The economic value of biodiversity: a scoping paper

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

10. Ways forward

The causes of the problem of biodiversity loss have been identified by economists. The manifestations of biodiversity loss have been described by biophysical scientists. Economists have also identified promising policy tools that would allow biodiversity protection to be delivered to society at least cost.

What is missing in this progression of knowledge is the rigorous analytical assessment of the amount of biodiversity protection that would provide society with the greatest net gain. Certainly society is not advantaged by the complete loss of biodiversity. That would see the collapse of our civilisation. However, it is equally safe to conclude that society does not want total biodiversity protection as that would mean the abandonment of activities – such as commercial agriculture - that ensure the survival of humanity. In other 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 scientists who 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 scientific community ‘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 regarding validity 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 for politicians to cater to the demands of politically powerful vested interest groups.

Clearly with these three sources of distrust, the application of economic tools to the consideration of society’s 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 is required. The science must be applied and policy relevant. There is a great need for scientists 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 for valuing 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 for economic 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 exploration of 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.

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 preference techniques 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 are complex 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 cultural differences 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 yet untapped. 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 to do so. There is also a need for economists to do a better job of explaining what it is that they do when they analyse biodiversity choices. There is a degree of misunderstanding amongst 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 how economics 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 need for 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 valuation specifically 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 process of 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 diversity of 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 for the evolutionary development of analytical processes and decision-making. The fittest of those approaches will survive the debate.