Economic Value of Biodiversity

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The economic value of biodiversity: a scoping paper

Professor Jeff Bennett

Asia Pacific School of Economics and Government

The Australian National University, October 2003

1. Economics and biodiversity

From the perspective of an economist, biological diversity or biodiversity is of interest

for two fundamental reasons. First, biodiversity is valuable to society. That is, the greaterthe biodiversity we have, the better off we are and if we lose some biodiversity, we

consider ourselves to be worse off. Second, choices made by society have made and are

continuing to have effects on biodiversity. That is, some of the resource use decisionsmade by society albeit inadvertently have left us with less biodiversity. Clearing land

for agriculture, harvesting timber from forests, draining wetlands for housing estates for

example, have caused depletions in biodiversity.

Putting these two reasons together lead the economist to conclude that biodiversity is a

scarce and valuable resource. And for an economist, that means their discipline hassomething to contribute to the biodiversity debate, simply because the focus of

economics is on the analysis of the ways societies make choices about their scarce and

valuable resources.

The primary goal of this paper is therefore to provide an understanding of what

economics has to say about biodiversity. Because the overriding goal of economics is todeliver choice solutions that make society better off, a strong emphasis will be given to

the value of biodiversity because it is the creation of value that makes society better off.

Specifically, three questions will be addressed:

1. Why is biodiversity valuable?2. How can the value of biodiversity be estimated? and,3. How can the value of biodiversity be delivered to society?

The goal is not to advocate or promote any particular type of analysis. Rather, it is

intended that the paper will give policy makers a background on what economics has to

offer, with both the strengths and weaknesses of the economics approach beinghighlighted. This, it is hoped, will be a base for policy makers to determine what role (if

indeed any) economic analysis should play in the consideration of resource use choices

that have biodiversity impacts. If a role is deemed appropriate, the secondary goal is toform a foundation for decisions regarding elements of the application and further

development of economic analysis of biodiversity.

The paper begins with an attempt to define biodiversity. Attempt is used advisedly here

because it is immediately apparent that biodiversity is a complex concept that generates

definitional conundrums. The importance to society and the policy significance ofbiodiversity are addressed to answer the question: Why is biodiversity valuable? What


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economists have done to estimate the value of biodiversity is outlined. While the lists of

valuation techniques developed and applications performed internationally are extensive,

it is also apparent that the discipline does not find itself standing on safe ground in thisarea. Some of the specific issues that have caused concerns both within and outside the

economics profession are overviewed, especially in the light of observations made

regarding the relevance of applications to policy making. Briefly, the third question ofhow the value of biodiversity can be delivered to society is tackled before the paper

concludes with some suggestions for the way forward

2. What is biodiversity?

The casual observer may be excused for thinking that biodiversity is synonymous with all

things natural and worth caring for in the environment such is the generality with which

the term is used. Protecting biodiversity is a frequent call to arms within conservationnon-government organization and features prominently in government policy documents

as a goal. The definition of biodiversity is to the contrary, rather specific. It is, according

to the United Nations Convention on Biological Diversity, the variability amongliving organisms. Hence, the term relates specifically to variability rather than to theoverall extent of the biological resource.

This variability can be considered at four levels:

Genetic (ie genes, nucleotides, chromosomes, individuals); Species (ie kingdom, phyla, families, subspecies, species, populations); Ecosystem (ie bioregions, landscapes, habitats); and, Functional (ie ecosystem robustness, resilience, goods and services).

Hence, the term can be applied to the variability of genetic material through to landscapediversity.

It is also important to recognise that variability and overall magnitude are intrinsicallylinked. It is conceivable that genetic variability could be protected in intensively managed

small-scale facilities such as zoos and herbariums and that mini landscape preserves

could be established to provide representations at the ecosystem level. But to ensureresilience and robustness at the functional level it is difficult to imagine a protection

regime that does not involve scale as well as diversity. For instance, resilience implies an

ability to recover from an externally imposed shock. Almost by definition, a small-scaleattempt to protect biodiversity will be at greater risk from an external shock. Even at the

genetic and species levels, the protection of variability in the biological resource is

afforded by larger scale protection initiatives. Put simply, scale and variability in the

biological resource are likely to be strongly complementary.

