The Economic Valuation Of Biological Diversity

Tropical Ecology Support Program (TÖB)

The Economic Valuation of Biological Diversity

Tropical Ecology Support Program (TÖB)

The Economic Valuation of Biological Diversity

Dr. Thomas Plän

Eschborn, 1999

TÖB Publication No.: TÖB P-3e

Published by:

Deutsche Gesellschaft für Technische Zusammenarbeit (GTZ) GmbH Postfach 5180 D-65726 Eschborn

Responsible:

Tropenökologisches Begleitprogramm (TÖB) Dr. Claus Bätke

Author:

Dr. Thomas Plän, inf – Informationsmanagement, Biotechnologie / Biodiversitätsnutzung, Lessingstr. 3a, D-93049 Regensburg, Germany Tel.: +49-941-299054, Fax: +49-941-25627, email: [email protected]

Edited by:

Michaela Hammer

Nominal fee:

DM 5,-

ISBN: Produced by: © 1999 All rights reserved

TZ-Verlagsgesellschaft mbH, D-64380 Roßdorf

Foreword For the majority of the world's population, tropical ecosystems are a vital lifesustaining force. However, the progressive destruction and depletion of natural resources in developing countries are jeopardising efforts aimed at achieving sustainable development and effective poverty reduction. The Flanking Program for Tropical Ecology is a supraregional service project being run by the Deutsche Gesellschaft für Technische Zusammenarbeit (GTZ) GmbH on behalf of the Federal German Ministry for Economic Cooperation and Development (BMZ), its mandate being to help collect and process experience in this sector, thus improving the information status. On request, the program flanks specific projects with studies focusing on issues relevant to tropical ecology. By so doing, it is aiming to further develop concepts and approaches geared to protecting, conserving and ensuring the sustainable use of tropical ecosystems. At the same time, this research work provides the basis for designing innovative instruments that will facilitate more ecologically-sound development cooperation in future. By applying scientific results at grass-roots extension level, the program assists other projects in the implementation of international agreements, in particular Agenda 21 and the Biodiversity Convention, to which the BMZ attaches great importance. A key element of the program concept centres on a joint approach which provides German and local scientists with a forum for discussion. The Flanking Program for Tropical Ecology is thus making a valuable contribution to the practice-oriented upgrading of counterpart experts and the consolidation of tropical-ecology expertise in partner countries. This series of publications has been produced in a generally comprehensible form with the specific aim of presenting its results and recommendations to all organisations and institutions active in development cooperation, and also to all those members of the general public who are interested in environmental and development-policy issues. Dr. H. P. Schipulle

Dr. C. van Tuyll

Head of the Environmental Policy, Protection of Natural Resources and

Head of the Rural Development Division

Forestry Division Federal German Ministry for Economic Cooperation and Development (BMZ)

Deutsche Gesellschaft für Technische Zusammenarbeit (GTZ) mbH

Contents

Table of Contents TABLE OF CONTENTS .....................................................................I LIST OF FIGURES..........................................................................IV LIST OF TABLES ...........................................................................IV GLOSSARY ...................................................................................V SUMMARY ...................................................................................IX 1

INTRODUCTION ......................................................................1 1.1 Description of the development cooperation project and purpose of the project ................................................................. 1 1.2 Analysis of problems .................................................................. 2 1.3 Objectives................................................................................... 3

2

RESULTS AND ANALYSIS ........................................................7 2.1 Decrease in biodiversity as a consequence of the lack of markets and of market failure ..................................................... 7 2.2 Classification of the types of values of biological diversity ...... 11 2.3 Examples of evaluating biological diversity ............................. 22 2.3.1 Use value of genes and biochemicals............................ 22 2.3.2 Use value of species...................................................... 28 2.3.3 Use value of ecosystems and landscapes....................... 30

3

RECOMMENDATIONS ............................................................35 3.1 Valuation methods and techniques............................................ 35 3.1.1 Determining direct and passive use values on simulated markets ......................................................... 38 3.1.2 Indirectly determining direct use values........................ 43 3.1.3 Determining indirect use values.................................... 45 I

The Economic Valuation of Biological Diversity

3.2 The cost aspect of the conservation and destruction of biological diversity and the cost-benefit analysis procedure ..... 48 3.2.1 Opportunity costs: restoration costs, sustainability costs, lost use values..................................................... 48 3.2.2 Cost-benefit analysis..................................................... 52 3.3 Organisation of markets with appropriate prices....................... 53 3.3.1 Monetisation and cost-benefit analyses......................... 54 3.3.2 Dismantling failed interventions ................................... 55 3.3.3 Creation of private property rights and integrated biodiversity management.............................................. 56 3.3.4 Creation of market-based regulatory instruments.......... 58 3.3.5 Creation of global markets............................................ 61 3.4 Recommendations for development cooperation ...................... 65 3.4.1 Project-oriented cost-benefit analyses using the available valuation instruments..................................... 66 3.4.2 Training and capacity-building to inventor and monitor biodiversity ..................................................... 66 3.4.3 Creation and/or strengthening of institutional prerequisites for the development and implementation of national biodiversity strategies ........ 67 3.4.4 Training and capacity-building to conduct costbenefit analyses and valuation techniques..................... 67 3.4.5 Supporting research capacities in developing countries at the frontier between ecology and economics

68

3.4.6 Identification of interventions failures .......................... 70 3.4.7 Creation of incentive instruments ................................. 71 3.4.8 Participation of local communities in biodiversity yields ............................................................................ 71 II

Contents

3.4.9 Assistance in the creation of property rights ................. 72 3.4.10 Cooperation in establishing global environmental markets through bilateral and multilateral agreements.................................................................... 73

4

BIBLIOGRAPHY ....................................................................75 4.1 Cited references........................................................................ 75 4.2 Other references ....................................................................... 83

III

The Economic Valuation of Biological Diversity

List of figures Fig. 1: Total economic value of a biological asset

13

Fig. 2: Classification of resources

17

Fig. 3: Classification of economic values and attributable valuation methods (methods in angled brackets are less suitable ones) 37 Fig. 4: Comparison of the resulting costs and use of protected areas 52

List of tables Table 1: Use values of genes and biochemicals

28

Table 2: Use values of species

30

Table 3: Use values of ecosystems

33

IV

Glossary

Glossary Allocation

Mechanism for the allocation of productive factors or

mechanism

resources to certain goals

Assimilation

Admission and processing of a substrate

Bequest value

Value of keeping a resource intact for future generations

Biodiversity or

General term for the number, variety and diversity of

biological diversity

living organisms in a certain environment or unit of space, divisible into the order and integration levels genes, species and ecosystems

Biological resource

General term for genetic resources, organisms or parts of organisms, populations or any other biological component of ecosystems of actual or potential use or value for mankind

Bioprospecting

Exploration of biodiversity in search of commercially exploitable genetic and biochemical resources

Biotic

Of or relating to organisms or life processes

Cost-benefit analysis

Collection and evaluation of relevant actions or

(CBA)

measures and their alternatives in monetary terms

Direct use value

Value of biological resources or resource systems by consumption or production or by their direct interaction with market subjects

Discounting

Preference of a currently available private use, which V

The Economic Valuation of Biological Diversity

involves social destruction, over a private use in the future, which also involves social preservation Ecosystem

Fundamental functional ecological unit which includes organisms and environment, divisible into energy flows, food chains, diversity samples, biogeochemical food cycles, development and evolution, cybernetics

Emission rights

Pollution licence entitling the holder to a certain level of emissions

Existence value

Intrinsic value of a resource

Global environmental Global markets which have either been enforced by markets (GEMs)

international sets of rules or have resulted from voluntary agreements

Gross national

Total value of the goods and services produced by

product (GNP)

firms owned by a country

Gross primary

Entire photosynthesis, including organic material

production

used during respiration

Habitat

Place in which an organism lives

Indirect use value

Value of biological resources or achievement for directly used resources or ecosystems

Market analysis

Analysis of the procurements and sales prospects of an enterprise or an industry and the market influences affecting it at a certain time

VI

Glossary

Natural capital

The natural wealth of biological resources

Net primary

Quantity of organic material stored in green plants

production

minus that used in respiration

Opportunity costs

Costs of alternatives that are not used

Option value

Use reserved for a later time

Passive use value

Measurement of the significance of resources or similar factors for us, our descendants or other species

Population

Total individuals belonging to a certain species in a certain area

Preference

Ranking of demand for certain goods by individuals

Productivity

Accumulation of one organic substance per unit of time

Quasi-option value

Value of delaying an irreversible decision to wait for additional information to help in the decision-making process

Surrogate market

Evaluation of markets for private goods and services

concept

related to the relevant resources and products

Screening

Purposeful search for certain substances or effects

Travel cost approach Market approach based on the expenditure required for a particular journey corresponding to or characteristic of products or resources, etc.

VII

The Economic Valuation of Biological Diversity

Total economic value Sum or aggregation of direct value, indirect value, (TEV)

option/quasi-option value and passive use value of a resource or a resource system

Transferable

International trade development rights to enable

development rights

adequate protection of global biodiversity values, in

(TDRs)

particular in tropical countries

Willingness to pay

Survey to obtain a value, e.g. for biological diversity

VIII

Summary

Summary Biological diversity is decreasing at all levels of integration at an alarming rate. The market prices of biological resources do not reflect their true values because of a lack of internalisation of external costs and benefits. This omission is an indication of market failure, based in particular on the difference between private and social/ecological benefits, on the lack of markets and on failed interventions. This paper is based on the hypothesis that the failure to allocate economic values to the respective components of biological diversity is one of the causes of this decrease in diversity. Conversely, the allocation of the appropriate economic values to these components should be able to halt this trend and to reverse it. After an introductory chapter, the chapter on "Results and Analysis" highlights the loss of biodiversity under the aspect of the lack of markets and of market failure. It is postulated that a market-oriented strategy to valuate the components of biological diversity would help to stop this decline. Types of values of biological diversity are therefore subdivided into different use-dependent and use-independent categories. The social/ecological value of biological resources or services is made up of four categories of use values: the direct use value, indirect use value, option/quasi-option use value and passive use value. These are added together to give the so-called total economic value (TEV). However, there is a certain amount of overlap between these types of values, which means that there is a danger of values attributes being counted more than once in different value categories. The more aspects of use value that can be determined and compiled to form the TEV, the closer the TEV will come to the "real" value of a biological asset. However, if this TEV fails to be IX

The Economic Valuation of Biological Diversity

reflected by market prices, it remains a theoretical concept. Because of the benefits of biological diversity and the lack of information available about these benefits as a result of market failure, there is an urgent need for economic valuation studies to be carried out. The results of several studies carried out to assess genes and biochemicals, species, ecosystems and landscapes in terms of the use values of the respective components of biological diversity are highlighted. The third chapter discusses application relevance and recommendations for action and presents the relevant assessment methods. These methods primarily suggest how markets would need to be reformed in order to correct the present imbalance between prices and values and/or, where this is not possible, provide decision-making aids indicating the political measures that need to be taken to correct market signals. The contingent valuation method (CVM) and related methods of analysis are of particular importance in this context, because they allow combined valuations of the direct use value, the option/quasi-option use value and the passive use value of the components of biological diversity. Moreover, these methods are the only useful ones to determine passive or non-use values. Alternative indirect techniques by which to determine direct use values are also presented. Methods to determine preferences such as the CVM are not suitable to determine the indirect use values (e.g. ecological regulatory functions) of nature as a production factor, since these values support economic activities or even enable such activities to be carried out regardless of preferences. In order to determine indirect use values, methods such as productivity change, maintenance or optimisation work effort, the restoration cost approach and the production-function approach are currently being applied. X

Summary

The latter approach is designed to determine the physical effects that changes of ecological functions have on economic activities. In order to be able to be compared with use values and benefits, the costs associated with the conservation, sustainable use and restoration of biological diversity need to be determined. On the basis of the results of this analysis, the alternative that is not chosen generates opportunity costs. Finally, cost-benefit analyses (CBAs) allow relevant activities and their alternatives to be identified and valuated in monetary terms. The relevant cost and benefit variables have to established to allow an accurate direct comparison of the possible alternatives to be made. By applying valuation methods, it was able to be shown that the economic benefits of conserving biological diversity are limited at a local level, are somewhat higher at a regional and national level and become substantial at a global level. In contrast, the costs frequently show the opposite trend: They are significant at a local level and low at a regional and national level. In order to allow effective conservation of biodiversity, the imbalance on each of these levels needs to be corrected. In this context, four measures are discussed which should lead to an effective translation of the evaluation approaches into the creation of markets. They concern the following: The removal of damaging distortions of market mechanisms (deregulation) by dismantling failed interventions. In order to establish prices that reflect social costs, it is important to abolish all supportive measures that artificially reduce the private costs of activities detrimental to biodiversity. The creation of markets by privatisation and integrated biodiversity management based on the efficiency criterion, i.e. those who control assets XI

The Economic Valuation of Biological Diversity

should also be those who profit from the benefits of these assets. This could be attained by establishing property rights to those biological resources to which vested titles do not yet exist and/or by transferring vested titles from the State to landowners (including those not yet entitled to land tenure due to pending reforms). The introduction of control instruments, in particular market-induced instruments, in addition to regulatory ones. While the latter imply direct control (reduction/limitation) of unwanted actions in conjunction with legislative or politically agreed standards, market economy-based intervention instruments (MEIs) create economic incentives. Strictly speaking, MEIs include all political measures explicitly related to private benefits and costs by which the comparative social benefits and costs can be incorporated into market prices. These instruments can be subdivided into five categories: duties/taxes/fees, subsidies, pledge systems, tradable rights and compensatory incentives. The creation of global environmental markets (GEMs). These markets can be enforced by international law or can be created on the basis of voluntary agreements. A common feature of both approaches are bilateral or multilateral transfer payments. The particular practical relevance of approaches used to valuate conservation, sustainable use and restoration costs for transfer payments (e.g. transferable development rights, TDRs) lies in the fact that these payments can be related to the amount of money required in national and international budgets to be spent inter alia on conservation. In this respect, it is not sufficient to provide donor countries with financial compensation. The transfer payments must also reach those individuals and communities immediately involved in using and preserving the components of biological diversity in question.

