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Environmental economics

Support to sectoral policies:  Biodiversity

See also the Economics of biodiversity pages on DG Environment's website

Exploring potential Demand for and Supply of Habitat Banking in the EU and appropriate design elements for a Habitat Banking Scheme (2013)

This study provides a critical assessment of the EU legislative framework for addressing the No Net Loss (NNL) of biodiversity and explores potential demand for and supply of habitat banking in the EU, and appropriate design elements for a habitat banking scheme. NNL is not explicitly stated in EU legislation but it is implicit in a number of Directives (Birds, Habitats, EIA and SEA Directives), while several EU laws also require compensation and remediation of damages to biodiversity (EIA, SEA and Environmental Liability Directive), which covers impacts to biodiversity from accidents). Moreover, several Member States have additional national or even regional provisions. Despite these provisions, there is no concrete and coherent framework for NNL in the EU. The new EU initiative on NNL will aim to cover the identified gaps. 

Demand for offsets under a NNL policy can be driven by land use changes, which in the EU account for 50,000 to 100,000 ha per annum, without taking account land changes and biodiversity loss due to natural disasters. Further loss of biodiversity and ecosystem services due to degradation, as well as impacts to global biodiversity from EU actors and actions could also be taken into account, increasing the above figures. To provide for this potential demand, the supply of grassland and wetland habitats for restoration, enhancement or re-creation is least constrained, while coastal, freshwater, forests and heathland habitats are slightly more limited.  Dunes and rocky habitats are the most difficult habitats to restore or replace and therefore provide limited opportunities for offsetting. Currently however, the largest constraint on supply is the availability and accessibility of land. Most available evidence in the EU suggests that the total costs of offsets are likely to range from between €30,000 and €100,000 per hectare, but could be higher than this in some circumstances. Offset costs represent only a small proportion of total development costs. Globally, the annual market for biodiversity offsets has been estimated to be worth at least $2.4 billion and possibly over $4.0 billion.

Biodiversity offsets have the potential to compensate for biodiversity loss, but a number of technical, ecological, geographical and economic constraints mean that this is not possible or appropriate in all circumstances. In cases of particularly vulnerable and/or irreplaceable biodiversity, ‘like for like’ offsets should be preferred. Where the biodiversity affected is not vulnerable or irreplaceable, ‘trading up’ to conserve higher conservation priority biodiversity may be the best outcome. For habitat banking and offsetting to be successful, there is a need for a strong regulatory framework to create demand, establish basic standards, and drive the process. The study explores how roles and responsibilities should be defined, including robust mechanisms for monitoring, enforcement, compliance and safeguarding against potential risks and uncertainties to ensure that benefits from offsets are sustained in the long term.

Innovative Use of Financial Instruments and Approaches to Enhance Private Sector Finance of Biodiversity (2012)

This study explored ways that innovative financing through new instruments and approaches can be used to finance biodiversity and ecosystem services, responding to the needs of the new EU Biodiversity Strategy to 2020. In addition to the EU co-financing, there is still room to engage more actively the private sector (businesses and financial institutions, the utilities sector and municipalities) and to put forward proposals for bankable projects. The study looked to various types of biodiversity projects with a bankable potential, and analyse the project promoters and beneficiaries that can bring forward these projects. The study examined in detail the following 3 intervention areas: Market-based Instruments & Offsets, Establishing Green Infrastructure and Supporting Carbon Credit Actions, while also it looked to a lesser extent the provision of support for biodiversity-friendly businesses. Furthermore it explored 2 cross-cutting issues that are of concern for all type of biodiversity related investments, i.e. how to address investment and policy risks and how to collect and provide market information about biodiversity. Through interviews with market specialists and investors, as well as key stakeholders (EIB and the financial sector) they explored the potential for investment into the respective areas examined and made recommendations on Private finance opportunities in relation to biodiversity and on the European interventions that can bring these about. 

