 2025)
Key issues:
- Integrity and high transaction costs
- Misaligned incentives
- Low profitability and limited scalability
- Offsetting and greenwashing
- Harmful subsidies
The way forward
Nature credits have emerged as a potential tool to complement public funding, but the road ahead is fraught with technical, ethical, and governance challenges. As climate and environmental crises intensify, innovative finance mechanisms such as nature credits can play a supporting role, but they cannot be a substitute for regulation, public funding, and political will. Nature credit schemes must not distract from the urgent need to redirect harmful subsidies and significantly increase public investment in biodiversity. The challenge now is to ensure that financial innovation serves biodiversity, rather than the other way around.
