Chapter 29 The economics of biodiversity

The conservation of biodiversity is a major environmental issue, one that promises to remain at or near the top of the environmental agenda for the foreseeable future. The conservation of biodiversity is a major environmental issue, one that promises to remain at or near the to

Chapter 29 THE ECONOMICS OF BIODIVERSITY STEPHEN POLASKY University of Minnesota, USA CHRISTOPHER COSTELLO University of California at Santa Barbara, USA ANDREW SOLOW Woods Hole Oceanographic Institution, USA Contents Abstract Keywords Introduction Measures of biodiversity 2.1 Measures based on relative abundance 2.2 Measures based on joint dissimilarity Sources of value from biodiversity 3.1 Use value and existence values of individual species 3.2 Biological prospecting 3.3 Biodiversity and ecosystem services Strategies to conserve biodiversity 4.1 Terrestrial habitat protection 4.2 Marine biodiversity and reserves 4.3 Introduced species Incentives to conserve and conservation policy Conclusions References Handbook of Environmental Economics, Volume Edited by K.-G Mäler and J.R Vincent © 2005 Elsevier B.V All rights reserved DOI: 10.1016/S1574-0099(05)03029-9 1518 1518 1519 1520 1520 1522 1525 1525 1526 1528 1532 1532 1538 1540 1544 1551 1552 1518 S Polasky et al Abstract The conservation of biodiversity is a major environmental issue, one that promises to remain at or near the top of the environmental agenda for the foreseeable future The loss of biodiversity affects human welfare as well as being lamentable for its own sake Humans depend on natural systems to produce a wide variety of ecosystem goods and services, ranging from direct use of certain species for food or medicines to ecosystem functions that provide water purification, nutrient retention or climate regulation Threats to biodiversity include habitat loss and fragmentation, the introduction of nonindigenous species, over-harvesting, pollution, changes in geochemical cycles and climate change Sustaining biodiversity in the face of increasing human populations and increased human economic activity promises to be a major challenge Economists have an important role to play in helping to develop and evaluate conservation strategies Because biodiversity is at risk in large part because of human activity, finding ways to conserve biodiversity will come from better understanding and management of human affairs, not from better biology alone Economists can help set priorities to allocate scarce conservation resources where they will the most good Economists can help design incentive schemes to make conservation policy both effective and efficient Economic methods can shed light on what are the most valuable components of biodiversity, including analysis of species existence value, the value of bioprospecting and the value of ecosystem services Keywords biodiversity measures, valuation, ecosystem services, habitat conservation, conservation policy JEL classification: Q20, Q22, Q23, Q24, Q28 Ch 29: The Economics of Biodiversity 1519 Introduction The second half of the 20th century was, in many respects, good to Homo sapiens Human population more than doubled between 1950 and 2000, growing from approximately 2.5 billion in 1950 to just over billion in 2000 (U.S Bureau of Census) Human health, nutrition and average life expectancy improved dramatically [Johnson (2000)] The value of economic activity increased by over 400% over the second half of the 20th century [Delong (2003))] The same period was not so good to many of the other species on the planet Some ecologists fear that we may now be witnessing the sixth great extinction wave on the planet Though evidence is fragmentary, current rates of species extinction are estimated to be several orders of magnitude above background or natural extinction rates [NRC (1995), Lawton and May (1995), Pimm et al (1995)] The area of natural habitat has declined as humans have converted lands to agriculture, managed forests or urban development Roughly half of useable terrestrial land (i.e., land that is not tundra, ice, boreal, rock, desert) is devoted to grazing livestock or growing crops [Tilman et al (2001)] There is roughly half the area of forest now than existed when agriculture began 8000 years ago [WRI (1998)] Increased movement of goods has led to introductions of nonindigenous species with occasional substantial consequences for native ecosystems Over-harvesting of fish and game species, climate change, pollution, and changes in geochemical cycling has also threatened many species Given this experience, ecology may supplant economics as “the dismal science” Conserving biodiversity has become a major environmental issue In the words of ecologist Simon Levin: “The central environmental challenge of our time is embodied in the staggering losses, both recent and projected of biological diversity at all levels, from the smallest organisms to charismatic large animals and towering trees.” [Levin (1999, p 1)] The loss of biodiversity may be lamentable for its own sake but it also has impacts on human welfare Humans depend on natural systems to produce a wide variety of ecosystem goods and services, ranging from direct use of certain species for food or medicines to ecosystem functions that provide water purification, nutrient retention or climate regulation Cultural and spiritual values are also tied to elements of biodiversity The great concern for conserving biodiversity, in contrast to concerns for specific endangered species or particular ecosystems, is a relatively recent phenomenon The formation of the Society for Conservation Biology in 1985, the beginning of the journal Conservation Biology in 1987, and the publication of the edited volume BioDiversity [Wilson (1988)] serve as useful benchmarks signaling the beginning of broad scientific and policy