Design, implementation and cost elements of Green Infrastructure projects (2011)

Green Infrastructure (GI) is a valuable tool for addressing ecological preservation and environmental protection as well as societal needs in a complementary fashion. This study developed a definition of Green Infrastructure projects based on terminology and working definitions used in different EU member states and identified a set of European green infrastructure projects and initiatives with a view to operationalise the Green Infrastructure concept and create a typology of GI projects. Thereafter the study analyses green infrastructure projects carried out by EU funds or as national initiatives and provides elements of their design and process used to implement them on the ground, estimates of their cost and benefits, and of their potential to respond to multiple objectives (biodiversity management and enhancement, increasing resilience to climate change, protection against natural disasters, etc). Furthermore, the study reports on the potential of current EU policy(-ies) and available funding instruments to promote green infrastructure projects and provide for the capacities and planning needed to develop and implement them on the ground and provides recommendations for EU, national and regional/local policy makers to take them up when designing Green Infrastructures policies and projects.

Assessment of the Natura 2000 co-financing arrangements of the EU financing instrument (2011)

This study confirms that, despite the increased effort and some good examples on financing Natura 2000 from the Community funds, the existing EU co-financing framework is not fully effective. The problem arises from both gaps in the framework and significant constraints that make it difficult to use to its full potential. In particular, current funding is less than is needed; capacity building is needed to guarantee the most best use of the EU co-financing framework; and, there is scope to complement existing funding streams with innovative thinking and new funding mechanisms.

Costing the environmental needs related to rural land management (2011)

The study estimates the costs of undertaking environmentally beneficial land management on agricultural and forested land in 2020. A large proportion of the costs associated with environmentally beneficial management on farmland and woodland are associated with arable land. The study highlights, however, that it cannot be assumed that simply having sufficient budgetary resources available will lead to the environmental outcomes being achieved. Policy design and effective implementation are critical factors that will influence the cost of achieving the desired results. In many cases achieving changes in management practices also requires a change in attitude and approach to a farm’s core business activities.

Taking into account opportunity costs when assessing costs of biodiversity and ecosystem action (2011)

Addressing the challenge of halting the loss of biodiversity and the preservation of ecosystem services is key for European policy, thus providing adequate financial support for the successful protection of biodiversity and ecosystems services is crucial. Within Europe, however, there is limited data on their conservation costs, thus making the implicit costs of conservation explicit via the identification and inclusion of opportunity costs in estimates could help address this incoherence. Opportunity costs reflects the foregone economic benefits from alternative activities or uses of a resource on a particular site. This study is a first attempt to provide a comprehensive overview on the total costs for biodiversity and ecosystem actions in the European Union and makes a significant contribution to the understanding of opportunity costs within the context of biodiversity policies and actions established in various EU member states. The estimates produced demonstrate the broad scale of biodiversity costs but also the significance of opportunity costs within these, acknowledging the high variance between Member States and even regions. Given the wide discrepancies in costs categories present in existing estimates of biodiversity action costs, the study developed a general cost typology to enable the comparison of results from different cost assessments. The typology aims to deliver a clear categorisation of costs that could also serve as a model for an even broader application of the method beyond the project scope, and to allow for the integration of all relevant data from existing cost estimates. The combined cost of these different policy actions is roughly estimated at €10.6 billion per year. Within this, opportunity costs amount to approximately €8.4 billion.

The Social Dimension of Biodiversity Policy (2011)

This report investigates the social aspects of biodiversity conservation, in particular the links between biodiversity and employment, and the value of biodiversity for vulnerable rural people. The study maps the linkages between biodiversity, ecosystem services and employment and uses vulnerability-related indicators coupled with spatial mapping of biodiversity and ecosystem values for the EU to determine whether the poor and vulnerable rural communities are more strongly dependent on the provision of ecosystem services. A number of global case studies highlight a range of issues experienced by the rural poor in developing nations dependent on ecosystem services.

