BIODIVERSITY ECONOMICS

Context:

Conventional economic theory holds that markets efficiently allocate resources via supply and demand and that prices reflect the true cost of the goods and services to be traded. This model, while helpful, has a number of significant failings. Perhaps the greatest of these is its inability to account for the potential existence of non-monetary costs associated with a good or service – costs which may not be born by either the sellers or buyers in question, but by society (or the planet) as a whole. This failing is clearly evidenced by the fact that current economic and pricing models do not generally reflect the environmental costs associated with natural resource use and exploitation or with the impacts of pollution. For example, when forests are cleared, the price of the resulting timber is artificially low since it does not reflect the long-term costs of habitat loss and reduced delivery of ecosystem services (such as water purification, soil regeneration, etc.). If prices were to incorporate true environmental costs, economic mechanisms would afford the competitive edge to the most environmentally responsible producers as well as to those who are the most efficient in terms of labor and capital allocation.

Fortunately, efforts are underway to better account for the costs of environmental degradation and to find ways of rewarding individuals and firms that work to conserve biodiversity. For example, in the past few years, firms have begun trading emissions credits in an effort to offset their pollution outputs. The key here, as in the creation of other alternative pricing schemes, is to structure markets so as to account for environmental costs and to accrue benefits to individuals, communities and firms that work to preserve biodiversity and environmental integrity.

The creation of a market for biodiversity and ecosystem services represents one of the more promising avenues for protecting biodiversity from the ill effects of perversely driven economic activity. There exists, however, a major hurdle to the achievement of this end. For any market to function, a valuation system must first be clearly established. In the case of ecosystem services, this is proving especially difficult. In any market, as in that created for the trading of carbon emission credits, the first step is to agree on a common denominator. But in the case of ecosystem services, what should be the units in question? And how are they to be measured? These difficult questions are currently being addressed by researchers and policymakers. Unless we undertake a thorough re-examination of how biodiversity and ecosystem services are valued – in both a societal and economic sense – we will be unable to broach the wider challenge of creating markets that effectively reward environmentally sustainable economic activities.

UNDP Perspectives:

>> Promoting secure tenure
Before markets for ecosystem services can be created and efforts to conserve biodiversity can be rewarded economically, the tenure of all resource users, owners, and managers must be clearly established. Property owners and managers must have their rights and responsibilities clearly delineated. Likewise, the rights of people having a stake in a resource, but who might lack actual ownership entitlements, must also be clarified. This is important, for example, in the case of many mobile and indigenous peoples. All relevant stakeholders must have recourse to a transparent legal system capable of enforcing property rights. Individuals will only engage in significant biodiversity conservation efforts if their rights are clearly defined and protected and if they can be certain that their investment of time and effort will have some hope of accruing benefit, economic or otherwise, to them. As an essential precursor to establishing markets that promote biodiversity conservation and the protection of ecosystem services, UNDP must work with governments at all levels to encourage the transparent and clear delineation and enforcement of property rights.

>> Improving resource management
Many resource dependent communities could benefit from a re-examination of the basic economic principles that underpin existing systems of resource management. This is especially true in areas where “tragedy of the commons” scenarios are all too common. Typified by the so-called “free-rider” problem, these destructive spirals of over-use are frequently seen in the management of common-pool resources, such as fisheries and forests. More innovative management structures, based on alternative economic principles, might help to reduce the occurrence of these scenarios while also conserving biodiversity and raising local incomes. For example, many fisheries have been shown to benefit from the delineation of off-limit areas that promote conservation while also ensuring the long-term economic welfare of resource-dependent communities. If strictly enforced, these areas can have a positive impact on both biodiversity and yields. UNDP should assist governments and communities in reducing the imperative to exploit resources for short-term financial gain by identifying alternative economic models for resource use and management that respond to local circumstances.

>> Biodiversity and revenue generation: creating markets for ecosystem services
In addition to their other benefits, ecosystems fulfil an important function in transforming natural elements – such as soil, plants, animals, air, and water – into 'services' that are essential to human survival and development. Examples include: provision of clean water; maintenance of a livable climate; pollination; prevention and mitigation of natural disasters such as floods and landslides; and fulfillment of cultural and spiritual needs. One highly promising means of ensuring that ecosystem services are protected and maintained lies in the creation of markets that recognize and value their importance. Traditionally there has been an expectation that the state is solely responsible for managing landscapes for the provision of 'public good' ecosystem services. Experience has shown, however, that considerable alternative opportunities exist for the delivery of these complex, but essential, services. For example, payments for ecosystem services – as in the case of those made to peri-urban and rural communities that effectively protect sources of water for cities – can not only provide an incentive for conservation but can also create opportunities for income generation. As yet, the important role of ecosystem services is not recognized adequately in government policies or land management practices, let alone economic markets. UNDP should work with national governments, civil society, and the private sector to rectify this situation. Governments will play an especially important role in creating effective markets for ecosystem services, for example through the modification of resource management regulations and the establishment of tenure regimes that promote incentives for ecosystem service provision. In addition, opportunistic and entrepreneurial strategies that can reward communities, firms, and governments for work to conserve and protect ecosystem services must be identified and pursued by all actors.