XII

Summary

After describing application-relevant methods and mechanisms, ten specific recommendations are made for development cooperation (DC): • the establishment of project-oriented cost-benefit analyses applying the available valuation methodology for the DC projects themselves, • training and capacity-building to inventory and monitor biodiversity in the partner countries, • the creation and enforcement of institutional frameworks for the development and implementation of national biodiversity strategies, • training and capacity-building within the partner countries to carry out cost-benefit analyses and valuation techniques, • the support of research capacities in developing countries at the frontier between ecology and economics, • the identification of failed interventions and consultation concerning their dismantling, • consultation on the establishment of economic incentives, especially market-based ones, • the development of strategies for the participation of local communities in biodiversity yields, • assistance in the creation of vested titles/property rights and • cooperation in creating GEMs on the basis of bilateral and multilateral agreements.

XIII

Introduction

1 1.1

Introduction Description of the development cooperation project and purpose of the project

In December 1994, with the financial support of the German Forum on Environment and Development, the present author submitted a carefully considered preliminary study on "Economic concepts in the valuation of biological diversity". This study contained a short presentation and evaluation of economic valuation concepts of biological diversity. After discussions had been held with those involved in the Deutsche Gesellschaft für technische Zusammenarbeit (GTZ) GmbH's Tropical Ecology Support Programme (TÖB), this preliminary study was developed into a final study to be translated into English and laid out in accordance with the guidelines for TÖB research projects. Above all, it was to be revised to enable it to be used for practical purposes: How are valuation studies on biological diversity carried out and what methods are available to obtain adequate payment for the determined values? First of all, the German version of the study was therefore revised to meet comprehensibility criteria. In order to enable it to be put to practical use, it was also supplemented by a description of the methods used to valuate biological diversity, procedures used for cost-benefit analyses (CBAs), recommendations regarding the organisation of markets with appropriate prices and supplementary recommendations for development cooperation (DC). Finally, the revised text was translated into English.

1

The Economic Valuation of Biological Diversity

1.2

Analysis of problems

Biological diversity or biodiversity is the umbrella term for the number, variety and diversity of living organisms in a certain environment and unit of space. It is subdivided into the following order and integration levels: • genes (and their derivatives), • species and • ecosystems. On all three of these levels of integration and on a global scale, biological diversity is decreasing at an alarming rate. This paper is based on the hypothesis that the failure to allocate economic values to the respective components of biological diversity is one of the causes of this decrease in diversity. Conversely, the allocation of the appropriate economic values to the components in question should be able to halt and even reverse this trend. If market prices reflected the actual value of biological resources (including resource systems) and of their services (especially ecological ones), i.e. if external costs were internalised and the costs of the respective resources thus corresponded to all the values attributable to them, and if not only their private value but also their social (and ecological) value became apparent on the market to a sufficient degree, this notion should support conservation and the sustainable use of biological diversity. In addition, the socio-economic benefits of biological resources need to be determined as comprehensively as possible and translated into marks or dollars. Even if complete monetisation of the components of biological diversity cannot be achieved (e.g. because access to certain goods and resources is impossible

2

Introduction

to monitor and control), it might nevertheless be possible to arrive at an approximate value for these components.

1.3

Objectives

This study is concerned with existing valuations of the components of biological diversity, i.e. those to which market prices have been assigned, either as raw materials or as refined products. In addition, the various methods of direct and indirect valuation that are used to try to capture the "real" value of biological resources over and above their actual market prices are listed and classified. Which methods are available to determine the direct and indirect use values of biological resources? To what extent do biological resources contribute directly or indirectly to the economic prosperity and the socio-economic development of political economies? Or, put differently, what is the "real" value that authors attach to commercially used and usable biological resources? And how do they estimate the indirect value of biological resources, most obvious in functions such as flood protection, photosynthesis, climate stabilisation and soil protection? Many different approaches exist. One common procedure is the calculation of those costs that are incurred by restoration ecology. Another procedure is based on the market prices of biological resources using the theoretical concept of maximum sustainable harvests. A further approach addresses ecological and economic productivity. In this study, an attempt is made to categorise the various approaches and to evaluate their respective deficits, without overlooking the pitfalls of an exclusively economically oriented valuation approach.

3

The Economic Valuation of Biological Diversity

On the basis of the deficits that are identified, hypotheses of quality goals, values and costs of biological diversity are derived. Scientific, political and economic aspects are considered in order to establish which economic and/or monetary preconditions need to be fulfilled in order to enable biodiversity to be conserved and restored. Using cost-benefit analyses, the social conservation, sustainable use and restoration of biological diversity in monetary terms and their related costs and benefits can be compared with the private and social values of competitive benefits and costs. The following three steps are presented: • the consequences of these competitive scenarios are identified, • these scenarios are quantified in terms of their respective economic benefits and costs and • cost-benefit analyses are summarised and compared. However, even if this comparison favours the conservation alternative, this does not yet result in a conservation effect. This can only happen if the actual use value and its cost advantages become visible on the market in market prices. This can be accomplished as follows: • by creating markets for the components of biological diversity, • by using free market instruments to correct the existing price imbalances, by using regulatory interventions to impose balancing effects that even a functioning market could not achieve. This also raises the question of financing instruments that could generate the crucial incentive for the conservation, sustainable use or restoration of 4

Introduction

biological diversity at a national and international level. The concluding discussion concerns how financial instruments that already exist or that are in preparation should be considered and how they should be developed or modified. This paper is organised as follows: Following this introductory chapter, the second chapter on "Results and Analysis" highlights the loss of biodiversity under the aspect of the lack of markets and of market failure. It is postulated that a market-oriented valuation of the components of biological diversity would help to counter this loss. To this end, types of values of the components of biological diversity are then subdivided into different use-dependent and useindependent categories. Finally, actual and target values of genes, species and ecosystems are presented and illustrated using examples. In the third chapter on "Recommendations", methods are presented to valuate biological diversity for the different use values. The second section of this chapter deals with the cost aspect of conservation and presents the instrument of cost-benefit analysis. In the third section, measures are discussed which should lead to an effective translation of the evaluation approaches into the creation of markets. These measures are developed into recommendations for DC.

5

Results and Analysis

2 2.1

Results and Analysis Decrease in biodiversity as a consequence of the lack of markets and of market failure

The notion that economic well-being may not be impaired and that it may even be enhanced if the profits obtained by depleting natural capital are reinvested in reproducible capital is not particularly new in the literature on theoretical economics. It has been suggested that reinvestment of the profits derived from the intertemporal efficient use of exhaustible natural resources in reproducible and hence non-exhaustible capital will ensure a constant stream of consumption over time (e.g. Hartwick 1977; Solow 1974, 1986). In the context of ecological crisis, however, the increasing rate of loss of biological resources has led to a fundamental reappraisal of the role of the living environment in the economy in recent years. Biodiversity is now increasingly regarded as a form of natural capital that supports economic activities. In Art. 2 of the Convention on Biological Diversity (CBD), biological diversity is therefore defined as "variability among living organisms from all sources including, inter alia, terrestrial, marine and other aquatic ecosystems and the ecological complexes of which they are part". This definition "includes variety within species, between species and of ecosystems". In the same passage, biological resources are characterised as including "genetic resources, organisms or parts thereof, populations or any other biotic component of ecosystems with actual or potential use or value for humanity". In order for biological diversity and resources to be able to contribute to general prosperity, their economic yields have to become comparable to 7

The Economic Valuation of Biological Diversity

and higher than competitive sources. In other words, if the yields from investments that reduce the natural capital are higher than those that sustain it, the consumption of natural capital is economically justified (Barbier et al. 1994, pp. 53f.). This economic justification, however, is currently disappearing. Market prices of biological resources do not reflect the true value of these resources because they do not include external costs and benefits. The failure to include such external effects in the price is an indication of market failure. This market failure can have different causes: • Difference between private and social benefits: Where components of biological diversity are traded on markets, their market prices usually reflect only the private benefits and not the social (and ecological) benefits that are attributable to them in different degrees from the local to the global level. The assignment of market prices to marketed components of biological diversity thus does not mean that these prices reflect their actual economic values. Partially reliable methods to establish the social value of the components of biological diversity are lacking. Above all, there are no mechanisms that permit the integration of such valuation results into market prices. • Lack of property rights to components of biological diversity or the discounting problem, i.e. preference of a currently available private use, which involves social destruction, over a private use in the future, which also involves social preservation, makes it more difficult to find a solution to this problem.

8

Results and Analysis

• Lack of markets: The problem is not only that only certain attributes of the biological components that are traded on markets are included in market prices, but that most biological resources and ecological services are not traded on markets at all, while there are markets for alternative uses. The market does not take into account anthropogenic influences on biological diversity or the effects of biological diversity on humans. Local and/or global markets for the relevant components of biological diversity in which the market subjects could convert their value conceptions of biological/ecological goods and services into purchases and sales by aid of the price mechanism are lacking. • Interventions failures: Additional market failures as a consequence of politic failure, e.g. by disincentives (e.g. subsidies, direct income transfers, tax exemptions), making existing markets inefficient and favouring the depreciation or destruction of biological resources (clearcutting, cultivation of certain species, nutrient supplies detrimental to the ecosystem). Despite these limitations, the ability of the market to bring private and social benefits closer together and to contribute to a reduction of the threat to biological diversity should not be underestimated. "Finally, the quality of an allocation mechanism (= mechanism for the allocation of productive factors or resources to certain goals) may not exclusively be judged on the basis of a comparison of its results with ideal results, which are ultimately not attainable by any allocation mechanism (the so-called Nirvana approach). (...) Since in reality only incompletely functioning allocation mechanisms are available, it is worth asking what the market may contribute in pragmatic terms to taking care of natural resources" (Endres and Querner 1993, p. 139). By setting prices that reflect the real economic

9

The Economic Valuation of Biological Diversity

value, the social interest in the conservation of biological resources becomes translatable into an individual interest. Overcoming this market failure therefore implies the following: • the inclusion of the social values and costs of biological diversity in market prices, • the creation of markets for the value-oriented mobilisation of demand for and supply of biological resources and • the abolition of price-distorting political and economic interventions. The benefit that a certain component of biological diversity gives its consumers governs the purchase decision (e.g. pharmacologically exploitable resource, resource that can be exploited in tourism) and thus also the price. This benefit corresponds to the value that a potential consumer attaches to the respective component. One of the most important tasks of the monetisation of biological diversity is therefore to reflect this benefit and/or value in the market price. The appropriate methodology will be dealt with in a later section. According to Hampicke (1991, pp. 104f.), regarding biological diversity in economic and monetary terms obviously does not mean dealing with the monetary value of a species or nature on its own ("this kind of monetisation approach would not be allowed"). The question is actually how much it would cost to stop destruction of these resources and/or to re-establish their maximum possible functional capacity. "It cannot be agreed that this goes beyond the borders of what is admissible in monetary analyses. The criticism not infrequently expressed by the public that this kind of monetisation can only be based on misunderstandings could be avoided if people listened more carefully to what most economists really said." "If a 10

Results and Analysis

level of nature conservation is postulated that makes nature almost inviolable, then in economic terms this means that it is not possible to fall below this minimum level of species conservation even against paying demand - in purely mathematical terms, the price of this is infinitely high. It would only be at our disposal if the costs of nature conservation were unreasonably high, which might be interpreted as meaning that they are so high they cannot be expressed in monetary terms – e.g. if human lives have to be sacrificed. Then a decision must be made between two nonmonetisable alternatives, a decision nobody would be envied for having to make."

