the economic valuation of biological diversity

8/14/2019 The Economic Valuation of Biological Diversity

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Tropical Ecology SupportProgram (TB)

The Economic Valuationof Biological Diversity


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Tropical Ecology SupportProgram (TB)

The Economic Valuationof Biological Diversity

Dr. Thomas Pln

Eschborn, 1999


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TB Publication No.: TB P-3e

Published by: Deutsche Gesellschaft frTechnische Zusammenarbeit (GTZ) GmbHPostfach 5180D-65726 Eschborn

Responsible: Tropenkologisches Begleitprogramm (TB)Dr. Claus Btke

Author: Dr. Thomas Pln, inf Informationsmanagement,Biotechnologie / Biodiversittsnutzung,

Lessingstr. 3a, D-93049 Regensburg, GermanyTel.: +49-941-299054, Fax: +49-941-25627,email: [email protected]

Edited by: Michaela Hammer

Nominal fee: DM 5,-

ISBN:

Produced by: TZ-Verlagsgesellschaft mbH, D-64380 Rodorf

1999 All rights reserved


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Foreword

For the majority of the world's population, tropical ecosystems are a vital life-sustaining force. However, the progressive destruction and depletion of naturalresources 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 projectbeing run by the Deutsche Gesellschaft fr Technische Zusammenarbeit (GTZ)GmbH on behalf of the Federal German Ministry for Economic Cooperationand Development (BMZ), its mandate being to help collect and processexperience in this sector, thus improving the information status.

On request, the program flanks specific projects with studies focusing onissues relevant to tropical ecology. By so doing, it is aiming to further develop

concepts and approaches geared to protecting, conserving and ensuring thesustainable use of tropical ecosystems. At the same time, this research workprovides the basis for designing innovative instruments that will facilitate moreecologically-sound development cooperation in future.

By applying scientific results at grass-roots extension level, the program assistsother projects in the implementation of international agreements, in particularAgenda 21 and the Biodiversity Convention, to which the BMZ attaches greatimportance.

A key element of the program concept centres on a joint approach whichprovides German and local scientists with a forum for discussion. TheFlanking Program for Tropical Ecology is thus making a valuable contributionto the practice-oriented upgrading of counterpart experts and the consolidationof tropical-ecology expertise in partner countries.

This series of publications has been produced in a generally comprehensibleform with the specific aim of presenting its results and recommendations to allorganisations and institutions active in development cooperation, and also to allthose members of the general public who are interested in environmental anddevelopment-policy issues.

Dr. H. P. Schipulle

Head of the Environmental Policy,Protection of Natural Resources and

Forestry Division

Dr. C. van Tuyll

Head of the Rural Development Division

Federal German Ministry for EconomicCooperation and Development (BMZ)

Deutsche Gesellschaft fr TechnischeZusammenarbeit (GTZ) mbH


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Contents

I

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


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The Economic Valuation of Biological Diversity

II

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..................................................... 483.2.2 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 .............................................. 563.3.4 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 andmonitor 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 cost-

benefit 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


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Contents

III

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


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IV

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


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Glossary

V

Glossary

Allocation

mechanism

Mechanism for the allocation of productive factors or

resources to certain goals

Assimilation Admission and processing of a substrate

Bequest value Value of keeping a resource intact for future

generations

Biodiversity orbiological diversity

General term for the number, variety and diversity ofliving 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 orpotential 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

(CBA)

Collection and evaluation of relevant actions or

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


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VI

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

markets (GEMs)

Global markets which have either been enforced by

international sets of rules or have resulted from

voluntary agreements

Gross national

product (GNP)

Total value of the goods and services produced by

firms owned by a country

Gross primary

production

Entire photosynthesis, including organic material

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


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Glossary

VII

Natural capital The natural wealth of biological resources

Net primary

production

Quantity of organic material stored in green plants

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

concept

Evaluation of markets for private goods and services

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.


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VIII

Total economic value

(TEV)

Sum or aggregation of direct value, indirect value,

option/quasi-option value and passive use value of a

resource or a resource system

Transferable

development rights

(TDRs)

International trade development rights to enable

adequate protection of global biodiversity values, in

particular in tropical countries

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


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Summary

IX

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 marketsand 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


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X

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 methodsprimarily 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.


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Summary

XI

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 directcomparison 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


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XII

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 dueto 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.


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Summary

XIII

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 concerningtheir 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.


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Introduction

1

1 Introduction

1.1 Description of the development cooperation projectand 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 fr technische Zusammenarbeit (GTZ) GmbH's Tropical

Ecology Support Programme (TB), this preliminary study was developed

into a final study to be translated into English and laid out in accordance

with the guidelines for TB 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 valuatebiological 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.


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2

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


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Introduction

3

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 theoreticalconcept 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.


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4

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 enablebiodiversity 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


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Introduction

5

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 counterthis loss. To this end, types of values of the components of biological

diversity are then subdivided into different use-dependent and use-

independent 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.


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Results and Analysis

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2 Results and Analysis

2.1 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 nowincreasingly 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 andof 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


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8

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.


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9

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 (clear-

cutting, 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 thebasis 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


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10

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 monetisationapproach 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


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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 non-

monetisable 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 cost-

benefit 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


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12

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 valueassignment. The quasi-option value refers to the delay of an irreversible

decision to wait for additional information to help in the decision-

making 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


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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 ethicalconsiderations 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

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

Fig. 1: Total economic value of a biological asset


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15

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 nitrogen-

fixing 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


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17

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 thesupply aspect (d).

