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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