interests in the conservation of biodiversity By now there are thousands of journal articles and books devoted to various aspects of conservation (a partial biodiversity bibliography containing approximately 5000 entries can be found at http://www.apec.umn.edu/faculty/spolasky/Biobib.html) While biological scientists have a central role in researching biodiversity, economists have begun to play an important and expanding role [a collection of recent biodiversity articles by economists is contained in Polasky (2002)] Biodiversity is at risk largely 1520 S Polasky et al because of human activity Therefore, conservation solutions will come from better understanding and management of human affairs, not from better biology alone Since there are limited budgets for conservation that cannot support all worthy conservation projects, economists can help set priorities to allocate scarce resources where they will the most good Economists can help design incentive schemes to make conservation policy both effective and efficient Economic methods can shed light on what are the most valuable components of biodiversity In this chapter we review the recent economics literature on biodiversity We begin in Section by discussing various ways to define and measure biodiversity In Section we discuss the sources of value generated by biodiversity and various empirical measures of value Section covers strategies to conserve biodiversity in light of the main threats, namely habitat loss and invasive species Section discusses incentives (and disincentives) for conservation as well as policies whose goal is to conserve biodiversity We offer brief concluding comments in Section Measures of biodiversity The term biodiversity has been defined in a number of different ways Most of the measures of diversity developed and used by economists are defined as measures of the joint dissimilarity among a set of species There is, however, another strand of ecological literature that defines diversity in terms of the relative abundances of species within a community We begin this section with a review of measures based on relative abundance and then review measures based on joint dissimilarity 2.1 Measures based on relative abundance Perhaps the most common way in which the word diversity has been used in ecology is to characterize the relative abundances of species within a community [e.g., May (1972), Magurran (1988)] The relative abundance of a species in a community is defined as the proportion of individual organisms in the community that belong to that species Consider a community containing s species and let π = (π1 π2 πs ) be the vector of relative abundances with for all j and sj =1 πj = In qualitative terms, the community is said to be diverse if all of the elements of π are close to 1/s There is some evidence that communities that have recently been subjected to disturbance have low diversity A possible explanation is that, following disturbance, recolonization is led by opportunistic species with high fecundity (so-called r-strategists) whose numbers quickly dominate the community Over time, less fecund, but longer-lived species (socalled K-strategists) are able to compete successfully, thereby making the community more diverse The extent to which diversity reflects dynamical properties like stability and resilience remains an open question The chapter on ecosystem dynamics by Simon Levin and Stephen Pacala (2003) in Volume of this handbook discusses some aspects of this question and other matters related to the measurement of biodiversity Ch 29: The Economics of Biodiversity 1521 This qualitative notion of diversity is not amenable to analysis and, during the 1970s, there was a burst of attention to devising quantitative measures that capture this notion An important contribution by Patil and Tailie (1977) was to define the diversity of a community with relative abundance vector π by average rarity: s D(π) = rj πj , j =1 where rj is a measure of the rarity of species j Different choices of rarity measure yield different diversity measures Patil and Tailie (1977) focused on the one-parameter famβ ily rj = (1 − πj )/β with β −1 This gives rise to the family of diversity measures: s β+1 Dβ (π) = − πj β j =1 Special cases include: D−1 (π) = s − which is essentially species richness; s D1 (π) = − πj2 j =1 which is called the Simpson index and gives the probability that two individuals sampled at random are of different species; and the limiting form s D0 (π) = − πj log πj j =1 which is called variously the Shannon–Weaver index, the Shannon–Wiener index, and the entropy index It is fair to say that the notion that a high level of diversity of this type is preferable to a low level is without a clear basis in either ecology or economics Weitzman (2000) attempts to provide such a basis through a model of the relationship between the abundance of a crop and the number of pests or pathogens specific to that crop Briefly, under this model: Sj = kBjz , where Sj is the number of pests specific to crop j and Bj is the total biomass of the crop Weitzman (2000) imagines that this biomass is divided into Bj separate patches each of unit biomass If each pathogen has a probability ε of destroying a patch of biomass, then (under two independence assumptions) the probability of complete extinction of 1522 S Polasky et al the crop is: z Pj (Bj ) = − (1 − ε)kBj Bj Weitzman (2000) uses the approximation that, for small ε, Pj (Bj ) ∼ = (kBjz ε)Bj to show that the set of relative abundances that minimizes the probability of a loss of all crops maximizes the diversity measure D0 (π) The essential tension in this optimization problem is between the safety provided by a large number of patches and the corresponding large number of potentially harmful pests 2.2 Measures based on joint dissimilarity The focus of the rest of this