2.2

Classification of the types of values of biological diversity

The demand for biological goods results from the different value preferences of market subjects. Use values are relative and linked to market subjects and their preferences, i.e. all decisions on political allocation result in opportunity costs (i.e. the costs of alternatives that are not used). In costbenefit analyses (see Sect. 3.2.2), the alternatives can then be weighed up against each other. The social value of biological resources or services is thus composed of four categories of use value: Use-dependent values 1. The direct value of biological resources or resource systems is derived from their direct use (by consumption or production) or from their direct interaction with market subjects. Some biological resources are traded on markets, and their direct use values (e.g. agriculturally useful plants and animals, wood, medicinal plants, wildlife watching) are included in their market prices. Expenditure on the use of ecosystems for tourism, hunting 11

The Economic Valuation of Biological Diversity

or fishing also reflects their direct market values. As already mentioned, these market prices are incomplete, because they do not take account of certain social value attributes. 2. The indirect value of biological resources or services results from the value that these have for directly used resources or ecosystems. Many biological resources derive their value from their indirect economic importance for directly used resources. Indirect values result from (a) their benefit for other directly used species and/or their genes (indirect biocoenotic value), (b) their importance for ecological services, e.g. protection from erosion, assimilation of biological waste materials, microclimatic stabilisation, water retention, carbon storage (indirect ecosystem value), and (c) their importance for future evolution (indirect evolutionary value). 3. The option use value describes a use reserved for a later time. The option to use biological resources at a later date is kept open by value assignment. The quasi-option value refers to the delay of an irreversible decision to wait for additional information to help in the decisionmaking process. Because future information connected with the resource in question may be valuable, this resource remains untouched for the time being. Due to gaps in our knowledge, it can be difficult to assess risks and uncertainties when carrying out an evaluation; together with the partially irreversible consequences of the alternative use of the components of biological diversity, this means that the concept of the quasi-option value is becoming increasingly important. Use-independent values 4. The passive use value of biological diversity results from the importance attributed to it for us, our descendants or other species. It can be 12

Results and Analysis

subdivided into its bequest value (the value of keeping a resource intact for future generations) and its existence value (the value conferred by ensuring the survival of a resource). The non-use or passive use value of biological resources is nearly completely determined by ethical considerations and is of importance where individuals who do not intend to use components of biological diversity would nevertheless feel a loss if these disappeared (Brown 1990; Randall 1991). The direct value, indirect value, option/quasi-option value and passive use value of resources or resource systems add up to give their total economic value (TEV, Fig. 1). TEV = F (DUV, IUV, OV, QOV, BV, EV) TEV = UV + NUV = (DUV + IUV + OV + QOV) + (BV + EV) TEV: Total economic value UV: Use value NUV: Non-use value DUV: Direct use value IUV: Indirect use value OP: Option value QOV: Quasi-option value BV: Bequest value EV: Existence value

Fig. 1: Total economic value of a biological asset

There is some overlap between the different types of values, which means that there is a risk of the same value attributes being counted more than 13

The Economic Valuation of Biological Diversity

once in different value categories. This is particularly true of option, bequest and existence values. However, there are different concepts in economics of how the valuations of environmental changes should be aggregated in order to arrive at an overall economic evaluation. ad 1.Many biological resources are traded directly on local or international markets. This suggests that some direct use values of biological resources will be reflected in the prices of marketed goods and services. However, because subjects (individuals, public and private institutions, companies) can more readily perceive the economic value of marketed products and services of biological resources than the value of non-commercial and direct subsistence uses, the result may be a bias towards the development of the commercial use and an exploitation of biological resources. This may mean not only that commercial fishery, forestry and agricultural operations, for example, may be preferred to subsistence operations or to a philosophy of nature conservation involving doing nothing, but also that many natural ecosystems and habitats may also be converted to other monetisable direct uses (Perrings 1995, p. 866). The user value, for instance, is a typical non-monetised direct use value, corresponding to the individual personal benefit of biological diversity, e.g. by observing or photographing nature or being stimulated to carry out artistic activities. Where this direct use value is commercialised (e.g. by charging fees for wildlife watching), it becomes a serious alternative to other price-related direct uses (e.g. hunting). However, the explicit view of the direct use value shows that a valuerelated consideration of non-monetised direct alternative uses is 14

Results and Analysis

necessary in order to give them a fair chance on the market. (On the creation of markets by monetisation, see Sect. 3.3). ad 2.The indirect use value of a particular component of biological diversity is not usually taken into account by market prices. Its expression in monetary terms becomes more realistic the more indirect the particular use is. While an indirect biocoenotic use of soil micro-organisms (e.g. Leguminosae are associated with nitrogenfixing bacteria) for the direct use of legumes is relatively easy to derive, the central ecological role that elephants play in the diversification of African savannas and forests, the spreading of seeds, the prevention of scrubland, the expansion of grassland and the reduction in numbers of the tsetse fly is considerably more difficult to quantify, and indirect ecological use values, in particular, do not readily lend themselves to direct economic assessment. Determining these use values by value preferences becomes increasingly difficult and ultimately impossible due to the complexity of the object and of system properties that are emerging in the light of present ecological knowledge. ad 3.Difficult theoretical calculations in decision-making suggest that decisions with irreversible results should be examined particularly carefully in terms of possible consequences; moreover, in situations in which there is both an irreversible and a reversible alternative, the reversible one should be chosen. While the basic idea of the option value is to maintain access options on components of biological diversity that are not used at present, the idea of the quasi-option value is to use expenditure on biodiversity conservation to diminish uncertainty and/or to avoid irreversible decisions (Hampicke 1991, pp. 87f.). The difficult methodical question here is how much society 15

The Economic Valuation of Biological Diversity

should pay for the conservation of components of biological diversity that might one day become useful. ad 4.The bequest value is often included in the existence value, and the user value is sometimes added to these two values, reflecting the personal benefits of biological diversity. Since there is some overlap between these value types, these value components should be determined as a holistic non-use or passive use value. The more aspects of use value that can be determined and integrated into the TEV, the closer it comes to representing the "real" value of biological goods or services. In particular, due to the aspects of passive use and option value, the TEV is subject to group- and culture-dependent differences. Above all, however, the TEV remains a theoretical variable unless it is reflected by market prices. In addition to the relativity of values and prices on the user level, further limitations result from the usability of the respective resources. The use value includes the following: a) the extent to which biological resources can be used for different purposes (transformability), b) the extent to which they are replaceable by other resources (substitutability) and c) whether the use of biological resources by a market subject impairs the use of these or other resources by other market subjects (rival usability, sustainability criterion).

16

Results and Analysis

However, market prices are not only based on demand and the value preferences of market subjects it indicates. The market prices of biological resources are also determined by d) supply and by exclusivity of their usability, i.e. by (actual and intellectual) property rights and their effectiveness. Purely public goods (e.g. air, water) or a jointly usable resources pool (e.g. the welfare effects of the forest) can in fact be attributed with values, but because they are not scarce, they remain outside the market. Figure 2 shows the relation between the sustainability criterion (c) and the supply aspect (d). Others cannot be excluded

Others can be excluded

from the use of resources

from the use of resources

Use of resources by A does not influence

consumption

by

Purely public goods

others

Resources under (e.g. national) sovereignty Jointly usable resource pool

Use of resources by A does influence

consumption

by

Private goods

others

Fig. 2: Classification of resources

ad a-c)The values of competitively usable resources have to be determined in separate valuation steps and be evaluated comparatively in costbenefit analyses (see Sect. 3.2.2). Their results differ particularly due to the conflict between interests of private and social use. It is the dominance of private use interests in the market that frequently 17

The Economic Valuation of Biological Diversity

constitutes a threat to biological diversity. Markets and market prices exist for purely privately used goods, but not for purely public goods. ad d) When the Convention on Biological Diversity (CBD) came into force, exclusive national rights of use and property were created for the large majority of biological resources. Use rights to biological resources that are privately owned are purely exclusive. However, there is still some controversy over a whole range of biological resources and their services as to whether the use rights should be exclusively private or national. Vogel (1994) correctly acknowledges that it is only through consistent privatisation of biological resources that an interest in sustainability can become generally accepted against alternative uses. Before the CBD came into effect, those of the earth's biological resources that are now subject to national sovereignty were treated as the common heritage of mankind and thus as non-exclusively usable, freely accessible resources. Now that the CBD has come into force, the number of non-exclusive biological resources has decreased considerably. Resources that are still non-exclusively usable include marine biology resources outside national sovereignty zones. Ecological services of biological diversity are usually also nonexclusively usable (e.g. the production of oxygen by green plants). A gradual transition is taking place between exclusively privately usable biological resources and (the few) completely non-exclusively usable resources freely accessible to the public. The items "resources under national sovereignty" and "jointly usable resource pool" in Fig. 2 are the quasi-exclusive and/or quasi-non-exclusive links between these extremes. In determining use values, it is important to 18

Results and Analysis

make value preferences much more visible in markets by means of property interests. Regardless of whether a local, national or global perspective is taken, normative valuation approaches have to be integrated into the TEV of biological resources in order to take proper account of rights of access and property, unless the goods concerned are public ones. At the beginning of this paper, the hierarchical division of biological resources into the levels of genes, species and ecosystems was presented. TEVs can be determined on each of these three levels (and on further intermediate levels). However, the TEV of a gene or a biochemical will obviously not be suitable to show the TEV of its host species, and the TEV of a species (or a biocoenosis) is not sufficient to illustrate the value of the respective ecosystem. To use an analogy, the total value of a screw cannot be used deduce the value of an engine, the value of an engine cannot be used to determine the value of an aeroplane and the value of an aeroplane does not indicate the value of an airport. The significance of economic valuation depends on the integration level on which it was carried out. In this respect, it is not surprising that particular attention is paid to the application of economic valuation approaches at the level of the ecosystem (Barbier et al. 1994). If cost-benefit analyses (see Sect. 3.2.2) of an ecosystem's TEV result in the conservation option, this also includes a number of components of biological diversity on the lower integration levels for which individual TEVs do not need to be determined (and which would presumably not be technically feasible). If cost-benefit analyses of an ecosystem result in the options sustainable use, restoration or alternative use, then supplementing the TEV on lower hierarchical levels may become

19

The Economic Valuation of Biological Diversity

necessary in order to arrive at evaluations or specific management recommendations for specific populations or genetic resources. Economic valuations of biological resources of the lower levels can of course lead to effects that make a TEV on a higher integration level superfluous. In addition, depending on the economic question concerned, dealing with objects on a lower level of the hierarchy can lead to synergistic results that are relevant for higher levels as well. For instance, screening all the higher plants of an ecosystem for pharmacological ingredients may have a direct ecosystem-sustaining effect, while interest in one specific gene will only generate marginal conservation effects, if any. Furthermore, the notion of a so-called primary value has also been introduced; this is added to the TEV (i.e. the secondary value) to give the total environmental value (TV). It represents properties of an ecosystem or biosphere that are highly relevant in economic terms, but that cannot be captured by value preferences. Whether it will be possible to express it in economic terms at all is contentious (see Perrings 1995, pp. 842f.). There is no clear-cut distinction between this and the indirect use value, and it is therefore not discussed separately here. The properties of its system should be integrated in the indirect use value. The central importance of these values for monetisation approaches, however, is undisputed. Immler (1993) states that "the productive natural capital is the key category in a holistic ecological/economic valuation". In answer to the objection that economics does not offer the tools for operationalising pricing, he rightly points out that "any approximation to this admittedly difficult unit is better and more reasonable than an operational term which is certainly wrong" and that "the lack of industrial understanding of the category 'natural capital' is not the consequence of a 20

Results and Analysis

nature that cannot be understood, but of an economics that does not want to know anything about it". One method of approximation is the production-function approach. The transformation of ecological value units into economic ones could be successful on the basis of productivity, both an ecological and an economic concept. Ecological productivity (net and gross primary production) has a theoretically assignable (potential) maximum, which could be defined as the productivity of the primary ecosystems ("world-wide wilderness productivity") and/or by the theoretical productivity of ecosystems after the sudden end of human influences ("potential natural productivity"). Cultivated ecological systems may obviously show the same net productivity (agricultural areas including external fertiliser supply) but a smaller gross productivity than autochthonous ecosystems. (Due to the ecological degradation phenomena such as nutrient washing and soil erosion that accompany the creation of cultivated ecological systems, however, their net primary production also diminishes over time; 20% of cultivable soil has been lost over the past 30 years world-wide). Even back in 1986, humans consumed 40% of the global terrestrial net primary production (Vitousek et al. 1986). However, even if ecosystems were ranked by determining their TEVs, this would not correspond to ecologically specified rankings (e.g. on the basis of productivity criteria). This is partially because of the inclusion of nonuse values (whereby a mountainous region that is not particularly productive, but attractive might gain a higher monetary value than a highly productive grassland, for example). However, it is primarily due to the fact that there are at present still no methods or scientific information to approximate the actual indirect use value. For instance, we need to understand the role of species in mediating the key structuring processes in 21

The Economic Valuation of Biological Diversity

ecosystems over a range of environmental conditions. This requires ecological and economic production functions to be specified (Perrings 1995, p. 889). It also requires not just snapshots of the value of ecosystem function, but also time series that show how the value of such functions is changing. Not only the ecological aspect, but also the evolutionary component is not taken into consideration sufficiently in economic valuation approaches of biological diversity, although awareness of the value of the genetic resources of plants and their relatives in the wild has risen in economic terms as well, implicitly acknowledging its importance (see e.g. Mooney and Fowler 1991). However, it is only by regarding natural ecosystems in economic terms as durable in situ production, experimentation and storage sites of biodiversity evolution that conservationists' expectations linked to bioprospecting strategies can have a chance of being realised.