It is, perhaps, because of this complementarity that biodiversity has taken on such anextensive mantle in the nature conservation debate.


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What does biodiversity do?

To understand the economists approach to the role of biodiversity, it is first necessary to

understand the approachs underlying philosophy. It is:

Anthropocentric, in that it is fundamentally centred on people; and it is

Utilitarian, because it is focussed on improving the wellbeing of people.In other words, the economic approach involves the analysis of what makes people better

off.

Furthermore, because the anthropocentric nature of the approach implies that the

individual matters, a democratic base is also implied. The individual is taken to knowwhat is best for themselves. This is contrary to the paternalistic approach of governments

and/or experts knowing what is best for society without reference to the preferences of

individuals.

In addition, the economics approach is:

Marginalist, in that it involves the consideration of the impact on people that willoccur when a specified change is imposed.

Hence, the concern of economists is strictly not for the value of biodiversity but rather

for the value of a change in biodiversity. The approach used by Costanza et al (1998) toinfer a value for the worlds biodiversity was therefore a contradiction. It used valueestimates that were based on the economic approach and were therefore marginalist in an

attempt to value the entire stock of biodiversity.

What these approach characteristics imply is that an economic analysis of biodiversity

requires an understanding of the connections between the choices people make, theresultant changes in biodiversity and the subsequent changes in the wellbeing of people.

Figure 1 provides a diagrammatic representation of this causal chain.


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Figure 1: Human/biodiversity interrelationships

At the core of the interrelationships between people and biodiversity is the ecologicalsystem in which the state and scale of biological resources are intrinsically linked to

biodiversity. This is particularly evident in a dynamic analysis of the interrelationship

through the notion of resilience. This is because, in general, the greater the biodiversity,the greater is the resilience of the ecological system. Hence, with greater biodiversity,

society has better insurance against the impacts of a future adverse event.

Human impacts on the ecological system may have impacts on the extent of biological

resources and the their diversity. In turn, human wellbeing both now and in the future

may be impacted. People may be affected both directly and indirectly.

Hence biodiversity cannot be considered as an entity separate from the extent of thebiological resource in the process of generating wellbeing. Nor can it be considered at

just one point in time. Biodiversitys interaction with the extent and quality of the

biological resource through time precludes it.

For the economist, the important thing is that there is a causal relationship between the

resource use choices that people make, the status of the ecological system and thewellbeing of people.

The nature of the relationship between human cause and human effect is clearly tied intothe functioning of the ecosystem. Hence, to understand what biodiversity does it is

necessary to understand the way in which the ecological system works. Put simply, in

order to be able to predict what will happen to human wellbeing as a result of a humanimpact, it is first necessary to be able to predict what happens to the extent and variability

of the biological resource. This is the province of the biophysical scientists.


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It is possible therefore to see a two-stage answer to the question of what biodiversity

does. The first stage involves the prediction of the impacts on the ecological system of

human actions. For instance, in the context of a choice regarding the clear felling of aforest, this stage would require forest ecologists to assess the likely impact on key

parameters of biological diversity and extent through time. The second stage involves the

consideration of what effect those impacts have on human wellbeing. So in the sameforest-clearing context, this second stage would involve an assessment of the impact on

wellbeing that results from the changes in biological diversity and extent. This is the

domain of the economist.

The clear message from this two-stage characterisation is that a prerequisite to any

economic analysis of changes in the wellbeing of people is a strong scientific analysis ofthe biophysical impacts of human choices.

To this point, the relationship between the extent and variability of the biological

resource and human wellbeing has been left only vaguely specified. To pursue the

question of what biodiversity does any further, it is important now to pay greaterattention to this relationship.

It is useful to consider biodiversity-induced changes in human wellbeing using theconcept of total economic value. This involves a reductionist approach. Specifically,

wellbeing is defined in terms of the different types of value that individuals derive from

biodiversity.

The first category of value is known as direct use value. It includes:

The benefits arising from marketed goods such as pharmaceuticals andagricultural products that are impacted by the diversity and extent of biologicalresource.