section is on quantitative measures of diversity that are intended to reflect the joint dissimilarity of a collection of species One practical motivation for work in this area has been the need to evaluate policies aimed at protecting species from extinction It is worth stressing that, as the goal of such policies is to preserve species from extinction, this kind of diversity measure should be sensitive only to extinctions (or changes in extinction probabilities) and not to ecological changes (e.g., in population size or abundance distributions) This is not to say that maintaining populations is unimportant – indeed, it is a critical policy instrument in preventing extinction – only that it is not the ultimate goal In cases where species are harvested for food or sport, increasing the population size will have utility in and of itself There is a large bioeconomics literature that analyze these issues [Clark (1990)] and we will not consider population size issues further in this section The standard measure by which policies aimed at preventing extinction are evaluated is the number of species that they protect However, this measure of diversity – species number – takes no account of the relative differences between species A policy that protects a large number of species covering a small number of genera may be, in some sense, inferior to a policy that protects a smaller number of species covering a larger number of genera This point was made by Vane-Wright, Humphries and Williams (1991), who went on to propose measures of the diversity of a collection of species based on the phylogenetic tree connecting them Under the simplest of these measures, each species in the tree is assigned a numerical value inversely proportional to the number of nodes in the tree associated with it For a given species, this value reflects the number of closely related species The diversity of a collection of species is then found by summing these values for the species in the collection By measuring the diversity of a collection of species by combining values assigned to the species in the collection, this measure cannot distinguish between the case in which a pair of closely related species are both in the collection and the case in which only one is This creates a problem: it would not make sense to depreciate the value of preserving a species with many close relatives when these close relatives are doomed to extinction Other proposed measures suffer from a similar problem [e.g., Haney and Eiswerth (1992)] To formalize the measurement problem, consider a collection S = (s1 , s2 , , sn ) of n species or other types and let d(sj , sk ) be the distance or dissimilarity between Ch 29: The Economics of Biodiversity 1523 species sj and sk (neither of which needs be in S) The problem is to define a nonnegative real-valued function D(S) that measures the diversity of S It is natural to require D to satisfy the following conditions [Weitzman (1992)] First, diversity should not be reduced by the addition of a species to s That is, if S and S are two collections of species with S ⊂ S , then D(S) < D(S ) Second, diversity should not be increased by the addition of a species that is identical (in the sense of having dissimilarity) to a species already in S That is, if s◦ is a species not in S, then D(S ∪ s◦ ) = D(S) if and only if d(s◦ , si ) = for some si ⊂ S Third, diversity should not decrease with an unambiguous increase in the dissimilarities between species That is, for a oneto-one mapping of S onto S such that d(si , sj ) d(si , sj ) with at least one strict inequality, D(S) D(S ) Other requirements are possible (e.g., involving continuity of the measure with respect to increasing dissimilarity), but these three seem fundamental The first measure to satisfy these requirements was proposed by Weitzman (1992) With the diversity of a single species defined as 0, this measure is given by the recursion DW (S) = max DW (S − si ) + d(si , S − si ) , where S − si denotes the collection S with species si removed; the distance d(si , S − si ) between species si and the collection S − si is defined as the minimum of the distances between si and the species in S − si ; and the maximum is taken over the species si in S In the important case where the distances between species are ultrametric (so that, for any set of three species, the largest two distances between species are equal), the species can be represented by a planar tree, and then Weitzman’s measure corresponds to the total length of the tree This is arguably the only sensible measure of pure diversity in this case Other diversity measures have been proposed [e.g., Crozier and Kusmierski (1996), Faith (2002)], but these tend to be ad hoc It is worth noting at this point that Weitzman’s measure and other early measures of diversity were not directly connected to any theory of economic (or ecological) value This is not to say that the qualitative connection had not been made Ecologists have long believed that diversity in nature supports the stability and resilience of ecosystems [despite some surprising suggestions to the contrary, May (1972)] Diversity, therefore, has economic value arising not only from direct benefits but also from indirect benefits from ecosystem functions that generate valuable ecosystem services, which we discuss in more detail in Section 3.3 Economists have developed the argument that, to the extent that similar species provide similar benefits and suffer similar susceptibilities, it is sensible to maintain a diverse portfolio of species The first attempt to base a measure of diversity on a theory of value was by Polasky, Solow and Broadus (1993) Using a highly stylized probability model of substitutability of species in providing a single benefit, Polasky, Solow and Broadus (1993) derived a measure of the diversity of a