2.3

Examples of evaluating biological diversity

This section deals with estimates of the value of genes, species and ecosystems arrived at using the valuation methods described previously and methodologically illustrated in Sect. 3.1 (see Perrings 1995, pp. 844 ff.).

2.3.1 Use value of genes and biochemicals Whereas the utilisation of genes (animal and plant breeding) or natural products used to be linked to the cultivation of the respective species, new biotechnologies now permit genes and biochemicals to be utilised independently of their parent species, e.g. in cell cultures or transgenic organisms. This makes the examples discussed in this section different from product examples such as ivory or timber, whose use remains bound to the species producing them. However, the borders between the two types 22

Results and Analysis

are transient, and it may be more profitable not to make use of these biotechnological options and to obtain certain natural products from complete (cultivated or wild living) individuals of the species of origin. The direct use value of genetic diversity results from delivering the raw material with desirable properties for the pharmaceutical, agricultural and food production industry. Modern biotechnology and genetic engineering (with the potential for intra- and inter-species gene transfer they offer) allow the use potential of genetic resources to be extended and therefore lead economically to an increase and/or a supplementary effect to the direct use value of genetic resources and their derivatives (natural products). The size of the market for biotechnologically manufactured products world-wide is now more than US $250 billion per year, and private biotechnological research and development (R&D) investments in the countries of the Organisation for Economic Cooperation and Development (OECD) amount to approximately US $9 billion per year. The annual growth rates vary between 8% (biotechnological processes) and 20%-35% (gene technology processes). For example, the United States' proceeds of sale in 1992 amounted to approximately US $5 billion, i.e. a 35% increase compared to the previous year (Burrill and Lee 1992; cited in Downes 1993). For the year 2000, a tenfold increase is expected (Industrial Biotechnology Association 1992; cited in Downes 1993). Like the existing and potential market prices specified in the following examples, these are usually distorted by transfer components, and corrections therefore have to be made for economic cost calculations (cf. Hampicke 1991, pp. 180f.). Above all, however, the obtained or attainable price for the respective biological resources is not determined ecologically, but solely on the basis of market criteria. 23

The Economic Valuation of Biological Diversity

Nevertheless, conservation effects on biological resources can arise from the presence or development of a market (although the opposite can also occur). Thus bioprospecting projects are associated with the idea that the identification (via bioassays) and development of useful biochemicals and genes might result in a market that exerts conservation effects on concrete resources in situ with optional conservation effects on other resources in the same habitat that are not yet commercially exploited. According to Sánchez and Juma (1994), the exchange of genetic resources and technologies between the North and the South should increase to about 10% of the respective world trade volume. Some authors have published papers about the commercial value of genetic resources. However, some of these data are questionable, because indirect or passive use values were hardly integrated into these valuations and TEVs are also lacking. As far as direct use options are concerned, pharmacological or agricultural uses of genes and biochemicals have been dealt with more intensely, whereas enzyme use or the genetic resources of ornamental plants, for example, have been largely neglected. A study by Sedjo et al. (1994) addresses prospecting strategies for genetic resources by comparing them with a lottery. Neither the prize nor the possible number of main winners among whom the prize is finally divided is known, and it is not clear whether numbers are drawn for which no tickets have been submitted. This comparison highlights the unknown spatial distribution of organisms and the uncertainty about whether the relevant gene or biomolecule might also be found in other organisms. Due to genetic engineering, the market for genetic resources is developing into new segments, and it is not known how scarce most biological resources actually are; the willingness of industry to pay high prices for biomolecules is thus relatively small. The study by Sedjo and colleagues concludes that, 24

Results and Analysis

under optimal conditions, a maximum economic yield of US $10,000 per species might result. With respect to endangered habitats in which the relevant species exist, a maximum of $20 per hectare might be paid. On the basis of respective contracts, prospecting companies have so far been willing to pay approximately $50-200 per unprocessed in situ sample (Laird 1993). However, it would be too simplistic to infer the market value of the genetic material from these amounts, because it is primarily the labour-intensive collection that is paid for and not the material itself. Pharmacologically useful biomolecules According to a study by the OECD (1987), about 25% of all medicaments in the OECD countries are of plant origin; if we include those countries that are not industrially developed, the overall world-wide proportion increases to 75%. In the OECD member countries, plant-based medicaments amounting to more than DM 100 billion were sold in 1985. Two fifths of all modern U.S. pharmaceutical products contain one or more ingredients of natural origin (Oldfield 1984). The commercial value of medicines derived from species living in the wild is estimated at more than US $40 billion p.a. world-wide, and the figure for the United States in 1980 was US $8112 billion. The present share of the genetic material used for pharmaceutical products originating from the South amounts to about US $4.7 billion. The present hectare yields of medicinal plants from the tropical rain forest are estimated to range from $262 to $1000 (Pearce and Moran 1994). Assuming a rate of extinction of 10%, an estimated 2067 plant species will have become extinct by the year 2000, 16 of them of special

25

The Economic Valuation of Biological Diversity

pharmaceutical interest; Farnsworth and Soejarto (1985) have estimated this to entail an economic loss of US $3.25 billion ($16×203 million). By means of bioprospecting, i.e. screening biological diversity in search of commercially exploitable genetic and biochemical resources, the value of the germ plasm for medicinal purposes from the South, which currently amounts to approximately US $4.7 billion, might rise over the next 10 years to US $47 billion. For Costa Rica, Aylward (1993) estimated the value of "pharmaceutical prospecting" at $4.81 million per successfully prospected product. However, these figures have to be related to capital outlays of over US $200 million for the development of a single successful pharmaceutical ready for the market (Krattiger and Lesser 1994). Mendelsohn and Balick (1995) are sceptical regarding the future economic importance of bioprospecting. They estimate the entire social value of nondiscovered tropical pharmaceuticals at only approximately US $150 billion or US $48 per hectare, and the market value for private enterprises at US $3 billion or US $1 per hectare. A rough estimation of the pharmaceutical value of extinct plant species on behalf of UNEP came to the conclusion that the average "pharmaceutical" loss for each of these species amounts to approximately $80,000 (UNEP 1993). This figure is problematic, however, because some "best-sellers" that have earned the companies that sell them millions (e.g. aspirin, taxol) are included in this estimate. Genetic resources of plants The complexity of modern and traditional breeding practices means that only a very general approximation of the actual monetary value is possible, and even then only for the most common grain varieties. This uncertainty 26

Results and Analysis

in putting a number on the existing market value is reflected in estimations concerning the contribution of the genetic resources of the South to the valuation of food production in the North. For wheat and corn, the figures are estimated at US $75 million p.a. for Australia, US $500 million p.a. for the United States and US $2.7 billion p.a. for all the OECD countries together (Mooney and Fowler 1991). According to Woodruff and Gall (1992), about half of the increase in agricultural productivity in this century can be directly attributed to artificial selection, recombination and intraspecies gene transfer. Calculations by the U.S. seed industry show that a genetic trait of a plant in the Third World that can be used for breeding purposes may contribute over $2 billion annually to the yields of U.S. wheat, rice and corn producers. The U.S. Department of Agriculture estimates that genetic plant material has led to an average increase in productivity of about 1% a year, with an initial monetary value far exceeding US $1.billion. Bioprospecting as a source of new cultivated plants and of raw materials to breed improved plant varieties and as a supplier of natural pesticides and renewable resources such as fibres and botanical chemicals has great potential (Plotkin 1992). At the beginning of the next millennium, the world-wide biotechnology food sector will increase to US $20 billion (a sixfold increase).

27

The Economic Valuation of Biological Diversity

Table 1: Use values of genes and biochemicals Components used

Evaluation method applied

Plants

Market analysis: estimations of proceeds of sale Plants Market analysis Trees Market analysis Plants Evaluation of the number of lives saved Species from Cameroon Costs of renewing patents Species from Costa Rica Market analysis, estimated licence fees Plants of the rain forest Market analysis and evaluation of human lives saved Pharmaceutical bioprospecting for a Market analysis: net commercially successful plant returns on product bioprospecting Living organisms Market analysis: returns on purchase + licence fees

Estimated value (US $)

Source

2,580,000

Farnsworth and Soejarto 1985

474,000 7,500 23,700,000

Principe 1989 McAllister 1991 Principe 1989

15-150

4.81 million

Ruitenbeek 1989 Harvard Business School Pearce and Puroshothaman 1992 Aylward 1993

52-46,000

Reid et al. 1993

253 585-1,050,000

2.3.2 Use value of species In contrast to Sect. 2.3.1., the components of biological diversity dealt with in this section are used as total organisms. Use of plants Of the approximately 250,000 higher plant species that have been described world-wide, about one third probably has edible components, i.e. around 80,000 species. About 15,000 species (including spice plants, herbs, etc.) 28

Results and Analysis

are actually used for human nutrition (Heywood 1994, personal communication). Supraregionally or world-wide, about 150 species are cultivated for human nutrition. However, only five varieties of grain (wheat, corn, rice, barley and millet) account for 50% of vegetable nutrition in humans, and 20 species supply 90% of the world-wide demand (Myers 1989). The quantity of renewable resources currently used and processed worldwide amounts to approximately 2 billion tons of timber, 2 billion tons of grain (including the food supply) and 2 billion tons of other products such as sugar-cane, carrots, oil and leguminous plants. The global timber trade is worth approximately $80 billion annually. According to Peters et al. (1989), the present net value of sustainably used biological raw materials (rubber, fruits, wood) from the rain forest in Peru amounts to $6330 per hectare, i.e. more than sixfold the value of utilisable wood ($490/ha). In the German chemical industry, about 2 million tons of renewable resources are utilised at present (i.e. 10% of the entire consumption of raw materials). Use of game animals Prescott-Allen and Prescott-Allen (1986) estimate the monetary contributions of wild and semi-wild animals and plants as accounting for approximately 4% of the gross national product (GNP) in the United States and Canada. Barnes and Pearce (1991) have shown that the direct use value of certain forms of wildlife management is financially more productive than the transformation of game reserves into pasture areas (cf. Table 2).

29

The Economic Valuation of Biological Diversity

Table 2: Use values of species Components of biodiversity used

Evaluation Estimated method applied value (US $)

Source

Wildlife watching value of elephants, CVM; travel cost 25 Brown and Henry 1989 Kenya method million/year Ivory exports before the export ban, 35-35 Barbier et al. 1990 Africa million/year Use of wild buffaloes, Zimbabwe 3.5-4.5/ha Child 1990 Export of non-coniferous wood 11 billion/year Barbier et al. 1994 products, entire tropics Harvest of wood fruits and latex, 6330/ha Peters et al. 1989 Peru Fish and firewood from wetlands, 38-59/ha Barbier et al. 1991 Nigeria Improvement of the survival CRM 21/person and Brown et al. 1994 probability of the Northern spotted year owl CVM, contingent valuation method; CRM, contingent ranking method.

2.3.3 Use value of ecosystems and landscapes Ecological resources and services that can be derived from the production, carrier and information functions of ecosystems produce economic yields in the form of direct use values. Direct use values include timber and nonwood products, medicinal plants, plant genes, hunting and fishery, recreation and tourism, education and human living areas, since all these products and services are the result of a direct use of forests. Direct use presupposes access to forest resources, among other things. In contrast, indirect use does not require access to forest resources. The most important indirect use values of biological diversity include the regulatory functions of ecosystems. Each ecosystem is composed of a 30

Results and Analysis

whole range of physical, biological and chemical components. Interaction between these components results in specific types of ecosystem functions or characteristics such as the nutrient cycle, biological productivity, water regime and sedimentation. These regulatory ecological functions are fundamental to numerous secondary ecological functions and services, which again are of fundamental importance in human life and societies (e.g. erosion protection, water retention, detoxification, assimilation of biological waste, climatic stabilisation, carbon storage). As far as the role of individual species in the mediation of such regulatory functions is understood, it is principally possible to establish the indirect use value of such species. Indeed, the relationship between individual organisms and ecosystem functioning is of central importance in the concept of indirect use valuation. Immler (1989) assumes that roughly a third of GNP (based on the German GNP) would be necessary to re-establish the disturbed non-human natural services and processes. Most studies assessing the economic value of forests only take account of partial values and not the TEV (for a relevant review, see Perrings 1995, pp. 886f.). Indirect and non-use values are usually completely neglected, and direct use values are also frequently only incompletely considered. The first attempt to estimate the TEV of tropical forest habitats was undertaken by Castro (1994). Castro calculated an average net actual value of $1278-$2871 per hectare for Costa Rica's game wilderness. Multiplied by the total area of 1.3 million hectares, this gave a present total value of $1.7-$3.7 billion, of which, according to this study, 34% benefits Costa Rica and 66% the world community.

