BIOECON

BIOECON News

Issue no. 9 - Autumn 2013

BIOECON 2014

SAVE THE DATE >> BIOECON 16: Kings College Cambridge, 21-23 September 2014
BIOECON XVI will be held again in Cambridge, UK in 2014. The organisers will be Ben Groom (LSE) and Andreas Kontoleon (UCAM), with assistance from Silvia Bertolin (FEEM) and Kristine Kjeldsen (IHEID). A Call for Papers will issue in Autumn 2013, and the deadline for submissions will be in the Spring 2014. Please put the date in your diaries!

BIOECON XV: Conference outputs

by Ben Groom, London School of Economics
and Derek Eaton, CIES, Graduate Institute of International and Development Studies

The 15th Annual BIOECON Conference on Conservation and Development: Exploring Conflicts and Challenges was held on 19-20 of September 2013 at Kings College Cambridge, England. This year’s meeting invited attention to the relationship between biodiversity and land use management, population and food security. The keynote speeches were held by Prof Thomas Sterner (University of Gothenburg, Sweden), and Prof Robert Mendelsohn (Yale University, USA). In addition, two policy panels focused on the themes of "Biodiversity Offsets: Problems, Policies, Opportunities?" and “Food Security and Biodiversity: Conflicts, Challenges, Policies”.

Below a report of the plenary sessions and the policy panels is available.

Plenary Invited Sessions

Prof. Thomas Sterner and Prof. Robert Mendelsohn gave contrasting and thought provoking keynote speeches in this year’s BIOECON plenary sessions.

In a talk entitled “Red-Lists and Hotspots”, Prof. Sterner asked the questions, “what species do we want to save?” and “is biodiversity good for growth. The talk focussed on the importance of developing robust measures of biodiversity for policy purposes given that the notion of biodiversity among economists, policy makers and elsewhere, is a very “fuzzy” one. Typically biodiversity is related to ecosystem function, conservation of rare species, or even more fuzzy concepts like Mother Nature. Speaking about rare and endangered species, Prof. Sterner made the point that many of the truly rare species are so-called singletons or doubletons, of which respectively only 1 or 2 have been observed in the wild. These are typically marine species, which are not represented in important metrics of conservation such as the IUCN Red-List. The reason for this is that such rare species are unfamiliar and their role in ecosystem function is little understood. This lacuna becomes even more important, he argued, since what evidence that is about the role of rare species in the function of ecosystems suggests that it is limited, compared to the loss of more common species. Furthermore, rare species to not compensate the loss of common species, but rather the reverse. Rare species are typically the first to disappear as a consequence of habitat changes, and are often useful indicators.

While the focus on single species and rare lists may not always be a useful approach to conservation, Prof. Sterner made the powerful point that genetic diversity is important, even within species, and that from the perspective of ecosystem function the loss of dominant species (e.g. cod, marine mammals and pollinating insects) may be far more important than the loss from rare species. Using examples from fisheries, it was argued that what economists view as a single entity fish stock is typically populated by several functional groups within this stock. This has two implications, the first being that reduction of the fish stock may well be irreversible if particular groups are overfished sequentially, and second that the impact of moratoria may well be limited, with only certain groups recovering thereafter. The modelling of fisheries should pay more attention to the genetic diversity within dominant species for this reason.
Prof. Sterner concluded that the research tends to show that a focus on ecosystem function should guide policy on species conservation, not necessarily the rare species found on red-lists. Concentration on threatened dominant species and genetic variation is the way forward.

Prof. Mendelsohn, focussed on the question of the influence of climate change on biodiversity and ecosystem services in his lecture entitled “The Economics of Climate Change and Conservation”. His talk pieced together the recent work on climate dynamics and temperature change in order to make the point that there is a strong possibility that, on balance, limited warming would increase the productivity of ecosystem services in the same way it appeared to do in similar episodes over the past 800,000 years. Prof. Mendelsohn suggested that there is a general tendency to prejudge change as a negative development.

One of the main messages of his talk was to lay down a challenge to experts working on the valuation of ecosystem services to provide an understanding of the economic impact of global warming and a shifting of biomes. It is likely that an increase in forested biomes and net primary productivity will lead to an increase in the supply of marketed products. There may also be an increase in non-marketed values as the coverage of biomes offering higher non-marketed values, such as forests, increases, relative to those offering lower non-marketed values. While there are studies of marketed values in forestry that show increases in productivity, there are few studies of the non-marketed aspects of ecosystem services. The policy message coming from the keynote was that we should plan to adapt and manage the changing ecosystems as climate change inevitably progresses. The one caveat to this story of adaptation was that, by the same logic as the previous example, changes in temperature beyond 4 degrees may have catastrophic effects.