collection of species that reflected the probability that at least one species in the collection provided the benefit The measure satisfied the three requirements listed above The diversity measure of Polasky, Solow and Broadus (1993) was based on a complete (if stylized) model of substitutability In later work, Solow and Polasky (1994) took a slightly different approach Suppose that interest in species conservation arises 1524 S Polasky et al from the possibility of species providing a benefit, such as a cure for a disease, in the future Suppose further that having more than one species that provides this benefit is no better than having a single species that provides it Let Bi be the event that species si provides this benefit The event that the collection S also provides this benefit is given by n B(S) = Bi i=1 The expected benefit of S is p(S)V , where p(S) = prob(B(S)) and V is the fixed unit value of the benefit Because V is fixed, p(S) provides a basis for comparing different collections of species In the absence of specific information, Solow and Polasky (1994) assumed that the probability of the event Bi that species si would provide the benefit is an unknown constant p that does not depend on i They also assumed that the conditional probability of Bi given the event Bj that species sj provides the benefit is: prob(Bi | Bj ) = p + (1 − p)f d(si , sj ) , where f is a known function satisfying f (0) = 1; f (∞) = 0; and f Although it is not possible to obtain the n-variate probability p(S) from the univariate probability p and the set of conditional probabilities prob(Bi | Bj ), Solow and Polasky (1994) used a probability inequality due to Gallot (1966) to show that a lower bound on p(S) is given by p DSP (S), where DSP (S) = et F −1 e for the n-by-n matrix F = [f (d(si , sj ))] In summary, a lower bound on the expected value of a collection S is an increasing function of the quantity DSP (S) Solow and Polasky (1994) went on to show that, under reasonable assumptions about the function f , this quantity also meets the three main requirements of a diversity measure Moreover, DSP (S) is bounded below by and above by n, so it has the interpretation as the effective number of species in S The main disadvantage of DSP (S) as a diversity measure is that it requires the specification of the function f that, in some sense, measures the “correlation” between species as a function of the dissimilarity between them On the other hand, from a practical perspective, it may be a disadvantage of DW (S) that it can increase without bound with dissimilarity A more serious objection to the practical use of these and other diversity measures in actual conservation decision-making is that their information requirements are utterly unrealistic Except in extremely unusual situations, conservation decisions involve large numbers of species from a wide variety of taxonomic groups whose identities – let alone genetic dissimilarities – are simply unknown The numbers of species themselves are also unknown and comparisons based on estimated species number are fraught with problems arising from sampling An attractive option in this situation is to aim conservation efforts at conserving a diverse collection of habitats, on the assumption that dissimilar habitats tend to support dissimilar species Of course, this merely Ch 29: The Economics of Biodiversity 1525 transforms the problem to one of assessing the diversity of a collection of habitats In this case, however, the information needed to construct dissimilarities between habitats (e.g., topography, climate, etc.) may be more readily available Note that, in contrast to the species case, there is no reason to assume that habitats are related through an analogue to a phylogenetic tree For this reason, diversity measures based on such a structure have no particular appeal Sources of value from biodiversity Some issues related to the value of biodiversity were touched upon in previous sections, for example the utilitarian motivation for the diversity measure of Solow and Polasky (1994) For the most part, however, discussion of diversity measures and value of biodiversity have been conducted in largely separate literatures In this section we review economics literature on the value of biodiversity (For background on valuation methods, see Volume of this handbook, titled Valuing Environmental Changes.) Biodiversity is a broad term encompassing everything from genes to species to ecosystems Value from biodiversity can arise at any of these levels We begin with value generated at the species level 3.1 Use value and existence values of individual species Humans have recognized the direct use value of other species, at least implicitly, for as long as our species has existed For millennia, humans depended upon successfully hunting animal species and gathering plants species The switch to domesticated agriculture changed the form but not the substance of our reliance on other species Many of the direct use values of species which humanity relies upon for food and fiber are well documented by agricultural economists, fishery economists and forestry economists Even for species that are not grown or harvested commercially, there is a long tradition within economics of estimating the value of recreational hunting and fishing [see, for example, Walsh, Johnson and McKean (1988), Markowski et al (1997), Rosenberger and Loomis (2001)] The increased interest in the conservation of biodiversity, especially conserving endangered species, brought about a new type of species valuation effort focused on species existence value rather than on direct use value Beginning in the 1980s, economists began to use contingent valuation surveys to ask people what they were willingto-pay to conserve particular rare or endangered species In reviewing studies covering 18 different