31

The Economic Valuation of Biological Diversity

Kaosard et al. (1994) evaluated not the total, but almost the total economic value of the Khao Yai Park in Thailand (not including non-use values for people who do not live in Thailand and estimations of carbon storage). The comparative evaluation with agriculturally managed areas arrived at a figure of $250 per hectare (see Table 3). Barbier et al. (1991) showed that the direct use of the Hadejia Jama'are floodplain in Nigeria for fishery, the production of firewood and migration agriculture results in economic yields that are higher than alternative irrigation projects upstream.

32

Results and Analysis

Table 3: Use values of ecosystems Components used Nature tourism, Cameroon: Sustaining soil fertility by forests and inundation control, Cameroon Khao Yai Park, Thailand Ecotourism, Costa Rica Importance of wetlands for crab production, Arabian Sea Valuation of reserves, Madagascar Carbon storage by forests, Brazil Importance of mangroves for agriculture, fishery, Indonesia Water retention by forests, USA Forest in Peru, Rio Nanay

Primeval forest, Costa Rica

Evaluation method Estimated value applied (US $)

Source

Productivity change

19/ha 8/ha and 23/ha

Ruitenbeek 1989 Ruitenbeek 1989

CVM, travel cost method Travel cost method

80 million/year, 400/ha/year 1250/ha

Kaosard et al. 1994 Tobias and Mendelsohn 1991 Ellis and Fisher 1987

Production-function approach

Production-function 566,070-2,160,000 Munasinghe 1993; approach, CVM, travel Kramer et al. 1993 cost method 1300/ha/year Pearce 1990

Productivity method (comparisons of income) TEV

33

536 million

Ruitenbeek 1992

232-388/acre

Bowes and Krutilla 1989 Peters et al. 1989

6300/ha for nontimber products vs. 1000 for clearcutting 102-214/ha/year, 1278-2871/ha, 133-278 million/year, 1.73.7 billion

Castro 1994

Recommendations

3

Recommendations

3.1

Valuation methods and techniques

Because of the benefits of biological diversity and the lack of information about these benefits due to market failure, there is an urgent need for economic valuation studies to be carried out. In the following, relevant valuation methods are thus presented. Arguments in favour of their application include the following: • they give valuable information on how markets need to be reformed in order to correct the present bias and/or, where this is not possible, • they provide decision-making aids indicating political measures that should be taken to correct market signals. When applying these valuation methods, however, it is important to remember what is actually being measured by the valuation technique, e.g. direct use benefits, net benefits including use and non-use benefits, etc., and the reliability of the different data and methodologies in assessing these different benefits yields (Perrings 1995, p. 878). As Fig. 3 shows, the use value categories "direct use values", "indirect use values", "option/quasi-option values" and "non-use values", which together give the TEV, allow the application of various valuation methods. In the following, these methods are presented and the range of effects to be valued is considered. Not all of these methods are able to completely determine biodiversityrelated costs and benefits. Each of them, however, is useful in the correct

35

The Economic Valuation of Biological Diversity

context. Roughly speaking, we can differentiate between monetisation methods as follows (see OECD 1996, p. 74): • on the basis of actual market prices (market analyses), • on the basis of simulated market prices (contingent valuation and ranking; individual choice model), • on the basis of surrogate market prices (e.g. the travel cost approach and hedonic price approach) and • on the basis of the production-function approach (e.g. value of changes of productivity, avoided damage costs).

Since, in the context of this study, we are interested in the external use values of biological diversity that are not reflected by actual market prices, the subsequent discussion is limited to valuation approaches for simulated markets (Sect. 3.1), surrogate markets (Sect. 3.2) and the productionfunction approach (Sect. 3.3). The common instrument of market analysis is therefore not discussed here. The presently available set of valuation methods show very large differences not only in valuation methodology, but also in their conceptional treatment of the problem. For instance, there is still no consensus on how to determine the existence value (Perrings 1995, p. 891). These methods presuppose acceptance by those with political responsibility. They have to guarantee that the monetisation requirements that are identified become economically effective by income transmissions, taxes, etc.

36

Recommendations

Fig. 3: Classification of economic values and attributable valuation methods (methods in angled brackets are less suitable ones)

Use values

Non-use values

Direct use values

Indirect use values (functional values)

Option values Quasi-option values

Existence values Bequest values

METHODS:

METHODS:

METHODS:

METHODS:

Market analysis

Avoided damage costs

'Individual choice' model

Contingent valuation method

Travel cost method

Prophylactic expenses

Restricted information value

Contingent valuation method

Value of productivity changes

Contingent valuation method

Hedonic prices



'Public' prices





Figure 3 highlights the particular importance of the contingent valuation method (CVM); this method allows statements to be made about all use value categories with the exception of the indirect use value. Indeed, it is the only useful method to identify non-use values. This is because passive or non-use values of the components of biological diversity are not related to any activity or even the purchase of market goods and thus cannot be determined using indirect valuation methods (Stephan and Ahlheim 1996, p. 153).

37

The Economic Valuation of Biological Diversity

3.1.1 Determining direct and passive use values on simulated markets Sociological interviewing methods are the most practicable approaches to determine the economic value of the components of biological diversity. In principle, these methods can be differentiated according to two interview objectives: • to attribute a value to the components of biological diversity concerned (contingent valuation method, CVM) on the basis of analyses of willingness to pay (WTP) and willingness to accept (WTA) or • to rank values (contingent ranking method, CRM). The best way to apply the direct valuation method is to determine the WTP/WTA of one environment-related use for the person being interviewed or the one that corresponds to his or her personal opinion and knowledge, e.g. recreation options. WTP analyses on the basis of losses of environmental/biological diversity are more problematic. Moreover, we still have some way to go before the psychological and cognitive processes that influence the formulation of answers can be definitively assessed. Even if the direct valuation method is not exact enough for carrying out cost-benefit analyses or for legislative purposes, provided that specific questions are asked, its results may nevertheless be used as a supplementary public opinion poll to establish earmarking priorities concerning the use and conservation of biodiversity, particularly because it is the only method that is able to translate non-use values into market prices (Blamey and Common 1993). The main problem of this method is undoubtedly related to the possible disparity between the data obtained from interviewees concerning their WTP and the amounts that they are actually willing to pay if the need arises (Ruck 1990, p. 330). In Australia, for instance, CVMs and related methods 38

Recommendations

are not generally recognised as accepted methods, since the values that are determined are seen as improbably high (Blamey 1996). Contingent valuation method (CVM) In a direct analysis of WTP or willingness to renounce, value preferences are determined on the basis of interviews. This method is referred to as the CVM, not least because of the hypothetical nature of the situation ("simulated market situation"). It is applied to determine direct use, non-use or passive use (existence and bequest values) and option/quasi-option use values, but not indirect use values. Thus CVM (and the analogous CRM) differ from all other important economic valuation methods, which can only be used to determine one type of use value. According to Pearce and Moran (1994), the CVM is the most important method for the economic valuation of biodiversity, largely because it is the only one that directly reflects the non-use-orientated (bequest and existence) values of biodiversity. In addition to information retrieval and information exchange during the interview process, verbatim minutes and tape recordings allow the interviewer to analyse the biodiversity-related knowledge and understanding of the interviewee ("think-aloud analysis"). Interest in this method has greatly increased over the last 10 years: • because it is the only procedure that can be used to evaluate non-usevalues, • because well-conceived and correctly conducted interviews might be as valid as valuations of direct use values obtained by other methods and • because the conception, analysis and interpretation of stated preferences have also improved, e.g. the "scientific sampling" and "benefit

39

The Economic Valuation of Biological Diversity

estimation" theories have improved the computerised data administration and analysis of public opinion polls and their validity. The first stage of a CVM involves providing interviewees with background information about the relevant biological resources. They are given further information about the quality, quantity and the time-scale of changes. In the second stage, a payment instrument is selected. This involves asking interviewees whether they would be willing to pay into a hypothetical fund or whether they would prefer a tax or a price increase. At this stage, it is very important for the interviewer to propose a reliable payment instrument and to be able to depict a plausible and acceptable scenario for the interviewee. In the third stage, a method has to be selected that allows the WTP or willingness to renounce to be determined as accurately as possible. In an open-ended approach, interviewees have to state the maximum amount that they would be ready to pay or renounce. If a "dichotomous choice" approach is used, the interviewee is confronted with a concrete amount that is varied within a group of interviewees to come as close as possible to the "real" value (see Perrings 1995, pp. 845f.; Hampicke 1991, pp. 118ff.; Pearce and Moran 1994, pp. 58ff.). Valuation of the direct value assigned to a product or service on the basis of the interview requires verification of the reliability and validity, and answers need to be examined to identify any possible falsifications. In order to obtain exact and reliable answers regarding the WTP, standardised guidelines can be used, such as those developed by the U.S. National Oceanic and Atmospheric Administration Committee (NOAA; Arrow 1993):

40

Recommendations 1. Sample type and size - probability sampling is essential. The choice of sample specific designs and size is a difficult technical question that requires the guidance of a professional sampling statistician. 2. Minimize non-responses - high non-response rates would make CV (contingent valuation) survey results unreliable. 3. Personal interview - it is improbable that reliable value estimates can be elicited with mail surveys. Face-to-face interviews are usually preferable, although telephone interviews have some advantages in terms of costs and centralized supervision. 4. Pretesting for interviewer effects - an important respect in which CV surveys differ from actual referendum is the presence of an interviewer (except in the case of mail survey). It is possible that interviewers contribute to 'social desirability' bias, since preserving the environment is widely viewed as something positive. In order to test this possibility, major CV studies should incorporate experiments that assess interviewer effects. 5. Reporting - every report of a CV study should make clear the definition of the population sampled, the sampling frame used, the sample size, the overall sample non-response rate and its components (e.g., refusals), and item non-responses on all important questions. The report should also reproduce the exact wording and sequence of the questionnaire and of other communications to respondents (e.g., advance letters). All data from the study should be archived and made available to interested parties. 6. Careful pretesting of a CV questionnaire - respondents in a CV survey are ordinarily presented with a good deal of new and often technical information, well beyond what is typical in most surveys. This requires very careful pilot work and pre-testing, plus evidence from the final survey that respondents understood and accepted the description of the good or service offered and the questioning reasonably well. 7. Conservative design - when aspects of the survey design and the analysis of the responses are ambiguous, the option that tends to underestimate the willingness-topay is generally preferred. A conservative design increases the reliability of the

41

The Economic Valuation of Biological Diversity estimate by eliminating extreme responses that can enlarge estimated values wildly and implausibly. 8. Elicitation format - the willingness-to-pay format should be used instead of compensation required because the former is the conservative choice. 9. Referendum format - the valuation question should be posed as a vote on a referendum. 10. Accurate description of the program or policy - adequate information must be provided to respondents about the environmental program that is offered. 11. Pretesting of photographs - the effects of photographs on subjects must be carefully explored. 12. Reminder of substitute commodities - respondents must be reminded of substitute commodities. This reminder should be introduced forcefully and directly prior to the main valuation to assure that the respondents have the alternatives clearly in mind. 13. Temporal averaging - time-dependent measurement noise should be reduced by averaging across independently drawn samples taken at different points in time. A clear and substantial time trend in the responses would cast doubt on the reliability of the value information obtained from a CV survey. 14. 'No-answer' option - a 'no-answer' option should be explicitly allowed in the addition to the 'yes' or 'no' options on the main valuation (referendum) question. Respondents who choose the 'no-answer' option should be asked to explain their choice. 15. Yes/no follow-ups - yes and no responses should be followed-up by the open-ended question: 'Why did you vote yes/no?' 16. Cross-tabulations - the survey should include a variety of other questions that help interpret the responses to the primary valuation question. The final report should include summaries of willingness-to-pay broken down by these categories (e.g., income, education, attitudes towards biodiversity). 17. Checks on understanding and acceptance - the survey instrument should not be so complex that it poses tasks that are beyond the ability or interest level of many participants.