The benefits generated by tourism and recreation activities that are dependent onbiological resources

The second category is known as passive use value and includes:Life support services

such as nutrient removal, flood control, climate stabilisation etc.1

Finally, there are the so-called non use values of biodiversity that derive from:

Human ethical considerations relating to matters such as the extinction of speciesand ecosystems (existence value)

Philanthropic and bequest motives whereby individuals enjoy the pleasure ofothers (both in the current and future generations) in the continuing availability of

the biological resource

The insurance benefit that is provided to society through the protection that aresilient ecological system provided (option value).
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In short then, biodiversity provides a range of contributions to human wellbeing. It makes

these contributions through the interaction between biodiversity and the extent of the

biological resource. For the economist, the interest is in being able to understand theimpact on wellbeing that arises because resource-use choices made by people impact on

biodiversity.

The importance of risk and time in these concepts of value must be stressed. First, the

protection of biodiversity provides value streams through time. The values generated arenot only available immediately. Biodiversity is natural capital, and therefore supplies

(potentially) a stream of value to current and future generations2. Second, biodiversity

provides resilience to ecosystems and hence provides a greater level of security for the

values that those ecosystems generate. In other words, biodiversity lowers the risk ofadverse outcomes. This too involves a future perspective in that the risks being

considered confront both current and future generations. This is the option value of

biodiversity protection.

An example is instructive to illustrate the point. Consider a choice made to drain awetland for irrigated cropping. Wetland ecologists and hydrologists may be able topredict some consequences of this choice on the extent and variability of the biological

resource. For instance, a species of bird may face an increased threat of extinction, some

duck shooting opportunities may be lost and the extent of flooding downstream may beincreased. In turn, these impacts may result in a range of impacts on human wellbeing.

People may be worse off because of the concerns they hold for the fate of the species.

Without that species, the ecosystems capacity to withstand an adverse turn of events say an explosion in the population of insects that damage crops may be diminished.

Hunters may be disadvantaged by not being able to enjoy the preferred location for their

recreation. Downstream residents may be harmed by the increased losses from flooding.

From this example, another key point can be drawn. None of the values described are

certain. Uncertainty is first introduced because we cannot be sure about the ecologicalconsequences of peoples actions. That is we cannot predict exactly the fate of species

impacted by the draining of the wetland. Furthermore, the fate of the species is unlikely

to be a black/white matter. That is, the draining of the wetland will have an impact on theprobability of the species being made extinct. In other words, the economics of

biodiversity protection is a matter of probabilities.

Footnotes:1. Note that these so-called ecosystem services are the products of ecological systems.

They are not biodiversityper sebut rather are one category of the outputs of theecological system that, in turn, is dependent on biodiversity. To illustrate the definitional

difference, not that ecosystem services may be provided by an ecological system that is

not biodiverse. For instance, a wetland in which water hyacinth grows may be veryeffective at retaining nutrients and slowing flood flows but is likely to be a monoculture.

2. Note that an increase in biodiversity will not always have a positive impact on

wellbeing over time. For instance, the introduction of European Carp in the inland
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waterways of Australia was initially an increase in biodiversity but subsequently it has

resulted in a net reduction in biodiversity.

4. Significance in policy

Some of the values impacted by biodiversity outlined in the previous section have thepublic good characteristics of non-excludability and jointness. For instance, the

enjoyment people experience from knowing that there is in existence a range of species isnon-excludable because it is impossible to stop anyone from experiencing it. And the

benefits of water purification provided by a biodiverse wetland system are joint in that

they are available at no extra cost to an additional beneficiary once it is initially supplied.

A consequence of these characteristics is that the type of market forces we rely upon to

supply society with wheat, shoes and houses will be unlikely to yield biodiversitybenefits at the socially most desirable level. This is the classical market failure

argument. Without the incentives for private sector provision that are generated when

goods are excludable and joint in supply, there will be insufficient biodiversity suppliedby market forces alone.