species, Loomis and White (1996, p 249) concluded “that the contingent valuation method can provide meaningful estimates of the anthropocentric benefits of preserving rare and endangered species.” Estimates of annual willingness-to-pay varied from a low of $6 per household for the striped shiner to a high of $95 per household for the spotted owl The estimates of willingness-to-pay tended to be higher for more 1526 S Polasky et al charismatic species and for situations with greater increases in population sizes, as one would expect Not all economists agree that the contingent valuation method can “provide meaningful estimates” of value for conserving species Brown and Shogren (1998) note that by aggregating the estimates reported by Loomis and White (1996) over all households, the implied willingness-to-pay to protect less than 2% of endangered species exceeds 1% of GDP, which they remark seems “suspiciously high” Responses to contingent valuation surveys on conserving species may exhibit “embedding effects” [Kahneman and Knetsch (1992)] A survey of willingness-to-pay for protecting a collection of species might generate estimates similar to the willingness-to-pay for protecting an individual species Desvouges et al (1993) found similar estimates for willingness-to-pay for preventing 2000, 20,000 and 200,000 bird deaths Survey responses may reflect the value of protecting an ecosystem (e.g., the value of old growth forests rather than the value of spotted owls), the environmental more generally, or the “warm-glow” of contributing to a worthy cause [Andreoni (1989, 1990)] On a different tack, Stevens et al (1991) found that many people object to survey questions that try to elicit a monetary value for species existence They found that the vast majority of survey respondents thought conserving species was important but they refused to state that they would pay a positive amount for conservation Stevens et al (1991, p 268) attribute the unwillingness to state a willingness-to-pay as arising from moral or ethical concerns about asking “people to choose between ordinary goods (income) and a moral principle.” 3.2 Biological prospecting With arguments about existence values unlikely to be viewed as conclusive, conservationists looked for other means to show that conserving biodiversity would make financial, as well as moral, sense One argument used extensively in the early 1990s was that conserving species preserved option value: species might contain valuable compounds that would yield valuable pharmaceuticals or other products at some future date [see, for example, Wilson (1992)] If the species were to go extinct this option value would be lost Determining the magnitude of this option value was the central focus of a literature on bioprospecting The early bioprospecting literature produced a wide range of estimates of the value of conserving a species for pharmaceutical purposes, from $44 [Aylward (1993)] to $23.7 million [Principe (1989)] per untested species The value of conserving an untested species was derived by multiplying the probability of successfully identifying a commercially valuable product with the average revenue generated by a successful product Simpson, Sedjo and Reid (1996) criticized this method This simple procedure generates estimates of the average value rather than the marginal value of an untested species Because multiple species may contain the same compound and in this sense be redundant, marginal values are likely to be far less than average values 1546 S Polasky et al has been extensively cultivated elsewhere However, if drug companies not keep a significant fraction of rents from developing new drugs they may not have sufficient incentive to develop new drugs via bioprospecting Mendelsohn and Balick (1995) found a significant difference between likely social and private returns to development of new drugs Koo and Wright (1999) also argue that biodiversity will be underprovided by the private sector via bioprospecting on the grounds that although the value of biodiversity is very large, market and social values are grossly misaligned Both ecotourism and bioprospecting have been subject to criticism that revenues generated by conservation activities have not necessarily resulted in benefits to local communities Local communities with no financial stake in conservation or that in fact suffer financial losses from conservation activities (e.g., wildlife damage to crops) might resent or actively oppose such activities, leading to a greater probability that conservation will fail Trying to give local communities a stake in conservation has led to efforts to promote community-based conservation [Western and Wright (1994)] and integrated conservation–development projects [Wells and Brandon (1992)] The goal of community-based conservation is to give local communities control over resources, thereby giving the community a stake in conservation The most well-known community-based conservation program is the Communal Areas Management Program for Indigenous Resources (CAMPFIRE) in Zimbabwe [see Barbier (1992) for an early review and economic assessment] Integrated conservation-development projects try to “link biodiversity conservation in protected areas with local socio-economic development” [Wells and Brandon (1992)] Both approaches arose because of the failure of traditional protected areas conservation strategies that ignored the needs of local communities The extent to which conservation and local control over resources, or local economic development, are mutually consistent remains to be seen Overall, community-based conservation and integrated conservation-development projects have had mixed success to date There is no guarantee that once they are given the choice, local communities will in fact choose to conserve Cultural, social or political factors