42

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Contingent ranking method (CRM) The CRM is the stepsister of the CVM. The different feature in this interview situation is that respondents are confronted with a set of options that they are asked to rank according to their valuation scale. For each of the options, the interviewer designates a set of characteristics and describes how the options differ. The resulting costs should be delineated for each option. Asking questions about relative valuations and specifically costed alternatives facilitates the choice for the interviewee; conversely, however, it becomes more difficult to determine the actual monetary limit. Further methodological progress The "stated preference" method (SPM; Adamowicz 1994; Louviere 1994) promises further improvements in the direct valuation process. Application of the SPM (which was originally developed for the marketing and transportation business) allows consumer responses to be made to a larger range of subject characteristics than is normally possible using direct valuation analysis.

3.1.2 Indirectly determining direct use values The indirect or surrogate market valuation methods are all based on the fact that the commodities "nature" or "biological resources" are consumed together with complementary private goods with well-known or easily determinable prices. These indirect approaches are techniques that derive preferences from actual market-based observations. Preferences for a biodiversity commodity can be assumed if an individual buys a product that is somehow related to the biodiversity commodity in question. The relevant techniques are as follows: 43

The Economic Valuation of Biological Diversity

• the travel cost method, • the "hedonic price" approach, • the avertive behaviour approach and • the dose-response method. Surrogate market techniques focus on markets for private commodities and services that are related to biological (or environmental) resources or products. The products or services sold on these surrogate markets correspond to the products/resources in question, because individuals reveal their preferences for a biodiversity commodity by purchasing a related object or service. "Strongly simplified: If a bird watcher spends DM 1000 on a telescope, then he is obviously willing to pay at least DM 1000 to watch birds" (Hampicke 1991, p. 115). However, the potential of surrogate market approaches is limited for several reasons: • No hypothetical conclusions can be drawn. If the natural commodity is no longer available, there will be no expenditure on the surrogate object (in the case described above, the telescope) either. • The method only measures the intensity of a personal interest ("user value"), and not the interest in conserving biological diversity ("existence value"). • The relationship between private expenditure and the conservation goal is frequently weak (e.g. telescopes may also serve other purposes). • Experiencing nature is often non-specific; many people experience biological diversity even in an ecologically worthless spruce forest. 44

Recommendations

Analogous limitations need to be addressed in the travel cost method. The relationship between travel expenses and the valuation of the components of biodiversity at the journey's destination is questionable if this journey is undertaken for other reasons as well. Nevertheless, this method can lead to valuable explanations about the WTP for experiencing nature, especially if expensive and very specific destinations (e.g. a national park) have been chosen. Past applications refer to large game parks in Africa (Brown and Henry 1989) and tropical forest reserves in Costa Rica (Tobias and Mendelsohn 1991), for example. In the latter study, it was shown that the WTP of native and foreign visitors (primarily from the United States) corresponding to a hectare of tropical forest exceeds the purchase price by two powers of ten. In economic terms, the only possible conclusion is that the area of the reserve should be increased. With respect to the travel cost method, Ruck (1990, p. 261) states that, in the case of Kenya and Tanzania, the abolition of national parks as tourist attractions would also lead to substantial losses in seaside tourism, whereas in countries such as Sri Lanka, India or the Ivory Coast, where tourism is largely beach or congress tourism and national parks do not play a central role, there would be less or no effects on the cost-benefit analyses of the tourism industry. The dose-response approach is designed to determine relationships between damage and its causes (e.g. pollution load); a certain load level is related to the output change, which in turn leads to value changes on the market. This approach, however, is only applicable to environmental changes and is therefore not suitable for the economics of use-independent values.

3.1.3 Determining indirect use values The methods presented in Sects. 3.1.1 and 3.1.2 to determine preferences are not suitable to determine the direct or indirect use values (ecological 45

The Economic Valuation of Biological Diversity

regulatory functions) of nature as production factors, since they support economic activities regardless of preferences. In order to determine indirect use values, other methods therefore have to be applied. However, such methods currently still suffer from our lack of knowledge about the functional importance of biological diversity and the ecological services linked to them. Indirect productivity measurements The productivity change method can be used to determine the direct and indirect use values of ecosystems within market prices. For instance, the value of the ecological function of a forest in the catchment area of a hydroelectric power plant can be measured by the net value of the difference in water power production because of sedimentation in the presence or absence (clearing) of forest or with a smaller (reduction) forest stand. A related productivity method measures the expenditure of work by a market subject (individual, enterprise) to maintain or optimise ecological effects (e.g. a farmer building terraces to prevent soil erosion). The observed protective or preventive expenditure provides a measure of the subject's valuation of the relevant ecological services (Perrings 1995, p. 856). The replacement cost approach focuses on the costs of replacing (e.g. reintroduction) or restoring (e.g. reforestation) components of biological diversity. Avoidance and repair costs are difficult to determine, since neither sophisticated techniques nor reliable cost levels are available for the avoidance or repair of environmental damage. We cannot use the costs of 46

Recommendations

reducing the percentage of sulphur dioxide and nitrogen oxide in the air to approximately zero to conclude that the value of clean air corresponds to the level of avoidance costs. An estimation of forest degradation by acid rain or the loss of fishery resources by water pollution on the basis of avoidance costs, for example, will be misleading unless those concerned are willing to bear these costs. The final report by the German Ministry of the Environment's research programme on the "Costs of Environmental Pollution/Benefit of Environmental Protection" puts the relevant avoidance costs at DM 130 million p.a. (Wicke 1986). Production-function approach The production-function approach determines the physical effects of changes of ecological functions on economic activities. The consequences of these changes become visible in the change in economic yield of these economic activities. Thus a relation between economic and ecological productivity is produced. In order to translate ecological into economic productivity, it is clearly necessary to understand how regulatory ecological functions support economic activities, and this is still the limiting factor. This becomes even more difficult where the causes (e.g. the functional role of individual species) of ecological functions have to be understood in greater detail. It is highly desirable both from an economic and an ecological point of view to promote this understanding. Our lack of understanding of the ecological causes of economic productivity should not prevent production-function valuations from being carried out using existing knowledge. On the basis of different assumptions about causal links between ecological and economic factors, Ruitenbeek

47

The Economic Valuation of Biological Diversity

(1992), for instance, has carried out valuations in different scenarios. The results of these valuation approaches are given in Sect. 2.3. The marketable yield Q is formally represented as being dependent on a set of factors: Q = F(Xi ... Xk, S). [In the study by Ellis and Fisher (1987) on the effect of wetlands on the crab harvest, QS is the area of the wetlands in question.]

3.2

The cost aspect of the conservation and destruction of biological diversity and the cost-benefit analysis procedure

The preceding sections have dealt with the type and range of economic use values of biological resources and the methods used to determine them. This section discusses the costs associated with the conservation, sustainable use and restoration of biological diversity in order to balance these costs with their social and economic benefits. If biological resources for conservation, sustainable use or restoration can be treated as scarce resources and valued accordingly, they can be balanced against alternative uses. The forgone opportunities are referred to as opportunity costs. On the basis of cost-benefit analyses (see below), the relevant activities and their alternatives can ultimately be determined and evaluated in monetary terms.

3.2.1 Opportunity costs: restoration costs, sustainability costs, lost use values How much does it cost not to destroy nature? Since the pioneering work by Krutilla and Fisher (1975), this question has been addressed by a number of studies. Approaches such as that used by Bishop (1980) to estimate conservation costs for individual species are still rare; other studies deal 48

Recommendations

with the opportunity costs of area requirements for nature conservation. The starting point of this kind of research was the work carried out by Goldstein (1971), who compared two alternative uses of areas in the Midwest of the United States. Retaining the area as an adventure range for WTP bird hunters instead of intensifying its agricultural uses proved to be economically more favourable. Some studies, such as the ones by Turner et al. (1983) and Krutilla and Fisher (1975), have established that maintaining a natural condition does not cause economic costs, because large investment planning has proved to be unprofitable. A study by Willis et al. (1988) elucidates the difference between land use costs if distorted prices support a use that destroys nature while lower opportunity costs are arrived at by correct calculations. The TEV approach should be used as the basis on which to calculate opportunity costs. Use-dependent and use-independent values have to be taken into account, and market price-based and market price-independent methods should be examined to valuate them. In 1989, the U.S. Court of Appeals ruled that the procedural guidelines of the U.S. Ministry of the Interior for the monetary valuation of environmental damage should be revised (Marggraf and Streb 1997, p. 17). However, this court decision has not yet been implemented, although a second ruling that environmental damage should be valuated on the basis of the sum of restoration costs and forgone use options has now been put into practice. At this point, it would seem appropriate to step aside for a moment and consider the actual and potential market values of the (minimum) goals and costs of biodiversity. What are the ecological and biodiversity standards that should be aimed at from a scientific point of view? And how can they

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The Economic Valuation of Biological Diversity

be translated into global and national economic units to make their economic superiority visible? "The progressive destruction of nature in many developing countries calls for an answer to the question of the number, size and geographical location of national parks that might be regarded as economically optimal within a given time frame for a country or for human civilisation" (Ruck 1990, p. 365), where "national park" is used as a synonym for protected, sustainably used or restored ecosystems/biodiversity. Ruck (pp. 365ff.) presents ways to arrive at economic responses to this question. "Market prices for products and factors partly reflect material scarcity and thus opportunity costs, but they are usually distorted by transfer components, and corrections therefore need to be made for calculations of economic costs. A distinction should always be made between dynamic and static sets of costs, and each has to be incorporated in the other" (Hampicke 1991, p. 180). Funds for the conservation of biological diversity should always be spent according to defined priorities and as efficiently as possible: certain goals can either be attained at minimum costs, or the degree to which a given goal is realised should be maximised at a given cost. The practical cost categories for the conservation of biological diversity can be divided into investment, work and land use costs, and each poses specific problems. A number of studies that have been undertaken world-wide concerning conflicts of various sizes show that opportunity costs for the conservation of biological diversity are often far lower than expected. In those federal states that belonged to West Germany before German reunification, for example, DM 1 billion would be sufficient to implement a thorough nature protection programme.

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Recommendations

Wells (1992) compared the costs and benefits of protected areas at the local, regional and global level, qualitatively estimating the distribution of costs and benefits on these different levels. His estimation of the benefit of protected areas was based on the work of Dixon and Sherman (1990; cited in Wells 1992). It was shown that the economic benefits of protected areas are limited at a local level, are somewhat higher at regional and national levels and become substantial at a global level. The related costs follow the opposite trend: They are significant at a local level, moderate at a regional and national level and small at a global level (e.g. contributions to multilateral financing mechanisms, cf. Fig. 4). Wells (1992) concluded that to ensure that biodiversity is effectively protected, this imbalance needs to be corrected by: • North-South money transfers and • an increase in profits at both a local and a regional and national level, e.g. by the expansion of sustainable use strategies. In order for local communities to actually profit from sustainable uses, however, further socio-economic and legal conditions have to be fulfilled on a national and regional level. These concern aspects such as land tenure rights, property rights to biological diversity and the promotion of rural development.

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The Economic Valuation of Biological Diversity

Fig. 4: Comparison of the resulting costs and use of protected areas Potentially significant benefits

Potentially significant costs LOCAL LEVEL

Consumption benefit Recreation/tourism

Indirect costs (e.g. damage by grazing) Opportunity costs (e.g. by restriction of use)

Future values REGIONAL/NATIONAL LEVEL

Recreation/tourism

Direct costs (establishment of protected areas) Opportunity costs

Water drainage areas Future values

GLOBAL LEVEL

Biological diversity Non-consumption use Ecological processes Environmental education and research Future values

(Minimum costs)

3.2.2 Cost-benefit analysis Cost-benefit analyses (CBAs) allow biodiversity-relevant activities and their alternatives to be evaluated and expressed in monetary terms. In order to be able to compare the costs and benefits of alternative uses, the following procedure should be followed: 1. All the consequences of a relevant action should be identified (e.g. use, alternative use, change in the status quo of biodiversity). 2. The present private benefits PV[B(DEV)] and costs PV[C(DEV)] associated with the individual action taken should be determined and the difference between them calculated: PV[B(DEV)] - PV[C(DEV)]. 3. Depending on the relevant integration level, the present local, national, global or total (TEVtot = TEVg + TEVn + TEVl) social benefit 52

Recommendations

PV[TEV(SUB)] of the alternative use (e.g. conservation, sustainable use) should be calculated; its social costs PV[C(SUB)] are then subtracted. 4. If the difference PV[TEV(SUB) - C(SUB)] is larger than the difference PV[B(DEV) - C(DEV)], then the social use alternative is the economically relevant one. It will also be politically relevant whether the private user is able to participate in the social global, national and/or local yields. If the costs and benefits of an action are to be calculated without considering an alternative scenario, step 2 should be omitted. The action concerned will then be economically reasonable if the valued benefit exceeds the respective costs. Since the cost-benefit analysis requires national and international costs and benefits to be identified and quantified as comprehensively as possible, it also includes individual cost and benefit aspects (e.g. external effects), even if these are not economically apparent.