Study on how businesses take into account their risks related to biodiversity and ecosystem services: state of play and way forward (2010)

The study examines what drives companies to address their biodiversity and ecosystem services risks and identifies the measures taken to tackle those risks and the main barriers for taking actions. The report presents case studies of sectors selected for their dependency and impact on biodiversity and ecosystem services (food and drink production, retail, tourism, bio-tech), their special link to consumers (retail) and to the whole economy (the financial sector). The study shows that, although businesses demonstrate concerns for sustainability, they are much less aware of biodiversity and ecosystem services as an isolated issue. Large companies are most advanced in addressing these risks, while SMEs seem to lack resources, awareness, knowledge and influence (e.g. against sub-suppliers) to do so. Sectors most dependent on biodiversity and ecosystem services (e.g. food production, pulp & paper, tourism) appear to be the most advanced in addressing their risks; securing future supply seems their main driver to do so and there is a growing trend towards direct procurement, ensuring a better control of upstream suppliers. For sectors closest to consumers (e.g. retail sector), the demand for labels/certified products and the promotion of corporate image are seen as the most important drivers.

Study on the evolution of some deforestation drivers and their potential impacts on the costs of avoiding deforestation scheme (2010)

The study describes the drivers for deforestation in the main regions in which it happens, namely Latin America and the Caribbean, Sub-Saharan Africa and Pacific Asia. On a global scale, the most important identified direct drivers for deforestation are agricultural expansion for food and energy production, followed by infrastructure development and wood extraction. The study estimates, using GLOBIOM and G4M models, the effects of changes in drivers on deforestation levels. Six shock areas are identified for quantitative modelling analysis: increased demand for biofuels, wood, meat, infrastructure and for biodiversity schemes. Some shock areas are analyzed on a global scale as well as for each of the 3 hotspots regions while the policy shocks related to infrastructure development and biodiversity protection are modelled both on a global scale and at a geographic-explicit level, namely the Congo Basin. The scenarios chosen do not necessarily seek full realism since the objective is rather to understand which kind of drivers is more important than other. Consequently, the technical details of the study are not as robust as they can be in more specific analysis fully dedicated to a specific driver, since some compromises in the modelling had to be made.

The study concludes that the two policy shocks leading to the worst consequences in terms of additional deforestation are an increase in consumption of 1st generation biodiesel and an increase in meat consumption. The Latin America and Caribbean region is predicted to experience, across all scenarios, the highest levels of deforestation worldwide between 2020 and 2030. By analyzing associated annual marginal costs of avoiding certain degrees of deforestation under the various shock scenarios, the modelling exercise also shows that world demand has significant implications in terms of financing a REDD mechanism: with more ambitious avoided deforestation targets, the need for financing not only becomes higher but also less predictable as the impacts of possible shocks become more influential.

The use of market-based instruments for biodiversity protection - the case of Habitat Banking (2010)

This study investigates the scope for using market-based instruments (MBI) and more specifically Habitat Banking to protect biodiversity at Community level – and the possible conditions and limitations for their use. The use of MBI is gaining acceptance as cost-effective , with Habitat Banking a potentially efficient MBI to get business to compensate for unavoidable harm from development projects. Habitat Banking can also contribute towards meeting the post 2010 EU biodiversity target and enhance the provision of ecosystem services.

The final study results indicate that although Habitat banking can be done voluntarily, a viable market of biodiversity credits will only be created by regulation that defines equivalence between those debits and credits, and enforces compensation obligations on those creating debits by developing, polluting or damaging, thereby ensuring sufficient levels of credit demand. The comparison of Habitat banking with other MBI for biodiversity, suggests that it can offer a useful additional instrument to help biodiversity policy move towards a "no net loss" objective, which remains part of the post 2010 biodiversity target and will feature in the future policies. Moreover, the creation of market incentives can stimulate private investment in biodiversity conservation, and facilitate economies of scale and efficiencies in delivering biodiversity offsets. The study also identifies a number of other opportunities but also risks associated with delivering biodiversity conservation through Habitat Banking, while it describes some possibilities for establishing an efficient system of Habitat Banking that can work in conformity with the existing EU legislative framework.