The talk stimulated a lively set of questions, which unfortunately could not be discussed in great depth due to time limitations. One chief observation was that the studies underpinning the conjecture about positive effects on the productivity of ecosystems were looking at a completely different timescale to the current predictions of temperature change due to Global Warming: tens of thousands of years compared to hundreds. It was therefore questioned whether ecosystems could adapt as quickly as they had done in the past. Similarly, it was noted that we are presently in uncharted territory in terms or carbon dioxide concentrations.

In both cases, the keynote speeches were well received and fulfilled their aim of stimulating lively debate and pointing to new research avenues and policy questions.

Plenary Policy Panel on "Food Security and Biodiversity: Challenges, Conflicts and Options"

At the 15th Annual BIOECON Conference, an expert panel on “Food Security and Biodiversity: Challenges, Conflicts and Options” was organized by UNEP and the Centre for International Environmental Studies at the Graduate Institute of International and Development Studies, Geneva, The Panel was moderated by Pushpam Kumar of UNEP and comprised of Prem Bindraban (Virtual Fertilizer Research Centre), Peter Hazell (Board member, Bioversity International), Ben Phalan (University of Cambridge) and M.S. Swaminathan (Swaminathan Foundation).

Dr. Kumar opened with an explanation of the context: how to ensure food security, in terms of access, utilization and sustainability, in a world with population set to exceed 9 billion by 2050. The expansion of agriculture needs to be contained to protect biodiversity but a UNEP report has indicated that more than 20 percent of existing agricultural lands have declining productivity due to degradation.

The Panel was fortunate to have received a recorded video intervention by Prof. M.S. Swaminathan who emphasized the need for public support to ensure both the availability of food and also to provide incentives for the conservation of agricultural biodiversity, with specific reference to the recent National Food Security Bill in India and also the Genome Saviour Award of the Saminathan Research Foundation. Dr. Bindraban discussed the need to increase the productivity of agricultural, while reducing environmental impacts. A key priority in this regard is the development of transformational and out-of-box innovations in the use of fertilizer, which is currently undersupplied in many parts of the developing world, but overused in advanced economies.

Dr. Hazell concentrated on the heterogeneity of agricultural systems, distinguishing most simply between high potential areas, which can produce surpluses, and lagging regions, with lower potential but accounting for 60 percent of agricultural land and a large number of smallholder farmers. There are tradeoffs involved between food production and biodiversity in both regions. In lagging regions, the land frontier continues to expand, resulting in loss of biodiversity. This process is driven in part by a combination of poverty and population growth, leading to land degradation.

Dr Phalan summarized the research agenda on “land-sparing vs land-sharing”. Studies, though still limited in extent, are indicating that land sparing, which concentrates on maintaining biodiversity outside of agriculture, may be a better strategy to both increase food production and maintain biodiversity. Finally, Prof. Kohlin focused on the challenges in lagging regions, illustrating the challenges in Ethiopia. In the past, strategies to increase productivity have concentrated on increasing the availability of inputs, but economic analysis has highlighted that other policies are also necessary, including for example tenure reform, safety net programs, credit facilities and conservation incentives. He highlighted the need for extensive and ambitious collection of panel data to undertake studies, including the valuation of ecosystem services, in order to provide guidance to policy.

The presentation and discussions will be summarized in a policy brief to be published by UNEP.

Plenary Policy Panel on "Biodiversity Offsets: Solution or Problem?"

The panel was chaired by Stuart Whitten (CSIRO) who commenced the session with a presentation looking at best practice and the practical problems that beset biodiversity offsets in various contexts. The set the tone for a lively discussion among the panellists and between the panel and the audience.

The panel represented legal and economic expertise from academia, international organisations and local (UK) biodiversity offset providers. Respectively Pr. Jim Salzman from Duke University, Pr. Thomas Sterner from Gothenburg University, Katia Karousakis from the OECD and Pr. David Hall from the Environment Bank an offset provider.

A biodiversity offset scheme (BDO) allows biodiversity or habitat harming development to go ahead provided that the damage to biodiversity is offset by increases in biodiversity elsewhere. The idea is that cost effectiveness gains can be made when economic activities, e.g. infrastructure development, agricultural expansion, manufacturing and housing, are allowed flexibility in the requirement that habitat or land uses remain unchanged at the point of development. BDOs are not a stand-alone measure in the sense that they are universally applied within the mitigation hierarchy: the requirement that damages and adverse effects of development are avoided and minimised, before offsetting is allowed. Based on the Polluter Pays Principle, the presence of BDOs can provide incentives to change the nature (location and design) of developments towards less destructive activities.

