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4.5: Environmental Economics

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    It should be clear from reading this chapter that the well-being of people around the world is fundamentally linked to opportunities for biodiversity to survive and prosper. That means that when we destroy an ecosystem or let a species go extinct, we also put at risk our own ability to survive and prosper. To fully account for these risks, decisions that negatively affect biodiversity must account for all the costs and benefits (hidden or otherwise), including the impacts on ecosystem services, before the decision is implemented.

    One of the most popular methods for accounting for potential harm to biodiversity, especially when weighing public policy and commercial decisions, is to attach market (or monetary) values to the ecosystem services. For some ecosystem services, it is rather straightforward to estimate a market value. For example, how much would it cost to replace a natural pollination service with hand pollination by farm workers? But for many services, estimating a monetary value is much more difficult. For example, how do we calculate the value of the Congo Basin’s carbon stocks? Where do we even start to estimate the value of breathing clean air, or knowing that dolphins exists?

    Environmental economics strengthen arguments for biodiversity protection by examining the contribution of ecosystem services to global economies.

    To examine these kinds of complex questions, conservation biologists look to a sub-discipline within economics called environmental economics. Environmental economics broadly examines the contribution of ecosystem services to global economies. An important component of this examination involves estimating the market value of all the different ecosystem services we benefit from, but it also includes studying the environmental costs of economic transactions, environmental policies, and other decisions that impact the environment.

    4.5.1 Placing a price on the natural world

    Approximating the market values of ecosystem services is no small feat, in part because nature’s contributions to people vary by location and perspective (Díaz et al., 2018). There also continue to be technical (e.g. Kling et al., 2012) and ethical (e.g. McCauley, 2006; Silvertown, 2015) disagreements about the need and methods used to translate nature’s services into monetary terms. Nevertheless, including such estimates has become a widely accepted norm in economics models and conservation activities (Guerry et al., 2015). To accomplish this task, economists rely on seven main methods to estimate the market values of ecosystem services (Farber et al., 2002):

    • Market value: The price a person is willing to pay for a specific product or service. For example, how much is a person willing to pay for a bundle of firewood at a local market?
    • Avoidance cost: The cost society avoids paying because a specific ecosystem service exists. For example, how much does society avoid paying for water filtration service otherwise provided by a region’s forests and wetlands?
    • Replacement cost: The cost society would have incurred if a specific ecosystem service had to be replaced. For example, how much would society have to pay in extra healthcare costs and in clean-up costs for diseased carcasses to replace the sanitation services provided by vultures?
    • Factor income: The additional income generated by the enhancement of an ecosystem service. For example, how much would a reduction in water pollution increase the income of fishermen through healthier fish populations?
    • Travel cost: The additional travel cost a person is willing to pay to experience an ecosystem service otherwise not available to them. For example, how much extra is a person willing to pay for transport to participate in recreational activities at a cleaner lake?
    • Hedonic pricing: The additional expense a person is willing to pay to experience an ecosystem service. For example, how much extra is someone willing to pay for a house with an ocean view, compared to an inland house?
    • Contingent valuation: The additional expenses a person is willing to pay for an alternative hypothetical scenario. For example, how much is someone willing to pay for cleaner air, or the right to catch more fish?

      The combined value of all of Earth’s ecosystem services may be double the current value of the global economy.

    Using a combination of these methods, a range of ecosystem services have been valued in recent years. For example, the services offered by pollinating insects around the world have been valued at US $153 billion per year (Gallai et al., 2008). In just South Africa’s Western Cape Province, free pollination services provided by wild insects to the local fruit industry, valued at US $500 million, has been estimated at nearly US $360 million per year (Allsopp et al., 2008). The replacement cost of tropical forests is also increasingly appreciated in carbon sequestration markets, where heavy greenhouse gas emitters pay huge sums of money to conserve forests to become more carbon neutral (Section 10.4). For example, the United Nations Environmental Programme (UNEP) has estimated that their forests are worth 4.2 times more intact than the value that could be earned through logging; the value of just Kenya’s remaining Mau forest, if left intact, is estimated at US $1.3 billion per year (UNEP, 2012). One ambitious study estimated the value of all of Earth’s ecosystem services at US $145 trillion annually (Costanza et al., 2014), which is almost double the current US $78 trillion value of the global economy. By comparing the value of ecosystem services over time, Costanza et al. (2014) also estimated that we are losing US $4.3–20.2 trillion per year in ecosystem services through land degradation.