3.3

Organisation of markets with appropriate prices

In the preceding sections, the causes of market failure were explained in terms of the valuation or rather the lack of valuation of biological diversity. In addition, techniques were described with which the actual value of the components of biological diversity can be determined (TEVs at a local, national and global level, etc.). The critical question is now how these theoretical insights and methods can have a practical impact on markets and prices and how the external costs and benefits of biological resources can become visible on the markets and in market prices.

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The Economic Valuation of Biological Diversity

3.3.1 Monetisation and cost-benefit analyses In order for market prices to approximate the "real" value of the components of biological diversity and/or for efficient market pricerelevant decisions to be made, it is first necessary to gather all the available information about the value of biodiversity commodities. The first step from theory to practice therefore has to be to apply the valuation techniques described in Sect. 3.1 and the cost-benefit analyses presented in Sect. 3.2. Barbier et al. (1994) draw some important conclusions from the investigation of Mantadia National Park for the practical relevance of costbenefit analyses (Munasinghe 1993): • Firstly, valuation techniques have to be adapted to the local situation; in the specific case concerned, the currency "rice" was used to value the economic advantages of forests. • Secondly, by carefully selecting and applying valuation techniques in relevant situations, useful indications can be obtained of the values that would be impaired by the selected land use alternative. It is important to realise what is actually measured by the particular valuation method used, e.g. direct use effects, net proceeds from direct and indirect use effects, etc., and to have a clear idea of the reliability of data and methods for the evaluation of the respective advantages. • Thirdly, it also needs to be clarified what was not measured by the study in question, on which level of the hierarchy the study was conducted and whether the TEV or only elements thereof were determined. Only with such specifically adapted instruments and the initial knowledge they provide about the "real" economic value of the biological resources and their use can the following central issue be addressed: What are the 54

Recommendations

mechanisms that transform the socio-economic values that have been determined into monetary reality on the market? Four such mechanisms will be discussed below: 1. the removal of damaging distortions of market mechanisms (deregulation) by dismantling failed interventions (Sect. 3.3.2), 2. the creation of markets by privatisation and integrated biodiversity management (Sect. 3.3.3), 3. market-induced control systems (Sect. 3.3.4.) and 4. the creation of global biodiversity markets (Sect. 3.3.5).

3.3.2 Dismantling failed interventions Governments generally tend to intervene in markets. This may be done with the best intentions. However, even though some interventions may use price corrections to adjust external effects that are damaging to biodiversity, many interventions run counter to the goals of protection biodiversity, even if they serve other important purposes. Well-known examples of such intervention prices are deforestation subsidies, water prices that are too low, subsidisation of agriculture, etc. Such measures are referred to as perverse incentives, i.e. incentives that lead to a decrease in biological diversity, and are the result of policy failure. The most perverse incentives are those that have been created to promote goals that destroy biodiversity (OECD 1996, p. 70). An important step towards achieving prices that reflect social costs is therefore to abolish any supportive measures that artificially reduce the private costs of actions that are detrimental to biodiversity. The OECD (1998) has very recently undertaken a study of this problem, which will be 55

The Economic Valuation of Biological Diversity

referred to later. One way of correcting the price distortions caused by price controls or national monopolies is to take internationally valid competitive market prices as "shadow" prices (Ruck 1990, p. 220).

3.3.3 Creation of private property rights and integrated biodiversity management In an ideal free market, the market develops on its own such that private use interests work to support social interests and correcting measures are kept to a minimum. In order to at least come close to this ideal, private users have be able to profit from the national or global yields of the conservation and/or sustainable use of biodiversity. This could be achieved by creating vested titles to those biological resources to which vested titles do not yet exist and/or by transferring property rights from the State to landowners (including those who should be entitled to such rights due to pending land reforms). This approach would be the logical consequence of the "national sovereignty regime" over genetic resources that was created by the CBD to replace the former "free access regime" to shift it at the local level. It would meet the efficiency criterion that those who control net assets should also be those who profit from the utilisable effects of these net assets. If a local community cannot draw net use from its investment (the sustainable use of ecosystems/components of biodiversity), it will not have an interest in maintaining its investment (Pearce and Moran 1994, p. 144). Persson (1994) was able to show that the transferral of vested titles to squatters causes them to stop clearing, in particular if discounting is lower than the future value of the forest. These property rights could further be licensed, e.g. as bioprospecting ratios, visitor ratios, harvest ratios, emission rights, development rights, etc. 56

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With respect to genes, species and ecosystems as levels in the biodiversity hierarchy, property rights will probably refer to the ecosystem level. It would be advisable for transferred vested titles not to be restricted to single uses, but to be open for the whole range of use options, e.g. tourism, bioprospecting, hunting, renewable resources, etc. For a comprehensive bioprospecting strategy could ensure conservation effects for the specific resource in situ; moreover, it may also generate conservation effects for other resources in the same habitat that are not yet being sought or commercially exploited. This presupposes that a bioprospecting strategy will be open in terms of the species, genes and biomolecules it is looking for. A broader screening policy for commercially useful resources means that the quasi-option value of the resources that are not yet being screened for can create preservation effects for the whole ecosystem more effectively. If prospecting is more specific (species xy, effect ab), a holistic protective effect becomes less likely, particularly if shortages or losses may result from subsequent exploitation of the resources being sought. The status of the components of biodiversity concerned should therefore be monitored by means of pre- and post-prospecting programmes. Bioprospecting opens up new sources of income for developing countries. Instead of having to ask for new technologies and transfer payments from the North, these countries may be able to offer "genetic technology" in the form of raw materials, plant-based medicines, etc. (Krattiger and Lesser 1994). For a more lasting success in bioprospecting strategies, it would also be helpful to transfer an increasing amount of relevant biotechnological know-how ("capacity-building") to the area from which bioresources originate to enable further processed resources to be marketed not only globally, but also regionally. 57

The Economic Valuation of Biological Diversity

The same is true of ecotourism; multiple attractions can increase the duration of usability, but here, too, monitoring programmes should be implemented to register any side-effects, and benefits were to be shared with the local communities concerned.

3.3.4 Creation of market-based regulatory instruments Many regulatory instruments are available to bridge the gap between TEVs and current market prices on the national market. The main distinction is between regulatory and market-based instruments. While regulatory instruments imply the direct control (reduction/limitation) of unwanted actions in conjunction with legislative or politically agreed standards, market-based instruments create economic incentives. "It is no accident that 'command and control' concepts have dominated environmental policy so far world-wide. The reasons for this are the sectoral organisation and splintering of national competences, the minor political importance of national environmental institutions and, last but not least, the insufficient integration of environmental policy into public discussion in many countries" (Paulus 1995). Economic incentive systems can be subdivided into four categories: 1. Positive incentives: any monetary (direct payment, cost-sharing, tax advantages) or non-monetary inducement (such as awards in recognition of outstanding performance) that motivates individuals or groups (governments, international organisations, local communities) to conserve biological diversity. 2. Disincentives: any mechanism that internalises the costs of use and/or damage of biological resources in order to discourage activities that deplete biological diversity. 58

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3. Indirect incentives: any mechanism that creates or improves upon markets and price signals for biological resources, encouraging the conservation and sustainable use of biological diversity. 4. Perverse incentives: an incentive that induces behaviour leading to a reduction in biological diversity. Perverse incentives are the result of failed government intervention. Most perverse incentives are designed to achieve other policy objectives and their "perversity" is thus an external factor or an unanticipated side-effect of the policy (OECD 1996, p. 70). If the results of economic valuations of biological resources do not lead to reformed or newly created markets, the economic value of biological resources can only be asserted by intervention. The notion that the market is basically flexible enough, with only occasional State subsidies required, is only a qualitative one. "By no means can it be concluded that economic adjustment processes and government incentives are implemented in time and to a sufficient extent to avoid the catastrophic consequences of resource shortages" (Endres and Querner 1993; on market failure, see pp. 124ff.). However, despite the shortcomings of the market mechanism outlined above in reflecting the TEV of the relevant components of biological diversity, the capacity of the market to contribute to solving the problem of the destruction of biodiversity should not be underestimated. As only incomplete allocation mechanisms currently exist, it is not certain how the market can contribute to the conservation of natural resources in pragmatic terms (Endres and Querner 1993, p. 139). In order to optimise the quality of an allocation mechanism, free market economy intervention instruments (MEIs) should be used. Examples of such mechanisms include environment-related fees, a price strategy with 59

The Economic Valuation of Biological Diversity

resources and inputs, duties and taxes, subsidies, environmental funds, tradable rights and licences, flexible levies, pledge systems, etc. (Paulus 1995). Strictly speaking, MEIs include all political measures explicitly related to private costs and benefits by which the comparative social costs and benefits can be incorporated into market prices. These MEIs can be subdivided into five categories: 1. charges, taxes, fees or additional prices to be paid for the social costs arising from damage, 2. subsidies to assist individuals in altering activities or conforming to environmental standards, 3. deposit/refund or fee/rebate systems in which a surcharge is levied on the price of products leading to resource depletion which is then refunded if the product is recycled or if the depleted resource is restored, 4. tradable permits by which rights to exploit resources can be exchanged and 5. compensatory incentives to create markets or financial inducements for certain individuals or groups who bear a disproportionate share of the risks or costs of the conservation of biological resources (Barbier et al. 1994, p. 180). MEIs, however, entail a considerable amount of administrative and/or monitoring expenditure. It is therefore important to examine carefully, as Paulus (1995) does, the institutional conditions and to integrate measures into existing structures wherever possible. The following criteria need to be taken into account when selecting measures: ecological effectiveness, 60

Recommendations

economic efficiency, administrative management, public costs and yields, distribution effects and interspersing ability. No single MEI instrument will be sufficient to counter specific threats to biological diversity, and a range of MEIs will be necessary to address the complex problems of the social costs of conservation, sustainable use and restoration of biological diversity. In principle, the groups that damage biological resources should bear the damage prevention costs and/or the social costs connected with the damage. Otherwise, those who use biological resources would have to bear the entire costs of using resources, including the costs of control and prevention. Conversely, the incremental costs connected with the mobilisation of non-marketed uses should be offset by the utilisation of positive incentive systems. The latter could be implemented using marketbased control instruments, as clearly shown by Lippke (1996, p. 253).

3.3.5 Creation of global markets As mentioned several times in the preceding sections, many conservation and/or sustainable use approaches produce global benefits. The conservation of biological diversity in a tropical rain forest may benefit individuals and groups in other countries, e.g. because they profit from its renewable resources, because its biogeochemical cycles have global benefits or because they want it to exist for its own sake. However, if the country that owns the resources cannot derive monetary benefit from these global external use values due to a lack of appropriate markets, it will have no or little incentive to conserve the biological resources in question.