The implication of market failure is that there is a potential role for government in filling

the gap left by market forces. However, governments should only step in if it can be

demonstrated that the benefits of intervention exceed the costs. In other words, theactions of government must be justified with reference to an improvement in humanwellbeing. This is because a net benefit from government action cannot be presumed

simply because of market failure. There is always the prospect of government failure

arising because of inadequacies in the bureaucratic/political processes involved indesigning and implementing such action.

What this means is that without government intervention to protect biodiversity,insufficient protection can be expected. However, with government intervention, there is

a danger of it being deliberately misdirected due to the actions of vested interest groups

seeking to direct government action to their advantage. Even in the absence of this typeof so-called rent-seeking behaviour, the task faced by government in determining if

proposed interventions are to the benefit of its constituents is somewhat daunting.

However, economics has developed analytical tools to help in the process.

5. A role for economic valuation

To a large degree, the task of identifying if government intervention with regard to

biodiversity is no different to the cases of provision (or other forms of intervention) bythe state of other goods with public good characteristics like defence, health services and

education.

Economics has a well-established framework for assessing if proposals for intervention

are socially desirable. This is known as benefit cost analysis (BCA)3. In a BCA of a

proposed intervention, the benefits of that intervention are compared against the
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associated costs. The benefits and costs are estimated relative to some base-case,

usually that in which the proposed intervention is not enacted. The final question asked in

order to justify or disallow intervention is: are the marginal benefits in excess of themarginal costs?

Importantly, the BCA process requires the estimation in monetary terms, of all the costsand benefits of the intervention under analysis. This is problematic when the benefits of

intervention are outside the market. Of course, when values with public goodcharacteristics are the subject of the analysis they are normally not marketed. As shown

in the previous section this is frequently the case for the benefits of biodiversity

protection. This is in contrast to the situation for the costs of biodiversity protection.

These are predominantly the benefits of resource development that are foregone becauseof their incompatibility with biodiversity protection. These are usually goods and services

that are bought and sold in markets.

The irony, thus, is that BCA is called into action when there is market failure yet it

requires the estimation of benefits and costs using the unit of measurement of the market.

To implement BCA in the case of biodiversity focused interventions, it is therefore

necessary to have value estimation techniques available that can encompass the full rangeof values being generated by biodiversity protection. The suite of techniques that has

been developed range from the purely market based tools to those that are outside the

market completely.

Footnote:

3. See Hanley and Spash (1993) as an introductory text on the subject.

6. Valuation techniques

The range of biodiversity valuation techniques reviewed in this section is considered

under three headings that reflect the continuum from pure market to pure non-market

techniques. First, those techniques that are completely embedded in the markets for goodsand services are reviewed. Second, techniques that rely on specific relationships existing

between the biodiversity values under investigation and goods and services that are

marketed are detailed. These are known as revealed preference techniques becausepeoples preferences for biodiversity protection are revealed through their actions in

related markets. Finally, stated preference techniques are described. These are valuation

techniques that require people to state the strength of their preferences and hence revealthe values they enjoy through structured questionnaires. They do not involve any

reliance on market data.


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Market based techniques

For market based valuation techniques, the benefit generated by biodiversity must be

bought and sold in markets. Hence, the techniques are mostly suitable for application

where direct use benefits are involved. Benefits arise for both consumers of biodiversity

benefits and their producers. Observations of market supply (the marginal costs ofsuppliers) and price received through transactions recorded in markets allow the

estimation of profits enjoyed by producers (known technically as the producers surplus).Observations of market demand (the marginal values of consumers) and price paid allow

the estimation of the net benefit received by consumers when they purchase the

biodiversity derived good or service involved. This is the so-called consumers surplus.

Hence, for marketed biodiversity goods such as the rights to prospect for biodiversity

and biodiversity-based, commercial ecotourism experiences if there are sufficientobservations of trades, it is possible to use standard economic techniques to estimate

values for both buyers and sellers.

Revealed preference techniques

In other circumstances, market data are available for goods and services that are in some

specific way related to the biodiversity value in question. These data can be used to infer

values for the biodiversity goods and services.