    4.5.2 Environmental economics’ biggest contributions

    Since its development, environmental economics has contributed to conservation biology in several very important ways. Perhaps the most important contribution is that it has enabled conservation biologists to better communicate the value of ecosystem goods and services to audiences like government officials and business leaders, who often base decisions on economic considerations. By doing this, environmental economics has also focussed our attention on the wide range of goods and services that biodiversity provides and has elevated these topics into corridors where they were not previously discussed. These efforts have already paid dividends; in 2012, several Africa countries signed the Gaborone Declaration, a pledge to integrate the value of ecosystem services into their economies.

    Environmental economics enable us to better communicate the value of biodiversity to those who base decisions on economic considerations.

    Environmental economics also enabled conservation biologists to better account for environmental impacts of environmental damaging activities. In doing so, the field highlighted how activities that appear profitable are running at an economic loss when properly accounting for otherwise ignored environmental (and social) damages. While such calculations have traditionally focussed on imbalances in overharvesting of material contributions (see negative externalities, Section 4.5.3), recent developments have also started accounting for damages inflicted on regulating services and nonmaterial contributions, such as the loss of nature’s contribution to climate regulation (Auffhammer et al., 2017; Hsiang et al., 2017).

    4.5.3 Environmental economics’ biggest challenges

    Despite all the direct and indirect contributions of environmental economics to biodiversity conservation, there are also several challenges facing the field. Some of these challenges relate to methodological complexities of valuing ecosystem services, but many challenges also have their roots in governance failures. Following is a discussion of the most important challenges facing environmental economics.

    Accounting for negative externalities

    Modern economics is built on the principle of voluntary transactions—that is, a transaction occurs only when it benefits all the stakeholders involved. However, environmental (and social) harm often arises when some hidden costs are passed on to people not directly involved in the transactions. The unregulated use of open-access resources—resources such as water, air, and fish populations that are freely used by many different groups of people—provide many opportunities for this kind of abuse. Consider a company that dumps chemical waste into a river instead of properly disposing of it. While the company may benefit from this cost-cutting measure, people further downstream bear the environmental and social costs of the company’s “free” waste disposal by having to contend with polluted drinking water, loss of swimming and other recreational opportunities, and loss of fish as a safe food source. Damage inflicted on rivers and other open-access resources also represent a classic example of the tragedy of the commons—while some people initially benefit from abusing the “free” ecosystem services, those values are gradually lost to all of society, including those who abused it (NRC, 2002).

    Because negative externalities allow a small number of people to benefit at the expense of the rest of society, they often lead to market failures.

    The hidden costs of economic transactions that are passed on to people not directly involved are generally known as negative externalities (Figure 4.10). Because negative externalities allow a small number of people to benefit at the expense of the rest of society, they often lead to market failures, characterized by transactions that do not lead to optimal outcomes for all stakeholders. Governments may correct for these kinds of market failures by imposing taxes on activities that are harmful to the environment. Carbon taxes imposed on greenhouse gas emitters (see climate change, Chapter 6) is a common example. But many times, governance structures fail, or even exacerbate, the impact of negative externalities, by artificially maintaining destructive activities with tax incentives, direct payments, and price regulations. For example, subsidies give foreign fishing fleets operating off Africa a competitive advantage over local fisherman and artificially inflate their profitability despite declining fish populations (Brashares et al., 2004; Sumaila and Pauly, 2006; Mallory, 2013). The financial incentives governments provide to maintain destructive activities are more often referred to as perverse subsidies (Myers and Kent, 2001). The size of perverse subsidies is often very large, regularly dwarfing conservation spending. For example, US $26 billion in subsidies were provided to the Africa’s fossil fuel industry just in 2015 (Whitley and van der Burg, 2015), compared to just US $381 million spent annually to secure Africa’s protected areas with lions (Lindsey et al., 2018).