The panel discussion raised several key determinants of when a BDO is likely to be appropriate, effective and efficient, compared to the range of other regulatory instruments that could be deployed (e.g. standards and fines, taxes and subsidies). The first is the issue of substitutability. Clearly, where development converts unique habitats then it will be impossible to find a substitute site to offset these losses. A related issue is comparability. Even when it can be argued that biodiversity loss can in principle be offset by expansion elsewhere, a crucial question is whether or not a comparable site can be found? Central to this is the issue of the measurement of biodiversity and the overall metric or currency that can be used to determine the comparability of different habitats, and evaluate the performance of the offset. Unlike other environmental trading schemes (sulphur, carbon etc.), biodiversity and habitat do not have the same qualities of relatively straightforward fungibility typically associated with market mechanisms.

Another issue is additionality. Would a site selected to offset a development have been conserved in any event, even in the absence of the offsetting scheme? And if so, what is the gain from improved management? Permanence was also raised as a crucial issue. With regard to the market itself, the panel raised the point that the thickness of markets, their competitiveness and the presence of transactions costs will determine whether the efficiency gains that justify market instruments are present or not.

The panel covered these issues in some depth. Some of the conclusions included: 1) BDOs have the potential to increase biodiversity, habitat and ecosystem services more cost-effectively than command-and-control instruments such as protected areas and land restrictions; 2) Implementation of BDOs require a position to be taken on the substitutability of biodiversity and habitat, strong sustainability and the issue of ‘critical’ natural capital. A tiered approach, defining different categories of habitat and biodiversity is one way to embody these concerns; 3) While similar in principle to tradable emissions permit systems, BDOs do not have the same level of fungibility. Finding ‘like for like’ habitats can be difficult, and non-fungibility has spatial and temporal dimensions; and, 4) Transaction costs may be particularly important given the fungibility issues described above.

Guest article
Procurement auctions for nature conservation: a laboratory experiment

by Justin Dijk¹, Daan van Soest², and Erik Ansink¹,³

¹ Institute for Environmental Studies (IVM), VU University Amsterdam
² Department of Economics and TSC, Tilburg University
³ Department of Spatial Economics, VU University Amsterdam

Procurement auctions are used to increase the private provision of environmental goods and services (cf. Ferraro 2008). Typically, these auctions are discriminatory price (or “get-paid-as-asked”) auctions that allow governments to contract a specific amount of environmental goods or services at lower expense than, for example, uniform payments. However, the get-paid-as-asked auction quickly loses its efficiency when it is repeated (cf. Stoneham et al. 2003, Schilizzi and Latacz-Lohmann 2007) – one of the main reasons being that repetition facilitates collusion among sellers. In contrast, behavioral economics tells us that repetition may increase efficiency because it attenuates the endowment effect. As is well documented by now, the endowment effect is the phenomenon that people tend to attach higher values to goods when they own them (cf. Kahneman et al. 1991). And with repetition, this “ownership premium” tends to fall as agents discover that no longer possessing the item is not as painful as anticipated – experience increasing the likelihood of trades taking place (cf. List 2003). So, if strategic behavior dominates in the get-paid-as-asked auction, this suggests that the procurement of long-term conservation contracts (or even perpetual contracts) is most efficient. And if the endowment effect dominates, these auctions might be more efficient than typically suggested, and thus allow policy makers to resort to more frequent procurement of (shorter term) conservation contracts.

Now, as compared to standard “pay-as-bid” auctions, the large set of possible equilibria that characterize (multi-unit) procurement auctions makes the analytical comparison of optimal bidding strategies intractable (cf. Hailu and Thoyer 2006). Hence, there is a strong case for using either agent-based modeling or experimental analysis to understand bidder behavior in such auctions. And since we hypothesize that the endowment effect is one of the drivers of bidder behavior in get-paid-as-asked auctions, experimental analysis is the most suitable approach here.

In the 1950s, Vernon Smith was one of the first to suggest that we can test economic theory using laboratory experiments. Obviously, the biggest advantage of his experiments was that he needed only one major assumption to identify a treatment effect – subjects needed to be randomly assigned into treatment and control. This was at a time that econometric methods such as instrumental variables regression were not as common as they are now. But even at present, other empirical methods typically require more and oftentimes debatable assumptions to isolate the treated from the control group, while the randomization assumption of the experimental method is easily verified.