The first group of such revealed preference techniques involve observing the behaviour

specifically, the purchases of people when biodiversity benefits are threatened.Values are thus inferred from the amount of money people are willing to spend to avoid

or mitigate the consequences of biodiversity loss. These techniques are variously known

as the preventative or mitigatory expenditure and averting behaviour approaches.Hence if a species is under threat of extinction, the cost of a captive breeding programmemay be used to estimate the benefit being provided by its continued survival.

The second approach involves the estimation of how much it would cost to replace the

lost biodiversity benefit with a substitute. This replacement cost techniqueis

exemplified by the use of the costs of water filtration units to substitute for the waterpurification services offered by a biodiverse wetland.

Both of these types of approach do not strictly estimate the value of biodiversity benefits.They are surrogate approaches in that they estimate costs associated with providing

substitutes or avoiding loss. Their accuracy in producing measures of value rely on a

number of factors. First, if the substitute under the replacement cost approach is notperfect or the mitigation/ prevention/aversion strategy is not complete, then both

approaches will be inadequate. The costs estimated do not relate exactly to the

biodiversity benefit being considered. Secondly, both types of approach rely on thedecision to undertake the prevention or the replacement of biodiversity being made with

due consideration to the benefits being generated as a consequence. To illustrate this

point, consider the decision of an individual to replace a damaged engine in their car. If


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the value of services offered by the continued operation of the car are assessed to be

greater than the cost of a new engine, then the replacement will be made and we can be

safe in saying that the value of the cars services are at least as great as the cost of thenew engine. So too would the value of restoring an ecological system be greater than the

cost of the restoration. Two points are worth noting. First, the restored ecological system

must be a perfect substitute for the original and this is not always the case. Second, if thedecision is not made with any consideration of the benefits provided, the costs can exceed

the benefits. For instance, a government decision to restore an ecosystem for purely

political purposes may be taken despite the costs exceeding the biodiversity benefits.

Put simply, neither of these first two approaches can be regarded as conceptually

appropriate to the value estimation task but may be useful in providing a firstapproximation of value.

Other revealed preference techniques are more appropriate. These are techniques that rely

on the observation of peoples actions in markets that are specifically related to the values

impacted by biodiversity change.

The first of these is the production function technique. Under this approach,a

biological resource that is impacted by a change in biodiversity must be an input into theproduction of a marketed good. For instance, the soil biota a part of the biological

resource that can be impacted by a change in biodiversity is an input into the production

of crops. The biophysical relationship between inputs and outputs in the productionprocess (known as the production function) can be used to infer values for the inputs even

when they are not marketed. The demand for inputs which is called a derived demand

can be estimated from the demand for the final marketed output in association withinformation from the production function. To apply this approach, good biophysical

information on the production function is required before the economic relationshipsbetween inputs and outputs can be estimated.

The second approach is called the hedonic pricing technique. Here it is the relationship

between the price of a marketed good or service and a biodiversity related factor that isused to derive estimates of the value of a change in biodiversity. For instance, again using

the soil biota example, the price of land for farming activities may be affected by the

quality of the soil biota or the existence of biodiverse shelterbelts. If there are enough

data on property sales, it is possible to estimate the relationship between the extent of soilbiota and shelterbelts and the price of property and from this values for soil biota and

shelterbelts can be derived.

Finally in this genre is the travel cost method. Under this technique a demand curve for

a non-marketed recreational/tourist asset that is dependent on the condition of itsbiodiversity can be inferred from an estimated relationship between visitation rates and

the costs of travelling to the site. In other words, by investigating how much people are

willing to pay to get to a site, it is possible to infer the value they enjoy from being at the

site.


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largely been focused on soil and water aspects. This is because these two resources are

the most closely linked to marketed goods and services including agricultural production.

The travel cost method has been much more widely applied with studies having beencarried out all around the world in both developed and developing countries.

Stated preference techniques have also seen wide application. The studies that have usedthis approach have mostly used the contingent valuation method and have generally

considered the value of biodiversity at the single species, multiple species and habitatlevels. A smaller number of choice modelling studies have been performed but with a

similar focus.