    Figure 4.10 Politicians, developers, and industries all too often fail to account for negative externalities (right side of figure) when they consider the contribution of destructive economic activities to society. Accounting for these negative externalities—and redistributing perverse subsidies to activities that provide public benefits (left side of figure)—will help us transition to more sustainable lifestyles. CC BY 4.0.

    There are many reasons why governance structures continue to fail nature and allow market failures to occur. For example, due to the prevailing mindset of pursuing economic growth at all costs, politicians, developers, and industries often skew their cost-benefit analyses by prioritising the short-term benefits gained from destructive sectors over long-term societal well-being and sustainability. Another factor is intense lobbying by industries benefitting from perverse subsidies, which leads to corruption and other questionable decisions. Solving these challenges will rely on a society that prioritises economic development (Section 15.1) and establishes structures (i.e. passing and enforcing environmental laws, Chapter 12) that fully account for negative externalities.

    Determining ownership

    Another problem that plagues environmental economists and other stakeholders is deciding who owns the commercial rights to biodiversity. Imagine a biochemist from a wealthy country traveling in a rural part of West Africa. The biochemist falls sick, but luckily local villagers help the chemist get better with the aid of a traditional healing plant. Once back home, the biochemist scientifically demonstrates that this plant can be used to synthesise a new effective medicine. Do the profits from this new medicine belong to the biochemist, the organization that sponsored his/her trip, or the local people in the area who helped the biochemist?

    Scientists, economists, politicians, and others are currently debating who owns the commercial rights to the world’s biodiversity.

    In the past, corporations and scientists (generally from wealthier countries) travelled extensively (often to poorer countries in the tropics) to collect species from which commercially valuable products might be obtained. These new products were then sold, but all profits were kept by the corporations while the people in the poorer source countries received little to no financial benefit. One such example is the production of palm oil, of which Malaysia and Indonesia currently contribute 85% of the global vegetable oil supply. This industry is entirely dependent on the oil palm (Elaeis guineensis, LC), and its specialist pollinator, the oil palm weevil (Elaeidobius kamerunicus), both imported from West Africa. Yet, West Africa have seen little benefit from the profits palm oil generated in Southeast Asia (Mbugua, 2017). (Note this exploitation goes multiple ways; for example, South America has also seen little benefit from profits generated from cacao production in West Africa.)

    To combat this unfair exploitation, called biopiracy, many developing countries now require scientists and corporations to obtain permits before they can collect biological material for commercial or research purposes. Also, at the international level, nearly 100 countries have agreed to the fair sharing of benefits arising from the use of biological resources, through the Nagoya Protocol (see Section 12.2.1 for further discussion on international laws). Through these and similar laws and agreements, the hope is that a greater portion of the profits gained from biodiversity will be allocated to people who protect biodiversity and who live in the areas from where it is extracted.

    A more inclusive approach

    The valuation of ecosystem services has traditionally relied on generalised principles of economics and natural sciences. While this focus enabled scientists to develop broadly applicable themes and metrics in ecosystem evaluation, it also neglected the role of context and culture in understanding nature’s role in people’s lives. Many people have also remained uneasy about commodifying nature (i.e. giving it a market value), because some of the most important contributions of biodiversity are not easily converted into monetary metrics. Consequently, many feared that the transactional approach to ecosystem services would lead to social inequity concerns and alienate people offended by the idea that nature’s metaphysical properties must compete against commercial interests.

    To address these concerns, the valuation and classification of ecosystem services are currently undergoing several major transformations. Prominently, the UN’s most recent classification scheme (Díaz et al., 2018) has given a more prominent voice to a wider range of stakeholders, including the social sciences, and recognizes the importance of culture and context in nature’s contributions to people. This exciting area of research is actively developing, and readers are encouraged to track developments and reactions associated with 2019 IPBES Global Assessment at

    This page titled 4.5: Environmental Economics is shared under a CC BY 4.0 license and was authored, remixed, and/or curated by John W. Wilson & Richard B. Primack (Open Book Publishers) via source content that was edited to the style and standards of the LibreTexts platform; a detailed edit history is available upon request.

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