Two of the most important criticisms on the experimental method remain (cf. Levitt and List 2007). The first is that the results from the lab contain reference-dependent preferences (e.g. the role of the player in the experiment), and second, that, in contrast to the real world, the lab puts far too much emphasis on the process by which decisions and allocations are determined (e.g. through the experimental instructions that are provided). The latter is perhaps the main reason why researchers such as John List of the University of Chicago advocate the use of field experiments, which are often considered the best of both worlds: they use the randomization into treatments of the experimental method, but in a real-world setting. The reference-dependent preferences argument clearly is a reason for concern in experimental studies that try to design methods to elicit true valuation (see List and Price 2013). However, the fact that valuations differ between buyer and seller roles is precisely why we employ the experimental method in the present paper – we study the dynamics of bidding behavior in order to obtain an efficient design for procurement auctions, whether bids are equal to true valuation or not.

In our lab experiment, we endowed students with mugs, and let them submit bids in a discriminatory 4th price auction (with groups of 7 bidders). We then ran two additional treatments to isolate the strategic behavior from the endowment effect. Our results show that average bids in the discriminatory price auction tend to fall with repetition, albeit more so in the early rounds of auctioning. In particular, we find that the attenuation of the endowment effect dominates any increase in collusion – over the ten rounds that the auctions in the experiment lasted, but also in the “out of sample” predictions derived on the basis of various regression models.

Our results suggest that implementing repeated procurement auctions might prove to be less costly than previously suggested. This insight is especially relevant for nature conservation auctions, where auctioning off permanent nature conservation contracts in all regions of a country is typically prohibitively expensive. We believe that our results using student subjects have implications beyond the lab – especially in those instances where the endowment effect is expected to play a role. In that respect, it remains an open question whether the ownership premium farmers attach to their land is larger or smaller than the premium students attach to a coffee mug they just received. Our experimental methodology offers just a first step to determine whether repetition in nature conservation auctions increases or decreases the efficiency of the auction mechanism, but the results can help build confidence about the expected costliness of increasing/decreasing the frequency of auctioning in the real world and are hopefully seen as a point of departure for future field experiments.

An early version of the paper “The Endowment Effect and Strategic Behavior in Repeated Procurement Auctions: Implications for Payment for Ecosystem Services Schemes” has been presented at the 15th annual BioECON conference and is available on this website.

Selected references:

Kahneman, D., J.L. Knetsch, and R.H. Thaler (1991), “Anomalies: The Endowment Effect, Loss Aversion, and Status Quo Bias”, Journal of Economic Perspectives 5(1): 193-206.
Levitt, S.D. and J.A. List (2007), “What Do Laboratory Experiments Measuring Social Preferences Reveal about the Real World?”, Journal of Economic Perspectives 21(2): 153-174.
List, J.A. (2003), “Does Market Experience Eliminate Anomalies”, Quarterly Journal of Economics 118(1): 41-71.
List, J.A. and M.K. Price (2013), “Using Field Experiments in Environmental and Resource Economics”, NBER Working Paper 19289, Issued August 2013.

Authors' contact: Justin Dijk (justin.dijk@vu.nl)

BIOECON News

PARTNERSHIP

Prof. Brooks Kaiser from the University of Southern Denmark - Department of Environmental and Business Economicsand Dr. David Simpson from US Environmental Protection Agency, have accepted to join the BIOECON Network.

Dr. Julia Touza moved to University of York, UK, where she is Lecturer at the Environment Department.

FROM UNEP

International Conference on Valuation and Accounting of Natural Capital for Green Economy (VANTAGE)

The International Conference on Valuation and Accounting of Natural Capital for Green Economy (VANTAGE) will be held on 3-4 December 2013 at the United Nations Environment Programme Headquarters in Nairobi, Kenya. To address the needs highlighted at Rio+20 and other international fora regarding valuation of natural capital and ecosystem services and its integration into the development policy, Ecosystem Services Economics (ESE) Unit of the Division of Environmental Policy Implementation (DEPI) of UNEP has initiated the work under the programme on “Valuation and Accounting of Natural Capital for Green Economy (VANTAGE)”, with specific focus on the following three aspect of 1) economic valuation, 2) accounting and 3) policy linkages. An overall objective of the Conference is to showcase successful efforts by African countries and various organizations in undertaking valuation and accounting of natural capital, which has contributed to promoting their transformations to the Green Economy, and to promote awareness and buy-in for future efforts in the related field. It is expected that the conference will enable senior Government officials and key decision-makers from developing countries in Africa and other parts of the world to share experience and latest knowledge from prominent experts in the related field. This event will be organized in close collaboration with African Union Commission, the World Bank and United Nations Statistics Division.