The studies across all the techniques have been mostly concentrated on species and

habitat protection. Interestingly, whilst most studies claim to yield values for biodiversity,

there is little recognition of the complex relationship that exists between biodiversity andthe scale of the biological resource. Hence, the values reported cannot in most cases

claim to be estimates of biodiversityper sebut rather they are values of the

species/ecosystem under examination. Very few studies for instance, have specificallytargeted the value of ecosystem resilience as the specific result of biodiversity protection.In other words, peoples attitude to risk has not been a feature of the studies.

Amongst the studies there is also a predominance of US applications. Perhaps this is not

surprising given the large amount of basic research in this area that has been performed in

the US. However, it does highlight the potential for differences in results andmethodological processes between US and other developed countries analyses and

especially between the developed and the developing world where much of the worlds

endangered biodiversity is located.

Australian studies that can be loosely linked to biodiversity value estimation have mostlybeen stated preference applications and then mostly contingent valuation methodapplications with some examples of choice modelling. Perhaps surprisingly, there have

been very few revealed preference studies apart from travel cost applications that have

often been only marginally interested in biodiversity aspects of the recreationalexperience or market based valuations.

Furthermore, the policy significance of valuation studies is mixed. In the US, valuation ofbiodiversity damage caused by hazardous substance pollution is a legislative requirement

under the Comprehensive Environmental Response Compensation and Liability Act

(CERCLA) or Superfund Act. However since the litigation concerning the oil spillresulting from the grounding of the Exxon Valdez, the US Federal Government and the

various State Governments have been less enthusiastic to use stated preference

techniques to estimate environmental costs. European Union legislation requires a fullbenefit cost assessment of sites protected for biodiversity conservation under the Natura

2000 programme. In addition, the United Kingdom Government requires the estimation

of biodiversity benefits resulting from countryside protection actions.


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The Australian situation is more ad hoc with few biodiversity valuation studies having

been specifically commissioned for policy purposes. The area remains highly

controversial in Australia much more so than appears to be the case in the US and inEurope. It is difficult to judge the extent of the policy significance achieved by the studies

that have been commissioned. Some major policy decisions Coronation Hill, Fraser

Island and NSW rivers environmental flows have been supported by stated preferencestudies. However, there is little doubt that these studies were not pivotal.1

8. Issues

The paucity of studies and their lack of policy significance, at least in the Australiancontext, requires an analysis of the factors that are impeding the economic valuation of

biodiversity. Three major issues predominate: the lack of information to support

economic valuation, ethical concerns about valuing environmental impacts in moneyterms and technical concerns especially regarding the validity of the results from stated

preference technique applications.

Before the valuation techniques described in the previous section can be employed, a

sound understanding of the biophysical relationships between resource use decisions and

the ecological system needs to be established. For instance, to use the production functionapproach, it is necessary, for instance, to have an understanding of the links between farm

management practices, the soil biota and then the productivity of the soil. To apply a

stated choice method, the impacts of proposed resource use changes on the ecologicalsystem must be understood so that questionnaire respondents can have them explained. In

other words, unless the ecological system is understood, the role of economics is very

limited. The biophysical understanding is a prerequisite for any economic analysis ofbiodiversity value.

In many circumstances, the ability of biophysical scientists to predict the ecologicaloutcomes of alternative resource management options is very limited. Often, the

knowledge of the ecological system that is available is not of direct relevance to the type

of policy issue that faces society. For instance, scientists may have a good understandingof the feeding habits of carp but may not be able to predict the impact of an alternative

river management regime on the population of carp and the ecological state of the river.

Similarly, the relationship between a particular soil organism and the root growth of

wheat may be described but the impact on crop yield of a tillage regime that encouragesthe organism may not be predictable.

Hence, before economic valuation can achieve a greater role, the capacity of science to

deliver policy relevant results needs to be expanded.

1Footnotes:

4. Nunes and van den Bergh (2001) provide a useful survey of biodiversity valuation studies

internationally.

5. Throughout this section, value is used to refer to the technically correct marginal value


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The second set of issues surrounding the use of economic valuation in the context of

biodiversity involves the ethics of valuing non-marketed environmental impacts in

monetary terms. In other words, the question should it be done? is raised. Elements insociety raise objections to the monetisation of impacts that lie outside the market. The

argument is that such values are outside the purview of the market and should not be

reduced to the status of something that is bought and sold for a price.

