Humanity’s complex challenge of valuing biodiversity

This is the second article in a two-part series discussing how economics interacts with intergenerational equity and biodiversity. The first article was a discussion about intergenerational equity and economics. This time, the focus is on the interaction between economics and biodiversity.  

Throughout human history, rich biodiversity has been an invaluable resource supporting human survival and, in later periods, fundamental to economic development. Those who had access to animal species suitable for domestication tended to become herders; those with access to fish tended to become fishermen; and those with access to crops tended to become farmers. The differential access to biological materials has helped shape human development and culture.  

In the contemporary period, the economy is far more complex, but biodiversity still plays a fundamental role. Simon and Ian had a conversation about biodiversity and the modern economy. They discussed biodiversity’s contribution to economic growth and stability, challenges in valuing biodiversity, and how policymakers can consider biodiversity in economic policy.

Simon: Framing the answer to this question is difficult, as biodiversity is truly integrated throughout the economy. A quick internet search will produce countless articles on biodiversity’s contribution to the economy, from ecosystem services to market opportunities.  

A concrete example of this contribution is a mould infestation that was the origin point of a USD$46.5 billion industry that has saved countless lives. This example refers to, of course, Alexander Fleming and his accidental discovery of penicillin. One contaminated petri dish, and the work of some brilliant scientists, led to the creation of the antibiotics industry. The medical and pharmaceutical industries as we know them would not exist without the biodiversity present in Fleming’s lab.

Ian: Answering the question is extremely difficult, Simon. But we have some numbers we can use: primary industries in Aotearoa New Zealand are forecast to earn an annual export revenue of NZD $54.6 billion in 2024. These primary industries rely on functioning soils, pollinators, water quality, and healthy ecosystems. Up to two million hectares of biodiversity-rich land is cared for and maintained by primary industry.  

International tourism expenditure increased to $10.8 billion in March 2023. Tourists don’t come to Aotearoa New Zealand to see a poorly managed waste site, a dead dolphin, or degraded native forests. That would keep them away. The cornerstone of these industries is sustainability, which is the thriving biodiversity in Aotearoa New Zealand.

Looking ahead, evidence shows protecting nature could save Aotearoa New Zealand more than $270 billion over the next 50 years. This benefit is driven both by protecting from impacts associated with nature decline (avoided costs of inaction) and through the realisation of additional opportunities provided through a thriving natural environment. By investing in biodiversity, we invest in our ongoing economic productivity and our children’s common future with nature. Two birds with one stone.  

Simon: One of the key challenges in valuing biodiversity is the sheer range of life on the planet. How could you even begin to quantify monetary values for such a wide array of life? Is value only derived from human use? Does all the grass in New Zealand have a greater value than all the fungi? What about a single drop of ocean water containing upwards of a million microorganisms with little obvious value to us, but is of immense value to the aquatic life that depends on them? How do you value this drop? Valuing individual biodiversity is easier. Farmers may pay a premium to add genetic diversity to their herd or for certain genetic traits.

Well, one solution is data analysis. Economists love data and the insights that can be gained from analysing and understanding large datasets. More data on biodiversity and ecosystems would allow economists to understand the scale and complexity of biodiversity, explore interactions and relations, and help create credible valuations.  

Ian: Agreed. Data is key, and sometimes it can be as simple as measuring the right things. One of the most important things an economist can do is be multidisciplinary. Especially when we estimate the benefits of investment. I don’t expect to see three geckos and a mangrove estuary in a business’s profit and loss ledger. Neither do I expect to see $400 as the main value of a thriving Kiwi population in a biodiversity business case. When dealing with ecology and investment, economists should also draw on measurable science numbers like reducing endangerment or increasing representation to make better decisions. We apply the finance numbers to the lowest-cost options with the highest biodiversity benefits.  

We need to account for the full value spectrum of biodiversity, including intrinsic values and the value of nature over and above economic value. We all know about, and can value, commercial or market values. But we need to get better at using indirect use values, for example, the air that we breathe. What is the cost of having to generate oxygen as a substitute for nature? Is it even possible or even desirable? Probably not, if you ask my kids. Planning without biodiversity numbers and values is like painting a house with a wet fish; it works, but it doesn’t work as well as a paintbrush. It also has a bad smell about it.   

Simon: The difficulty in incorporating biodiversity into economic policies is that nearly all economic policy is going to have direct and indirect impacts on biodiversity. Largely, this is a result of policy not taking a holistic view of impacts. Careful policy design that accounts for biodiversity is a challenge, but not unsurmountable; we already have many of the tools required.  

A Conservation Management Agreement (CMA) is an established, proven method to incorporate biodiversity outcomes into economic policy. At its core, a CMA is usually an agreement between landowners to protect the biodiversity on their land, often in return for financial benefits. A common, effective form of CMA use is to enter into a partnership with farmers, helping them increase the value of their business, on the condition of preserving the biodiversity on their land. If the biodiversity is lost, the business support will be voided and the financial benefits lost. The CMA is a relatively straightforward way to protect biodiversity that works within the current legal and societal structure.  

Ian: Landowners may be doing more heavy lifting in the environmental space than we give them credit for. If we take all their investment, plus the important public sector investment such as that from DoC, we can build a Biodiversity Investment Ratio (BIR). Introducing a BIR is an important ‘big picture’ progression for New Zealand economic policy. This is the ratio of core biodiversity spend to a nation’s gross national product.  

Core biodiversity spend has a proven correlation to biodiversity outcomes, sustainable development, and a nature-positive economy. If we get the ratio right, we get better at investing at an appropriate level. New Zealand needs big-picture thinking to operate its economy. The BIR is as critical as our national debt/debt-servicing-to-income ratio. This is because it is a fundamental component of sustainable development.  

Other nations have developed this ratio as an outcome of United Nations processes, such as BIOFIN Assessments. New Zealand must do the same if we are serious about sustainable development. It is critically valuable to economic policy for the same reason as the debt-to-income ratio. If you don’t know it, how can you manage it or even know what is going on? The consequence is unsustainable development, poor integration of biodiversity conservation into economic policy, and very inadequate decision-making. The massive opportunity offered by the BIR is to transition to a nature-positive economy.  

Simon: Interactions between biodiversity and the economy are multifaceted and complex issues that present many challenges to policymakers. Recognition of the contributions biodiversity makes to economic growth and stability is a good start. Economic policy can do the right thing for biodiversity if it is properly considered. It is likely that real progress will be made when a more data-driven and multidisciplinary approach that takes into account a holistic view of impacts is taken when designing economic policy.