The economic value of biodiversity: a scoping paper

Professor Jeff Bennett
Asia Pacific School of Economics and Government
The Australian National University, October 2003

3. What does biodiversity do?

To understand the economist’s approach to the role of biodiversity, it is first necessary to understand the approach’s 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 know what 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 will occur 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) to infer a value for the world’s biodiversity was therefore a contradiction. It used value estimates 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, the resultant changes in biodiversity and the subsequent changes in the wellbeing of people. Figure 1 provides a diagrammatic representation of this causal chain.

At the core of the interrelationships between people and biodiversity is the ecological system 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 the biological resource in the process of generating wellbeing. Nor can it be considered at just one point in time. Biodiversity’s 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 the wellbeing of people.

The nature of the relationship between human cause and human effect is clearly tied into the 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 human impact, 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.

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 a forest, 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 same forest-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 of the 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 greater attention to this relationship.

It is useful to consider biodiversity-induced changes in human wellbeing using the concept 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 and agricultural products that are impacted by the diversity and extent of biological resource.
  • The benefits generated by tourism and recreation activities that are dependent on biological 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 species and ecosystems (existence value)
  • Philanthropic and bequest motives whereby individuals enjoy the pleasure of others (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 a resilient ecological system provided (option value).

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 the impact 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 are not 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 of adverse 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 a wetland for irrigated cropping. Wetland ecologists and hydrologists may be able to predict 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 be increased. 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 ecosystem’s 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 ecological consequences 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 the probability of the species being made extinct. In other words, the economics of biodiversity protection is a matter of probabilities.

1. Note that these so-called ‘ecosystem services’ are the products of ecological systems. They are not biodiversity per se but rather are one category of the outputs of the ecological 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 very effective 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 waterways of Australia was initially an increase in biodiversity but subsequently it has resulted in a net reduction in biodiversity.