This is not the place for an assessment of the morality of monetary valuation. This willalways be a matter for individuals to resolve in their own minds. However, one point

needs to be made. Decisions regarding the fate of biodiversity will always be made. They

are unavoidable. When those decisions are made, whether by individuals or society at

large, trade-offs are made either explicitly or implicitly. For instance, if it is decided tolog a forest and so reduce the probability of a species surviving, then it has been decided

that the value of the timber harvested (and hence the house frames, furniture or paper that

are produced from that timber) is greater than the potential loss of biodiversity. Whetherwe like it or not, the trade off between the monetary value of the timber harvest and the

non-monetary value of the biodiversity loss has been made a valuation of the biodiversityloss has been made, albeit implicitly. The issue of monetising biodiversity values istherefore more a question of whether the values are made explicit or are kept implicit indecisions rather than one of ethics.

The third set of issues that may limit the application of economic tools to the biodiversity

debate relate to more technical concerns regarding the techniques capacities to deliver

accurate estimates of biodiversity value. These technical concerns have mostly beendirected at the stated preference techniques. Specific issues arise because of the

complexity of the biodiversity issue and the capacity of the general public to understand

those complexities when asked to respond to a questionnaire on the topic. There are alsoconcerns regarding the possibility of strategic behaviour on the part of stated preference

technique respondents. In other words, respondents may deliberately misrepresent their

preferences in an attempt to manipulate the outcomes of the decision making process intheir favour. They may also bias their responses simply because the questioning is

hypothetical. The array of technical issues goes on and a vast array of economic literature

has grown from their analysis. The point to make here is that the debate amongst

economists on the issue of technical validity has not given comfort to decision makers.Without a clear signal from the profession that these techniques are sound, policy makers

have been reluctant to see them implemented or their results given a high profile in the

policy making process.

Ironically, whilst many of the concerns regarding technical matters focus on the potentialfor over stating the value of biodiversity benefits (for instance, the strategic response to a

willingness to pay for an increase in biodiversity question is to offer more than one is

actually willing to pay) others are concerned that the value estimates achieved areinadequate. This, it is argued, is because the techniques do not allow for the full

incorporation of all the aspects of biodiversity protection.


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words, what society needs is a mechanism for determining the appropriate trade-off

between biodiversity protection and human activities that result in biodiversity loss.

Economics offers some techniques for the development of such a mechanism. They

include benefit cost analysis and non-market valuation. However these remain

controversial in application to the case of biodiversity. There is some distrust by scientistswho are sceptical of the capacity of the lay public to understand the complexities of the

issues involved. The logical progression of this scepticism is that the scientificcommunity knows best what biodiversity protection should be in place. This type of

paternalistic attitude is contrary to democratic principles and ignores any consideration

of what is given up by society to achieve biodiversity protection.

There is also a distrust of the economics approach by policy advisers and some members

of the economics profession. This largely arises because of the divisive debate regardingvalidity issues that frequently accompanies the application of economics to biodiversity

decision-making.

Politicians may also be distrustful of the use of economics in the analysis of biodiversity

choices. Political economy principles suggest that the transparency afforded by benefit

cost analyses that incorporate non-market values dissipates the opportunities forpoliticians to cater to the demands of politically powerful vested interest groups.

Clearly with these three sources of distrust, the application of economic tools to theconsideration of societys biodiversity trade-offs will not progress unless some strong

headway is made on a number of fronts.

First, there is a need for good science. Before economics can proceed to the estimation of

biodiversity values, a good understanding of biophysical cause and effect relationships isrequired. The science must be applied and policy relevant. There is a great need forscientists and economists to work together so that the scientific output is of the type

required for economic analysis.