Study on understanding the causes of biodiversity loss and the policy assessment framework (2009)

This study examines the causes of biodiversity loss. These tend to be an interaction of socio-economic forces and, what turns out to be, poor decision-making and policy choices for a range of ecosystem contexts. Most of the pressure on biodiversity stems from human-induced disturbance to ecosystems with underlying causes of economic and market failures. Case studies on marine, coastal, wetlands and forest ecosystems provide real life examples.

Further Developing Assumptions on Monetary Valuation of Biodiversity Cost of Policy Inaction (2009)

This study updates the figures used in the Cost of Policy Inaction study on halting biodiversity loss also available on this site. Firstly, it involves further development of reference values and sensitivity analysis of benefit transfer focussing on: (a) Geographic benefits transfer; (b) Time benefits transfer; (c) Benefits transfer across land-uses within a biome (eg from natural areas to other uses); and (d) Benefits transfer across biomes. Secondly, it examines in more detail the scope for substitution effects (from services generated by similar ecosystems or by man-made capital) to affect the values used in the COPI study. For example, limits of substitution may make the costs exponential or hit a critical threshold. Conversely there may be full substitution in the short term where there are no service losses.

Scenarios and models for exploring future trends of biodiversity and ecosystem services changes (2009)

This study addressed the use of scenarios, models and other quantitative tools for exploring future trends in biodiversity and their impacts on ecosystem services. The study reviewed the different scenarios and models used to explore future trends in biodiversity loss and ecosystem change and their associated impacts on ecosystem services. It summarised the key findings from recent global and regional assessments, assessed the limitations of existing models with respect to their suitability for producing robust projections of changes in biodiversity and ecosystem services, instigated a peer-review of the study’s’ initial conclusions during a expert workshop and finally it proposed a set of options for suitable models and scenarios to be used in future studies such as for 'The Economics of Ecosystems & Biodiversity (TEEB)' and other assessments. The results of this study are of general use for policy analysis and reflection on biodiversity and ecosystem services issues.

Cost of policy inaction  - The case of not meeting the 2010 biodiversity target (2008)

The report presents the results of an analysis of the costs of the loss of biodiversity and ecosystem services from forests and other ecosystems. In the first years of the period 2000 to 2050, it is estimated that we are losing forest ecosystem services with a value equivalent to around €28 billion each year, and this value increases over the period to 2050. Losses of our natural capital stock are felt not only in the year of the loss, as the reduction in the service flow continues over time. Monetised estimates are provided along with modelled estimates of the quantified loss. However, the monetary estimate is partial, excluding some ecosystem services, some negative feedback effects of these losses on GDP growth are not fully accounted for, and the values do not account for non-linearities and threshold effects in ecosystem functioning. These first results suggest that the socio-economic impacts of biodiversity loss can be substantial.

The Use of Market Incentives to Preserve Biodiversity (2006)

This study examines 204 examples of market based instruments currently being used to preserve biodiversity including: taxes, fees and charges; subsidies; tradable permits; eco-labelling; financial mechanisms; and liability and compensation schemes. Overall, the evidences is that well-designed and credibly implemented instruments that are tailored to local needs are able to deliver biodiversity objectives cost-efficiently. Many of the examples of market based instruments show that they work best not as a substitute to regulatory approaches, but complementary to them. Certainly, there seems to be wider scope for their application and a number of recommendations are made in how to use them most efficiently.

Value of Biodiversity (2006)

This study brings together EU examples where biodiversity loss or the modification/loss of habitats has led to the loss/degradation of ecosystem services, and consequently to economic costs and/or social losses. The report focuses on ten of these examples, which are presented as case studies. All ten case studies provided evidence that the loss of biodiversity and ecosystem services results in socio-economic costs, including financial losses Regarding the underlying reasons behind the loss, unsustainable resource management, including overexploitation of aquatic resources and agricultural intensification, combined with sectorally-oriented development initiatives are the principle drivers.