may block conservation even when economic factors favor conservation However, there is no guarantee that conservation and local economic development are in fact consistent goals Certainly in some communities with ecotourism potential or where ecosystems provide valuable ecosystem services, conservation and development may go hand-in-hand In other cases, the conservation of biodiversity and economic development may not be consistent Because of the pervasive nature of external benefits created by biodiversity conservation, it may require more than just allowing local control and market forces to achieve an efficient level of conservation Recognition that the conservation of biodiversity may generate benefits that reach well beyond the local community provides a rationale for governments and nongovernmental organizations to provide resources for conservation, and for the institution of national or international conservation policies At present, though there are a number of policies to promote conservation, there are also a number of policies that have the exact opposite effect Agricultural subsidies, subsidies to clearing land, resource Ch 29: The Economics of Biodiversity 1547 extraction and new development, all may contribute to driving a further wedge between private and social returns from actions that conserve biodiversity Perhaps the first rule for policy should be to “do no harm” Beyond doing no harm by eliminate perverse subsidies, however, positive external benefits from conservation require policies that create positive incentives to conserve Both governments and non-governmental organizations, such as the Nature Conservancy and World Wildlife Fund, are actively engaged in acquiring land for conservation and in other activities promoting conservation Buying land is a direct and secure way to promote conservation but it is often a costly instrument for protecting biodiversity Boyd, Caballero and Simpson (1999) find that acquisition is often “conservation overkill” Conservation easements that rule out certain incompatible land uses, but not all land uses, is often a far cheaper route to secure conservation objective than acquisition Recently, interest has shifted away from land acquisition toward conservation easements and other ways of working with landowners to promote both conservation and landowner interests For example the Nature Conservancy’s approach, once heavily weighted toward acquisition, now incorporates mechanisms such as community development projects to reduce the demand for fuel wood and the purchase of conservation easements to limit development (see www.nature.org for examples) Acknowledging that donors from high-income nations invest billions of dollars toward ecosystem protection in low-income nations, a related literature debates the relative merits of direct conservation payments versus indirect mechanisms (e.g payments to promote ecotourism which generates ecosystem protection as a joint product) Although indirect approaches are the predominant form of intervention in lowincome countries, Ferraro and Simpson (2002) argue that direct payments can be far more cost-effective, often requiring no additional institutional infrastructure or donor sophistication Another approach to conservation is to institute a system of transferable development rights (TDR) TDR are virtually identical to cap-and-trade schemes to limit pollution emissions In a TDR system, the conservation planner determines how much land can be developed in a given area Development rights are then allocated and trades for the right to develop are allowed Developers can increase density in a growth zone (“receiving area”) only by purchasing a development rights from the preservation area (“sending area”) The approach was developed and implemented extensively in the 1970s to direct development within urban areas [see Field and Conrad (1975) for what appears to be the first economic model of the supply and demand for development rights; see Mills (1980) for a model of TDR and a discussion of their appropriateness for use in protecting public goods] Not until recently have economists explicitly considered TDR as a mechanism to conserve biodiversity Panayotou (1994) develops the TDR approach for conservation He argues that “biodiversity conservation is ultimately a development rather than a conservation issue” [Panayotou (1994, p 91)] Given that most biodiversity exists in the developing world, and that the public good nature of biodiversity requires a mechanism for paying developing countries to be stewards of this resource, Panayotou argues that TDR may also be an effective way to protect global (as well as local) biodiversity 1548 S Polasky et al Merrifield (1996) proposes use of a similar concept where “habitat preservation credits” would be required for development There is no guarantee that TDR schemes, like cap-and-trade schemes, will result in efficient outcomes unless the planner chooses the correct amount of rights/permits to allocate An additional problem faced in TDR for conservation is deciding what are appropriate trades Land units, unlike air emissions, have unique characteristics and may contribute to a number of conservation objectives What constitutes an equal trade is not obvious Similar problems over establishing the proper trading ratios exist in mitigation banking schemes for wetlands Another direct method to create positive incentives for conservation is to institute a system of payments for the provision of ecosystem services The country that has moved furthest in this direction is Costa Rica The 1996 Forestry Law instituted payments for ecosystem services The law recognizes four ecosystem services: mitigation of greenhouse gas emissions, watershed protection, biodiversity conservation, and scenic beauty The National Forestry Financial Fund enters into contracts