>> Conference programme
>> VANTAGE brochure

From FEEM

FEEM Sustainability Index 2013 Preview
Fabio Eboli

The new version of theFEEM Sustainability Index (FEEM SI) has been released on November 12th 2013 during a dedicated event: "Methodologies and indicators for green growth measurement", where distinguished speakers from the World Bank and from OECD will focus on the state of the art in quantitative measurement of sustainability, connecting theoretical background, practical assessment and policy perspectives.

FEEM SI is an aggregate index that aims to assess worldwide progress in well-being. It provides projections of sustainability performances at the national and macro-regional scale up to the year 2030. It is an aggregate indexcomprised of 23 indicators related to economic, social and environmental dimensions.

Read the article

From Brandenburg University of Technology

A workshop will be conducted on 13 February 2014 to present the software DSS-Ecopay. DSS-Ecopay is a decision support tool to design effective and cost-effective compensation payments to support conservation measures in grasslands. DSS-Ecopay has been applied to the German federal states of Saxony, Schleswig-Holstein and Brandenburg and regions in Flanders, Belgium. The software contains several hundred conservation measures (different types of mowing, grazing and combinations of mowing and grazing) as alternatives and is directed at the conservation of altogether over 35 bird species, butterfly species and habitat types. The software can be applied by users to other regions.

For more information about the software and the workshop see http://www.inf.fu-berlin.de/DSS-Ecopay/ecopay_main_eng.html.

From CIES

A new project entitled "Human Niche Program" has just started at CIES. This project is funded by the MAVA foundation to look at the role of population growth, food production, land use conversion and technological change - and how these various factors interact in generating impacts upon conservation. The approach taken has been the construction of an IAM for looking at how land use is used in determining population and welfare. Various policies are being considered within this framework, such as protected areas, ecological footprinting and taxes on land conversion. The main objective is to examine how development-oriented policies interact with land conversion and conservation - in making policy effective.

For more information contact Tim Swanson (tim.swanson@graduateinstitute.ch).

From NTNU

A new project entitled "Norwegian salmon aquaculture and marine forage fish" will start in 2014 at the Norwegian University of Science and Technology (NTNU).The goal of the project is to study and analyze certain key elements in the production- and demand structure of the Norwegian farmed salmon sector related to possible limitations of forage fish using bioeconomic multispecies modeling. The project is divided into two subprojects with main content as follows:
a) To describe the historical forage fish use in Norwegian farmed salmon production and analyze factors explaining variation over time and between different production units. The basic goal is asses the ratio of wild fisheries input to farmed salmon output, or the Fish Input/Fish Output (FI/FO) ratio, and statistically analyzes the evolvement of this FI/FO ratio.
b) To formulate and analyze a two level tropical bioeconomic model with forage fish species and an upper tropical level edible fish species. The forage fish species serves as food for the upper tropical level fish, it may be fished for feed to the aquaculture sector (farmed salmon), or it may possibly also be fished directly for food and consumption. This model analysis aims, among others, to evaluate the opportunity cost of forage fish under various assumptions about property rights and type of exploitation scheme in the forage fish sector, effects of technological change in the aquaculture sector (e.g., reduction in the FI/FO ratio) and how changing demand and profitability conditions in the aquaculture may be channeled through the ecological system.

For more information contact Anders Skonhoft (anders.skonhoft@svt.ntnu.no).

From NRERC

The Israeli Mediterranean shores and their economic valuation

Aquatic ecosystems provide a range of ecosystem services (ES) which are often impaired in cases such as oceanic acidification, fishing, and shore based development resulting in damage to the ecosystem. As a consequence, ecosystem resilience and stability are compromised, limiting its ability to cope with increasing natural and anthropogenic threats. Nevertheless, ES are critical to society. This new project will assess the economic value of the Israeli Mediterranean shores and use the economic valuation to provide policy makers with tools to examine possible outcomes of ES resource allocation.

For more information contact Shiri Shamir (sshamir@econ.haifa.ac.il).

About the BIOECON Newsletter

The BIOECON Newsletter is prepared with the contribution of all the BIOECON Partner Institutions. Please send comments and questions to: silvia.bertolin@feem.it.
The BIOECON Newsletter is a six-month publication. Next issue: Spring 2014

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