The second requirement is for some good economics. There is much to be done in this

area. For the most part, two of the conceptually solid revealed preference techniques forvaluing biodiversity the hedonic pricing technique and the production function method

have not been viewed with any great scepticism or distrust by scientists, economists or

politicians. Yet they have seen very little application. This is a highly prospective area foreconomic research. The approaches do, however, have strong data requirements. For the

production function approach, a lot of science that is currently unexplored needs to be

developed. Just as agronomists have studied intensively the relationship between crop

yield and fertiliser application, what is now required is a similar effort in the explorationof biodiversity impacts on the production of goods and services. The hedonic pricing

technique is market data intensive and requires the development of new data collection

and analysis techniques.


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However, no matter how proficient we may become in the use of revealed preference

techniques, they will never be able to provide the breadth of coverage across the

biodiversity value categories that is required for a full understanding. Stated preferencetechniques can provide that breadth but their use requires refining if their results are to be

useful. Continued exploration of the validity of the techniques is required. This is

necessarily an iterative, evolutionary matter. The issues involved in their application arecomplex and the development process is unlikely to yield instant results. Whilst the

development of stated preference techniques is progressing internationally, it is important

that Australian researchers be involved because of the need to be sensitive to the culturaldifferences across countries in this field. For instance, it is possible that questionnaire

statements designed to elicit true preferences from questionnaire respondents in the US

will have different effects in the Australian context.

A number of stated preference technique research avenues appear prospective. The use of

experimental economics to review strategic behaviour incentives has potential yetuntapped. Risk and resilience as they relate to biodiversity and biological resources have

not yet been integrated into stated preference applications yet it would seem important todo so. There is also a need for economists to do a better job of explaining what it is thatthey do when they analyse biodiversity choices. There is a degree of misunderstandingamongst scientists policy makers and politicians as to the role of economics. Not the least

of the points that are misunderstood is at the very core of economics. Economics is about

choices and not just choices made on the stock market or by the Reserve Bank.Economics goes beyond the financial sector, beyond interest rates and inflation. The

discipline has something to contribute to the analysis of biodiversity. It is not simply a

discipline that can be used to further the destruction of the environment. Explaining howeconomics approaches the task of establishing a value for the protection of biodiversity is

a step in that direction.

There is also more to be done on the parts of policy advisers and politicians. In order to

further the development of economics in biodiversity applications, there will be a needfor some courageous decisions. Nothing will hone the techniques and their users better

than the reality of policy applications. But in commissioning such studies, policy makers

and their advisers need to recognise that the economics approach does not constitute a

black-box to which they entrust the decision. Rather economics and economic valuationspecifically are simply elements that contribute to the decision making process. And

these elements can prove very valuable in decision making from a political perspective.

Firstly they can be included to incorporate democratic principles, constituting a processof public consultation. Valuing biodiversity using economic techniques and incorporating

those values into decision-making is also a potentially powerful way to demonstrate the

importance of biodiversity protection to the broader public.

The use of economics to analyse biodiversity choices is controversial. There is a diversityof views on matters technical and principle. This however should not be viewed as a

negative. Just as a diversity within the biological resource is valuable, so too is a diversity

of opinion and approach to the economics of biodiversity. Such econ diversity allows


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for the evolutionary development of analytical processes and decision-making. The fittest

of those approaches will survive the debate.


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References

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Value of the Worlds Ecosystem Services and Natural Capital,Ecological Economics,

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Dasgupta, P. (2001).Human Well-being and the Natural Environment, Oxford UniversityPress, Oxford.

Garrod, G. and K. Willis (1999).Economic Valuation of the Environment: Methods andCase Studies, Edward Elgar, Cheltenham.

Hanley, N. and C. Spash ((1993). Cost Benefit Analysis and the Environment, Edward

Elgar, Cheltenham.

Nunes, P. and J. van den Bergh (2001). Economic Valuation of Biodiversity: sense ornonsense?,Ecological Economics39: 203-222.

Perrings, C., K-G. Maler, C. Folke, C. Holling and B-O Jansson (eds) (1995).

Biodiversity Loss: Economic and Ecological Issues, Cambridge University Press,Cambridge.

Turner, R., K. Button and P Nijkamp (eds) (1999).Ecosystems and Nature: EconomicsScience and Policy,Edward Elgar, Cheltenham.

Economic Value of Biodiversity

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