with landowners that agree to forest preservation, reforestation or sustainable timber management Funds to pay landowners come from taxes on fuel use, sale of carbon credits, payments from industry and from the Global Environment Fund Many developed countries have adopted some form of “green payments” in which agricultural support payments are targeted to farmers who adopt environmentally friendly management practices or land uses [OECD (2001)] While market oriented policies have been of increasing importance in recent years, other important policies directed at the conservation of biodiversity, including the U.S Endangered Species Act and the Convention on International Trade in Endangered Species, are at their core largely command and control regulatory regimes The Endangered Species Act (ESA), enacted in 1973, changed conservation policy from a largely voluntary and toothless regime that existed prior to 1973 into a powerful environmental law capable of stopping large government projects and actions of private landowners [Brown and Shogren (1998)] Section of the ESA prohibits federal agencies from actions that cause “jeopardy” (i.e., risk of extinction) to species listed as threatened or endangered Section prohibits public and private parties from “taking” listed species “Taking” includes causing harm to species through adverse habitat modification from otherwise legal land uses, such as timber harvesting or building, as well as more obvious prohibitions against killing, injuring or capturing a listed species The way the law is written, the ESA appears to have very limited scope for economic considerations Sections and are absolute prohibitions Biological criteria are the basis for listing species In TVA v Hill, the U.S Supreme Court wrote: “The plain intent of Congress in enacting this statue was to halt or reverse the trend toward species extinction, whatever the cost” [437 U.S 153, 184 (1978)] When it looked like a small unremarkable fish (the snail darter) that was previously all but unknown would halt construction of a large dam backed by politically powerful members of Congress, Congress amended the ESA They authorized the formation of the Endangered Species Committee (“The God Squad”) to allow an exemption to the ESA if the benefits of doing so Ch 29: The Economics of Biodiversity 1549 would clearly outweigh the costs There are high hurdles to be met for convening this Committee and it has been used rarely Despite the fact that the law is written in a way that appears to marginalize economic considerations, it has proved impossible to administer the Act while totally ignoring economics Several writers have noted that economic and political considerations influence agency actions at all stages of the ESA process including the listing stage, which is supposed to be done strictly on biological grounds [e.g., Bean (1991, p 41), Houck (1993, pp 285–286), Thomas and Verner (1992, p 628)] Endangered species whose protection threatens to impose large costs run into political opposition that translates into pressure on the Fish and Wildlife Service This pressure appears to translate to lower probability of listing [Ando (1999)] The benefits side of the equation also seems to affect listing and recovery spending even though the ESA does not base such decisions on the popularity of the species Metrick and Weitzman (1996) found that more charismatic species were more likely to be listed than uncharismatic species, and that once listed “visceral characteristics play a highly significant role in explaining the observed spending patterns, while the more scientific characteristics appear to have little influence” [Metrick and Weitzman (1996, p 3)] While much of the early regulatory activity under the ESA targeted government actions under Section 7, the 1990s saw an increase in the emphasis on conservation on private lands under Section More than half of endangered species have over 80% of their habitat on private land [USFWS (1997)] Conservation on private lands presents a number of incentive issues [Innes, Polasky and Tschirhart (1998)] A landowner whose parcel contains endangered species habitat may face restrictions on what activities may be undertaken The landowner need not be compensated if restrictions are imposed and losses to the landowner result [though the law on regulatory takings is quite unsettled, see Polasky and Doremus (1998)] The potential losses the ESA may impose on a landowner give rise to several perverse incentives Innes (1997) shows that there can be a race to develop in order to beat the imposition of an ESA ruling Similarly, there may be an incentive to “shoot, shovel and shut up” in order to lower the likelihood of imposition of restrictions under the ESA [Stroup (1995)] Further, because current law stipulates that acquiring specific information about species is a prerequisite to imposing restrictions on a landowner, there is no incentive for the landowner to cooperate in allowing biological information to be collected [Polasky and Doremus (1998)] There are several possible ways to reform the ESA to cure the worst of the perverse incentives One method is to provide compensation When eminent domain is used and there is a physical taking of property, the government is required to provide compensation equal to market value of the property The same approach could be taken when the government mandates conservation on private land There are two potential problems with this approach First, Blume, Rubinfeld and Shapiro (1984) show that when landowners are fully compensated in the event of a taking, there is an incentive to overinvest It is socially optimal to take account of the probability of future takings that render the investment worthless The landowner, however, is fully reimbursed and so ignores this factor Second, use of government funds to pay for