Welfare implications of no net loss policies with heterogeneous cultural ecosystem services

No net loss (NNL) targets for nature are increasingly implemented at both national and subnational levels. While these policies are typically framed in terms of area or biophysical equivalence, they may overlook heterogeneity in the cultural ecosystem service (CES) values associated with undeveloped land. This paper develops a parsimonious economic model to analyze the welfare implications of alternative NNL policy designs when CES values differ across municipalities. We distinguish between local CES values, such as recreational and amenity benefits accruing to nearby populations, and a national CES value associated with the existence of undeveloped nature. We compare unilateral and cooperative municipal policies and examine the performance of taxes and subsidies versus offset markets under area-based and CES value-based NNL targets. We show that area-based NNL policies are generally welfare suboptimal in the presence of heterogeneous local CES values, even when implemented cost-effectively through offset markets. By contrast, NNL targets defined in CES value terms can achieve constrained welfare optima using appropriately designed fiscal instruments or ambient permit markets. Although inter-municipal cooperation reduces aggregate costs, distributional effects may prevent mutually beneficial outcomes without side payments. Numerical illustrations based on Norwegian data support the analytical results and highlight implications for subnational and national offset policy design.