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 greater the 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 decisions made 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 has something 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 to deliver 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 being highlighted. 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 to form 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 of biodiversity are addressed to answer the question: Why is biodiversity valuable? What

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 this area. 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 of how 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 conservation non-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 among living organisms. Hence, the term relates specifically to variability rather than to the overall 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 landscape diversity. It is also important to recognise that variability and overall magnitude are intrinsically linked. 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 ensure resilience 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-scale attempt 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 an extensive mantle in the nature conservation debate.

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 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 worlds 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.

Figure 1: Human/biodiversity interrelationships

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. 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 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 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 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. Footnotes: 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. 4. Significance in policy Some of the values impacted by biodiversity outlined in the previous section have the public good characteristics of non-excludability and jointness. For instance, the enjoyment people experience from knowing that there is in existence a range of species is non-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 biodiversity benefits 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 supplied by 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, the actions of government must be justified with reference to an improvement in human wellbeing. 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 in designing 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 type of 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) by the 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

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 the marginal costs? Importantly, the BCA process requires the estimation in monetary terms, of all the costs and benefits of the intervention under analysis. This is problematic when the benefits of intervention are outside the market. Of course, when values with public good characteristics 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 because of 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 range of 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 goods and 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 because peoples 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 reveal the values they enjoy through structured questionnaires. They do not involve any reliance on market data.

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 of suppliers) 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 sufficient observations 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 programme may 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 technique is exemplified by the use of the costs of water filtration units to substitute for the water purification 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 not perfect 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 the decision 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

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 the new 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 the decision 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 first approximation 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 the production 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 production process (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 with information from the production function. To apply this approach, good biophysical information on the production function is required before the economic relationships between 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 is used 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 soil biota 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 its biodiversity 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.

Stated preference techniques Limitations in the range of biodiversity value types that can be estimated using either the market based or revealed preference techniques, led to the development of stated preference techniques. In this type of technique a sample of people are asked about their preferences for a biodiversity sensitive asset under a hypothetical set of circumstances. A number of different methods have been developed to inquire about peoples preferences. The first stated preference technique to be developed was the Contingent Valuation Method. Originally, this method required that a sample of people be asked the amount they would be willing to pay to secure an improvement in a particular aspect of biodiversity. More recently, the technique has been refined so that most applications use a dichotomous choice version that involves people being asked if they would or would not support a proposal to improve biodiversity given some personal monetary cost. The most recently developed stated preference technique is Choice Modelling or Choice Experiments. Under this method a sample of people is asked to choose their most preferred alternatives from a sequence of grouped options that relate to different biodiversity management strategies. Each option is described in terms of its biodiversity outcomes and a personal monetary cost to be born personally by the respondent. By analysing the choices made by respondents it is possible to infer the trade offs that people are willing to make between money and greater biodiversity benefits. This in turn allows the estimation of values for biodiversity changes. 7. Application It is not the goal of this section to provide a comprehensive review of the biodiversity valuation studies that have been carried out4. That would be a task beyond the scope of the current exercise. Rather what is provided is an overview of the types of studies done and the techniques used in them. Market based techniques to estimate the value of biodiversity5 have rarely been applied simply because the public good nature of the benefits have precluded the operation of markets in most instances. Furthermore, the need for biodiversity to be valued for the development of public policy is less in cases where private market forces have operated successfully to secure biodiversity protection. An exception to this is the case of biodiversity prospecting. Here, market forces have operated to secure supply but a policy interest remains because of the potential for initiatives such as the development of secure tradeable rights to biodiversity through the Biological Diversity or through the World Trade Organisation Trade Related Aspects of Intellectual Property (TRIPS) agreement to stimulate more market activity. More studies have used the revealed preference techniques. The majority of these have used the replacement cost/averting behaviour approach whilst a smaller number have applied the production function and hedonic pricing methods. Many of these applications have centred on the valuation of biodiversity at the ecosystem function level and have

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 been carried out all around the world in both developed and developing countries. Stated preference techniques have also seen wide application. The studies that have used this approach have mostly used the contingent valuation method and have generally considered the value of biodiversity at the single species, multiple species and habitat levels. 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 and the scale of the biological resource. Hence, the values reported cannot in most cases claim to be estimates of biodiversity per se but rather they are values of the species/ecosystem under examination. Very few studies for instance, have specifically targeted 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 and methodological 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 mostly been stated preference applications and then mostly contingent valuation method applications 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 recreational experience or market based valuations. Furthermore, the policy significance of valuation studies is mixed. In the US, valuation of biodiversity 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 spill resulting 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 full benefit 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.

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 in Europe. 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 preference studies. 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 Australian context, 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 money terms 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 function approach, 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 ecological system 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 of biodiversity value. In many circumstances, the ability of biophysical scientists to predict the ecological outcomes 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 understanding of 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 encourages the 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.

Footnotes: 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

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 in society 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 will always 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 to log 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. Whether we 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 biodiversity loss has been made, albeit implicitly. The issue of monetising biodiversity values is therefore more a question of whether the values are made explicit or are kept implicit in decisions 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 been directed 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 also concerns 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 in their 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 potential for 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 are inadequate. This, it is argued, is because the techniques do not allow for the full incorporation of all the aspects of biodiversity protection.

9. Delivering biodiversity values Whist biodiversity value estimation has struggled to get past the issues raised in the previous section and achieve a higher policy profile, the economic analysis of delivering biodiversity values to society has progressed rapidly in the last decade. This has been achieved through the development of policy tools that provide incentives for people to provide biodiversity values. The predominant mechanism for delivering public goods including biodiversity has been government provision. In the case of biodiversity this was achieved through the creation of a network of parks and nature reserves. However, in recognition that such a patchwork approach would not provide functional biodiversity protection (resilience) more policy emphasis has been put on biodiversity protection on privately owned land. Economists have provided assistance in this endeavour by bringing to the fore a suite of policy measures broadly known as market based instruments. These measures involve the use of financial incentives to promote biodiversity protection. They include the payment of targeted subsidies, the levying of taxes on biodiversity destructive practices and the introduction of trading and banking schemes in which property rights to biodiversity are created and then bought and sold amongst people who can supply biodiversity (for example, land owners) and those who want biodiversity (for example, society, as represented by their government, conservation clubs, and developers who want to use biodiversity in their development activities). The advantage of using market-based instruments is that they are able to deliver biodiversity values to society at the lowest cost. They ensure cost-effective delivery. What they do not ensure is that the level of biodiversity protection delivered to society is the most efficient level. In other words, the level of biodiversity protection that is targeted by the market-based instruments may be either too little or too great. The decision regarding the efficient level of biodiversity protection requires the input of valuation information. It is only with value estimates that society can be assured that the additional benefits of biodiversity protection are worth the additional costs. 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 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 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.

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