compensation may be 1550 S Polasky et al costly On the other hand, others point out that there is an advantage to forcing regulators to understand the costs of imposing regulations by paying compensation [e.g., Stroup (1995)] Rather than tying compensation to market value, paying compensation tied to the value of conservation, along the lines of green payments discussed above, can generate efficient incentives to conserve [Hermalin (1995)] A different approach to reform is to allow landowners to avoid sanctions if they can prove that their proposed actions will not cause harm [Polasky and Doremus (1998)] This type of approach is exemplified in the ESA by the provision to allow landowner actions that cause some minor and unintended harm to a listed species for landowners with approved Habitat Conservation Plans The incentive for filing Habitat Conservation Plans was further sweetened by promises of “no surprises” and “safe harbors” that put the burden on the government for costs imposed by future regulatory actions The Convention on International Trade in Endangered Species (CITES) has arguably been the international agreement that has had the greatest impact on conservation outcomes [WCMC (1992)] CITES authorizes banning international trade in species listed under Appendix I, and regulating trade in species listed under Appendix II In 1989, CITES initiated a ban on trade in ivory In the 1970s and 1980s rampant poaching of elephants caused a drop in elephant populations of roughly 50% [Barbier et al (1990)] Particularly threatened were elephant populations in east African countries Elephant populations in southern African countries were less threatened Imposing the ivory trade ban was controversial Southern African countries with relatively healthy elephant populations (Botswana, Malawi, Namibia, South Africa, Zimbabwe) objected and did not sign on to the ban Opponents of a ban argued that the ban would likely result in high ivory prices as supply was choked off, which would increase the rewards of successful poaching [Barbier and Swanson (1990)] Opponents also argued that by denying rights to sell ivory legally there would be less financial reason to conserve elephant populations and less money available for enforcement efforts against poaching Proponents of the ban, including east African countries and many developed countries, argued that without the ban elephant populations would continue to decline, as it was too easy to sell illegally harvested ivory and because anti-poaching efforts of impoverished governments were no match for well-organized poaching gangs Van Kooten and Bulte (2000) summarize economic arguments about the ivory ban and present results from application of several dynamic models The ivory ban appears to have been largely successful in halting the decline in elephant populations A main explanation for this apparent success is that by making the purchase of ivory illegal the ban appears to have decreased demand for ivory The increased price for ivory on the black market never materialized and in fact prices appeared to fall after the ban was put in place Kremer and Morcom (2000) offer an alternative explanation for the failure of prices to rise with the ban, namely that it created expectations of lower future prices, which were then self-fulfilling They point out that in dynamic renewable resource models with storage it is possible to have multiple equilibria, one leading to sustainable populations and the other leading to extinction If expectations are that there will be sufficient future stocks there will be low prices and Ch 29: The Economics of Biodiversity 1551 little incentive to poach, leading to a rise in population and fulfilling expectations On the other hand, if expectations are that there will not be sufficient future stocks, prices will be high leading to high poaching pressure and falling stocks thereby fulfilling expectations How trade affects conservation has been applied to other contexts besides elephants and ivory Brown and Layton (2001) argue that a trade ban would fail to work as well for rhino Rhino horn is ground into a powder and used in traditional medicine in Asia This type of demand would be unlikely to shift with imposition of a trade ban They argue that creating expectations of plentiful future supply, as in the sustainable equilibrium of Kremer and Morcom (2000), is really the only hope for rhino conservation There have also been analyses of the effect of trade on habitat conservation, particularly for tropical forests [see, for example, Barbier and Rauscher (1994)] Conclusions The conservation of biodiversity is a major environmental issue, one that promises to remain at or near the top of the environmental agenda for the foreseeable future The threats to biodiversity from habitat loss and fragmentation, introduction of nonindigenous species, over-harvesting, pollution, changes in geochemical cycles and climate change are likely to intensify rather than abate Sustaining biodiversity in the face of increasing human populations and increased human economic activity promises to be a major challenge Successful conservation efforts will require management that simultaneously keeps in mind the needs of Homo sapiens and other species Economists have an important role to play in helping to develop and evaluate conservation policies The economics literature on biodiversity conservation has gone from virtually nonexistent to fairly substantial in a short amount of time A quick glance through the references shows that the large majority of articles have been written within the past few years Advances have been made in defining and measuring biodiversity, evaluating bioprospecting and ecosystem services, analyzing strategies for habitat conservation and controlling introduction of 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