>> Biodiversity and revenue generation: ecotourism
Ecotourism serves throughout the world as a cost-effective and replicable mechanism for increasing local people’s incentives to protect species, habitat, and ecosystem services. It can also serve as a valuable means of reducing poverty, as new opportunities for employment are created and revenues shared. However, care must be taken to ensure that viable ecosystems are preserved, not merely those species or places that are useful for attracting ecotourism revenues. Further, communities must be assisted in efforts to promote economic diversification beyond ecotourism. Unless such assistance is provided, long-term prospects for sustainability could, in fact, be undermined in cases where tourist economies collapse or newer destinations are discovered by fickle consumers.

>> Biodiversity and revenue generation: bioprospecting
Bioprospecting has the potential to enhance local economic incentives to preserve biodiversity. In many cases, companies pay for the right to sift through ecosystems in search of species of scientific and economic value and, in so doing, provide vital income to communities. However, companies will only make payments if they feel the ecosystem is a rich source of biodiversity. Clear tenure systems are crucial if such activities are to return real benefits to local people. Communities must also have legal recourse to ensure that payments owed to them are made and companies clearly understand and adhere to their obligations.

>> Improving market transparency
The transparency of markets is vital for any market system to function with the least amount of friction and cost. Where environmental goods and services (such as traditional herbal extracts or the provision of clean water from an intact watershed) are to be traded, for example, steps must be taken to ensure the development of a fair and orderly market. Enforcement procedures must be developed to ensure that sellers fulfil their side of contracts and do indeed provide the goods or services in question. Further, clear legal procedures must be established to provide recourse to participants and to increase faith in the market. Much preliminary work is, of course, required before markets of this type can even be contemplated. UNDP must work to help governments and communities undertake this preparatory work, particularly in valuing ecosystem services and establishing fair and clear tenure systems.

>> Improving conservation finance
Finance infrastructures must be developed to allow local conservation projects maximal access to capital. Trust funds and land trusts are examples of structural tools that have been used to achieve this end. One of the most promising tools for financing biodiversity conservation and the protection of ecosystem services rests in the concept of “bundling”. According to this model, environmental public goods (such as the provision of ecosystem services and the conservation of biodiversity) are bundled with private goods (such as tourism, controlled game hunting, and nature education) to ensure that a financial return is seen by providers for their conservation efforts. This process of bundling can be performed by a variety of actors, from NGOs to private firms. Bundling by local communities may also lead to a stronger bargaining position when it comes to securing financing for their conservation efforts from donors. UNDP should help to promote opportunities for bundling and work with communities, NGOs, and private sector firms to find innovative opportunities for connecting the conservation of biodiversity and the protection of ecosystem services with the provision of highly marketable private goods.

>> Preventing perverse subsidies
Perverse subsidies can have debilitating effects on biodiversity. For example, the subsidization of fishing equipment for fishermen may lead to the overexploitation of fish stocks while the subsidization of chemical fertilizers may have dire consequences for soils and freshwater bodies. Clearly, the subsidization of systems that are detrimental to biodiversity must be removed, in tandem with the promotion of more sustainable production systems.

[ These 'perspectives' are intended to provoke thought and stimulate debate within UNDP and partner organizations. They do not necessarily represent UNDP's final word on these issues. This website will soon feature a discussion forum in which staff will be able to exchange opinion on these and other biodiversity issues. In the meantime, please send any comments and suggestions to biodiversity@undp.org ]

 

Further information:

Economic Measures for Biodiversity Planning (PDF) [UNDP]

Local Business for Global Biodiversity Conservation (PDF) [UNDP]

The Use of Economic Measures in National Biodiversity Strategies and Action Plans (PDF) [UNDP, IUCN, et al]

Economics and the CBD (PDF) [IUCN]

Community-Based Economic Incentives for Biodiversity Conservation (PDF) [IUCN]

Bundling Biodiversity (PDF) [Columbia University]

 

Online resources:

The Biodiversity Economics Library

Business and Sustainable Development: a Global Guide

Organisation for Economic Cooperation and Development
Contains a Handbook on biodiversity valuation

Biodiversity and Livelihoods Group
IIED's website on biodiversity and livelihoods issues

 

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