Others cannot be excluded

from the use of resources

Others can be excluded

from the use of resources

Use of resources by A does not

influence consumption by

others

Purely public goods

Resources under

Jointly usable resource pool

(e.g. national) sovereignty

Use of resources by A does

influence consumption by

others

Private goods

ad a-c)The values of competitively usable resources have to be determined

in separate valuation steps and be evaluated comparatively in cost-

benefit analyses (see Sect. 3.2.2). Their results differ particularly due

to the conflict between interests of private and social use. It is thedominance of private use interests in the market that frequently

Fig. 2: Classification of resources


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19

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 furtherintermediate 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 aeroplanedoes 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


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21

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 non-

use 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


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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


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23

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 annualgrowth 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.


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25

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


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26

pharmaceutical interest; Farnsworth and Soejarto (1985) have estimated

this to entail an economic loss of US $3.25 billion ($16203 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 non-

discovered 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


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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. forthe 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 intra-

species 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).


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Components used Evaluation method

applied

Estimated

value (US $)

Source

Plants Market analysis:estimations of

proceeds of sale

2,580,000 Farnsworth andSoejarto 1985

Plants Market analysis 474,000 Principe 1989

Trees Market analysis 7,500 McAllister 1991

Plants Evaluation of thenumber of lives saved

23,700,000 Principe 1989

Species from Cameroon Costs of renewingpatents

15-150 Ruitenbeek1989

Species from Costa Rica Market analysis,estimated licence fees

253 HarvardBusiness School

Plants of the rain forest Market analysis andevaluation of human

lives saved

585-1,050,000 Pearce andPuroshothaman

1992

Pharmaceutical bioprospecting for acommercially successful plant

product

Market analysis: netreturns on

bioprospecting

4.81 million Aylward 1993

Living organisms Market analysis:returns on purchase +

licence fees

52-46,000 Reid et al. 1993

2.3.2 Use value of species

In contrast to Sect. 2.3.1., the components of biological diversity dealt within 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.)

Table 1: Use values of genes and biochemicals


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29

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 nutritionin humans, and 20 species supply 90% of the world-wide demand (Myers

1989).

The quantity of renewable resources currently used and processed world-

wide 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 ofrenewable 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).


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Components of biodiversity

used

Evaluation

method applied

Estimated

value (US $)

Source

Wildlife watching value of elephants,Kenya

CVM; travel costmethod

25million/year

Brown and Henry 1989

Ivory exports before the export ban,Africa

35-35million/year

Barbier et al. 1990

Use of wild buffaloes, Zimbabwe 3.5-4.5/ha Child 1990

Export of non-coniferous woodproducts, entire tropics

11 billion/year Barbier et al. 1994

Harvest of wood fruits and latex,Peru

6330/ha Peters et al. 1989

Fish and firewood from wetlands,Nigeria

38-59/ha Barbier et al. 1991

Improvement of the survivalprobability of the Northern spottedowl

CRM 21/person andyear

Brown et al. 1994

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 non-

wood 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

Table 2: Use values of species


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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 arefundamental 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 naturalservices 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.


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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 afigure 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.


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Components used Evaluation method

applied

Estimated value

(US $)

Source

Nature tourism, Cameroon: 19/ha Ruitenbeek 1989Sustaining soil fertility byforests and inundationcontrol, Cameroon

Productivity change 8/ha and 23/ha Ruitenbeek 1989

Khao Yai Park, Thailand CVM, travel costmethod

80 million/year,400/ha/year

Kaosard et al.1994

Ecotourism, Costa Rica Travel cost method 1250/ha Tobias andMendelsohn 1991

Importance of wetlands forcrab production, ArabianSea

Production-functionapproach

Ellis and Fisher1987

Valuation of reserves,Madagascar

Production-functionapproach, CVM, travel

cost method

566,070-2,160,000 Munasinghe 1993;Kramer et al. 1993

Carbon storage by forests,Brazil

1300/ha/year Pearce 1990

Importance of mangroves

for agriculture, fishery,Indonesia

536 million Ruitenbeek 1992

Water retention by forests,USA

232-388/acre Bowes andKrutilla 1989

Forest in Peru, Rio Nanay Productivity method(comparisons of

income)

6300/ha for non-timber products

vs. 1000 for clear-cutting

Peters et al. 1989

Primeval forest, Costa Rica TEV 102-214/ha/year,

1278-2871/ha,133-278

million/year, 1.7-3.7 billion

Castro 1994

Table 3: Use values of ecosystems


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3 Recommendations

3.1 Valuation methods and techniquesBecause 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 biodiversity-

related costs and benefits. Each of them, however, is useful in the correct


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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 changesof 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 production-

function 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.


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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 processesthat 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


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Recommendations

39

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-use-

values,

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


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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 instrumentand 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):


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1. Sample type and size - probability sampling is essential. The choice of samplespecific 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 (contingentvaluation) survey results unreliable.

3. Personal interview - it is improbable that reliable value estimates can be elicitedwith 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 differfrom 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 thepopulation 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 areordinarily 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 theresponses are ambiguous, the option that tends to underestimate the willingness-to-

pay is generally preferred. A conservative design increases the reliability of the


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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 andtransportation 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 factthat 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 relevanttechniques are as follows:


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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 individualsreveal 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

the economic valuation of biological diversity

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