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It is therefore necessary to create global markets (GEMs). These markets can be enforced by international law or may result from voluntary agreements. Examples of the latter include debt-for-nature swaps or benefit-sharing agreements, as concluded by Merck & Co., Shaman Pharmaceuticals, Biotics Ltd. and others with the owners of bioresources. Regulation-induced markets have gained attention in the context of the Climate Convention, e.g. the intergovernmental agreement on CO2 reduction between Norway, Poland and Mexico concluded via the Global Environmental Facility (GEF) or the afforestation agreements entered into by various U.S. energy companies. Both approaches - regulation-induced and voluntary agreements - have a common feature: bilateral or multilateral transfer payments. Indeed, in the foreseeable future, well-organised and specific financial transfer services will be indispensable. The particular practical relevance of monetisation approaches for the conservation, sustainable use and restoration costs of biological diversity lies in the fact that these approaches will form the basis of assessment for the budgets of national and international measures for the protection of biological diversity. This is especially relevant for the implementation of the CBD with regard to international financing instruments such as the GEF and biodiversity portfolios of the World Bank, the Development Bank of the United Nations and continental development banks. The concept of "incremental costs" in the realisation of the CBD and the conservation of biological diversity may be helpful in this respect. Exactly what is covered by the term "full incremental costs" in accordance with Art. 20 of the CBD is still the subject of detailed discussion. A definition of the scope of this term, however, is urgently needed, since it determines which elements of biodiversity-relevant projects may be

62

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covered as "incremental costs" by the financial mechanisms of the CBD/GEF. For a definition of incremental costs, the (then still interim) secretariat of the CBD listed several items to justify transfer payments in the light of the CBD; however, these also suggest that a complicated bureaucracy will need to be established (UNEP/CBD/IC/2/17 of 25 April 1994). It might be more appropriate to restrict net incremental costs to the CBD aims of conservation and sustainable use (global externalities of biodiversity loss), because to achieve the third aim, the sharing of benefits and not incremental costs would have to be refunded, but yields would have to be divided. According to Glowka et al. (1994), incremental costs could be defined in a simplified form as those costs that are necessary to conserve, use sustainably or restore the components of biodiversity defined by quality goals (if necessary, minus the immediate yields from the direct sustainable use of biodiversity and benefit-sharing), whereby the extent of the specific financial expenditure should be based on non-use-related monetary values. The International Conservation Financing Project of the World Resources Institute has attempted to calculate the annual funds necessary for the conservation of biological resources and estimates a total of $20-50 million per year (Reid and Miller 1989). The conservation for 20 years of 2000 animal species with 500 individuals each costs approximately $25 billion alone, as much as the first landing by man on the moon. The traditional conservation of tropical rain forests is estimated to cost $170 million per year for at least 5 years. In order to develop a ranking order for transfer payments, a cost-efficiency index for biodiversity projects has been developed (see the Second Global Biodiversity Forum, Nassau 1994): 63

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• a suitable indicator of the benefits of biodiversity or of biological significance: data at a national level on species diversity and endemism (per km2) may be used to represent the benefits gained by the conservation activity concerned; • cost of intervention: represented by the amount of investment (per km2) in conservation measures at a national level; • probability of success (willingness to conserve): the percentage of land area defined as protected area is used to assess the probability of success; • degree of threat: deforestation rates and population growth are used to approximate the level of threat. It should be remembered that it is not sufficient to guarantee the return of profit shares to the countries owning the resources. Instead, financial compensation for the use or exploitation of biological diversity must benefit those groups (e.g. local communities, conservation organisations, national park administrations) that directly protect and sustainably use biodiversity. However, this presupposes a whole range of institutional, organisational and legal conditions, including procedures to ensure the predictability and reliability of the distribution of transfer funds as equivalents for economic values. A number of financing instruments (e.g. an international rain forest fund, resource franchise agreements) are being discussed to ascertain strategic international payments. Because of their free market nature, transferable development rights (TDRs) appear to be particularly promising to allow adequate conservation of global biodiversity values in tropical countries.

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The first step towards establishing TDRs for the conservation of biological diversity would be to differentiate between conservation and development areas. Individuals owning land in the conservation areas would also receive TDRs, but would not be allowed to implement these rights within the conservation areas. Instead, they could sell these vested titles in development areas in which there is assumed to be a high demand for limited development rights. Full compensation should thus result for the owners of the conservation areas by the sales of development rights. Such a market for TDRs could develop internationally. Tropical countries could exclude areas of authentic ecosystems from alternative use and offer TDRs locally and internationally at prices that cover their opportunity costs (current net value of the forgone development alternative; for further discussion, see Panayotou 1994). To a certain extent, a TDR system already exists in the form of the debt-for-nature swaps. The essential element of these agreements is the transfer of development rights for conservation areas to international non-governmental organisations (NGOs) in exchange for assuming part of the national debts of the countries concerned. However, the extent of these rights is usually not correlated with the opportunity costs.

3.4

Recommendations for development cooperation

The example of valuation techniques highlights the fundamental dilemma of environmental economics, i.e. the need to proceed from generalisations to formulate operational recommendations for action. The economic analyses in many case studies are fairly convincing, but their scientific theory is often still not translated into practice. Development co-operation is required in order to develop operational concepts and to implement them in pilot projects. The key concepts in this context are the acquisition of 65

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knowledge about specific costs and benefits, training and capacitybuilding.

3.4.1 Project-oriented cost-benefit analyses using the available valuation instruments The most obvious measure might be to introduce biodiversity valuation techniques and comprehensive cost-benefit analyses in project planning and to create project-oriented cost-benefit analyses (as a continuation of project environmental-impact assessments, EIAs) as a basis on which to determine project-related TEVs. This would require the development of appropriate training programmes and guidelines for those responsible for the projects in Germany and in the partner country, which should initially be conducted in a pilot phase for selected projects. When developing such programmes and guidelines, care should be taken to ensure that the necessary standardisation still allows sufficient scope for the individual project conditions and the practical adaptation of the relevant procedures (e.g. CVM).

3.4.2 Training and capacity-building to inventor and monitor biodiversity In order to carry out economic valuations of the components of biological diversity under reasonable conditions, the component to be valuated must be adequately characterised, i.e. inventories of the components of biological diversity concerned should be made on the relevant hierarchy and integration levels (e.g. genes, species, ecosystems); in the follow-up, these inventories also need to be reviewed using monitoring and assessment programmes. There is now an extensive body of literature (e.g. Stork and Samways 1995; Guarino et al. 1995) on the implementation of 66

Recommendations

such programmes, and this issue will not be addressed in detail here. Particular attention should be paid to rapid biodiversity assessment techniques (discussed in the literature) and to close cooperation between experts and parataxonomists, as has been documented particularly clearly for the Instituto de la Biodiversidad (INBio) in Costa Rica. DC is required to support and to participate in biodiversity inventories in the partner countries by means of suitable training courses and infrastructure measures.

3.4.3 Creation and/or strengthening of institutional prerequisites for the development and implementation of national biodiversity strategies In this context, it is necessary to support the national and regional authorities responsible for the conservation and sustainable use of biological diversity in diverse areas, to help integrate biodiversity conservation strategies in the planning of land use and to support cooperation among the organisations involved (government authorities, local authorities, environmental and development organisations, social movements, development cooperation institutions). DC can contribute to this process, e.g. by providing consultancy services. A possible form of support is to ensure that yields from the use of genetic resources are proportionately supplied to protected areas. At the same time, legislation must be examined and amended to ensure its compatibility with conservation and development goals.

3.4.4 Training and capacity-building to conduct cost-benefit analyses and valuation techniques Not only should project planning be carried out in donor countries (cf. Sect. 3.4.1), but the know-how for the application of valuation techniques 67

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and the implementation of cost-benefit analyses should also be transferred to the recipient countries by means of DC in association with the capacities to be built and developed in order to catalogue biodiversity. DC should organise project-related (advanced) training courses and consult the relevant institutions of the partner country. At the same time, legislation should be examined and amended in the light of the relevant methods and techniques, as done for the relevant American DOI guidelines, for example.

3.4.5 Supporting research capacities in developing countries at the frontier between ecology and economics Due to the rising demand for genetic resources, resulting in increased bioprospecting activity in tropical forests, for example, national inventory programmes on biological diversity and ecosystem research need to be supported in order to set up sustainable utilisation strategies. An international fund should provide support in capacity-building to inventory biological diversity, to document and analyse samples and to exchange information. Free access to information and the participation of local communities need to be ensured. Experience at institutions such as the Costa Rican Instituto de la Biodiversidad (INBio) suggest that we should be thinking about models for other countries above and beyond this Costa Rican approach. The research and technology capacity of developing countries can be supported by private initiatives; however, due to the size of these tasks, this alone will not be sufficient and supplementary efforts will be necessary. In close cooperation with partner institutions in the tropical countries, foreign research institutions should contribute to the complex field of basic research in the rain forests. In this context, it should be ensured that research results are accessible to all those involved, that emphasis is placed 68

Recommendations

on building national research capacities and that research results are put into practice by means of environmental education. One extremely important area in which DC is required is undoubtedly the establishment and promotion of modern biodiversity research in partner countries, in particular the creation of a sound modern taxonomy, as this forms the basis of all other fields of biodiversity research. "Taxonomy is fundamental in providing the units and the pattern to humankind's notion of species diversity" (Bisby 1995). As Hubert Markl puts it, "It has to be clearly stated: Without the active contribution of lively and productive biotaxonomic research - above all organism inventories of the tropics and subtropics and the seas of all latitudes - it will be impossible to gain the ecological insights that are necessary for the global management of the biosphere (a profitable form of management to our benefit, e.g. selfrestraint in relation to natural communities) in such a way that mankind and nature will be able to live together on a long-term basis, something our future depends on. (...) As an infrastructure-related task of biodiversity research, however, this reflects only part of the particular scientific value of biotaxonomic research. Is it not the sophisticated differentiation of life forms that forms the indispensable prerequisite for our astonishment and enthusiasm for all kinds of organisms more than anything else: their marvellous ability to adapt to their environment, their skilful methods of conquering ecological niches, their inexhaustible wealth of original solutions for all of life's problems from the procurement of food in competition with their own and other species, the avoidance of enemies, the fight against parasites and, finally, the development of supra-organismal social systems whose abilities to learn and adapt seem to know no limits even in animals, let alone in humans? We would not be able to carry out research on any of this without the clear distinctions identified by 69

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taxonomic research that provide the basis for our comparative analyses" (Markl 1995). Important tasks for the future include developing a modern taxonomy as an integral science combining both classical and molecular methods (see Bisby 1995) and training methodically (classical/molecular) holistic taxonomists who also have a particular expertise in data processing using information technology. It should be added that taxonomy will also become increasingly significant as an infrastructure for biotechnology. In the context of bioprospecting, biodiversity conservationists have pinned their hopes on strategies of participative use for biotechnologically exploitable natural substances for the in situ preservation of biological diversity. DC should therefore also take account of research into chemical ecology and natural products, including the industrial, sociological and economic aspects of biodiversity. Where possible, appropriate DC projects should be integrated into international scientific biodiversity initiatives such as DIVERSITAS, BioNET International or Species 2000. A further key area of biodiversity research for DC is the area of biodiversity economics. In recent years, not least as a result of discussions on the CBD, this subdiscipline of environmental economics has undergone rapid development, and there have been a number of publications focusing on valuation studies of biological resources. Interdisciplinary coordinated research efforts are still largely lacking, however.

3.4.6 Identification of interventions failures In order to come closer to the goal of having prices that reflect social costs, it is necessary both to eliminate subsidies that artificially lower private costs and to implement suitable economic instruments or other regulatory measures to ensure that harmful external effects are taken into account in 70

Recommendations

price setting. As part of DC, consultancy services are required in this context to support the dismantling of misdirected economic instruments on the basis of TEVs and cost-benefit analyses; in addition, approval for biodiversity project funding needs to be linked to the removal of any disincentives counterproductive to the aim of the project.

3.4.7 Creation of incentive instruments Consumption and non-consumption values of biological diversity are only partially reflected in market prices. An overall economic calculation should also consider ecological follow-up costs. Subsidising non-sustainable uses sends the wrong politico-economic signals and frequently causes the exploitation of natural resources. Within the framework of project cooperation, DC should therefore recommend that more attention be paid to economic incentives for the conservation of biological diversity together with the abolition of subsidies for ecologically harmful land uses. By means of consultancy services, national governments and authorities should be encouraged to use and test economic instruments able to generate market prices that approximate previously determined TEVs.

3.4.8 Participation of local communities in biodiversity yields Successful work on a project requires the appropriate participation of local communities in decision-making processes and the identification of problems in project planning, implementation, and monitoring and evaluation. Decision-making processes concerning the organisation of the project should be made as transparent as possible and should include objection options for the local communities concerned.

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The effectiveness of economic incentives for local communities has not been sufficiently considered so far. Bioprospecting and the gathering of biological resources by national organisations offer the opportunity for fair and equitable participation by local communities, and benefit-sharing arrangements should be made at the beginning of a project. Private initiatives that take account of such participation should be supported by government authorities.

3.4.9 Assistance in the creation of property rights The property rights of local communities need to be strengthened and secured. This includes examining land tenure structures and strengthening the rights of indigenous peoples and traditional communities to their cultural identity and the collective intellectual property of their traditional knowledge. While industrial innovations and newly developed products enjoy the protection of legally enforced intellectual property rights at an international level, e.g. patent rights (recently internationally strengthened by the GATT agreement), the collective intellectual property of traditional local communities and indigenous peoples is not internationally recognised. If the wealth of experience and valuable knowledge of this part of humanity is to be used in a fair and equitable way for the management and sustainable use of biological resources, these rights need to be strengthened. Action particularly needs to be taken in the following areas: • in the evaluation of land tenure systems to support sustainable management practices and the transfer of vested titles to biological diversity (keyword: privatisation), 72

Recommendations

• in the establishment of legal instruments to protect the collective intellectual property of indigenous peoples and traditional local communities and • in the examination of the influence that international rules such as the GATT and TRIPS agreements (strengthening of patent rights) might have on the availability of environmentally acceptable technologies in developing countries and the socio-economic and ecological effects that they may have on the lives of small farmers and indigenous peoples.

3.4.10 Cooperation in establishing global environmental markets through bilateral and multilateral agreements As in the implementation of the Climate Convention (with the goal of a reduction in the emission of CO2), where both bilateral and multilateral conventions and agreements under public and private law have been made, similar agreements should be made with the specific goal of biodiversity conservation. As example that might be mentioned here is the U.S. Forest for the Future Initiative. The participation and motivation of the private sector should also be sought in such bilateral or multilateral agreements on biodiversity.

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