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The Biodiversity Bargain: Optimal Policy to Internalise Biodiversity Externalities Professor Tim Swanson Hoffmann Professor of Economics Graduate Institute - Geneva International Bargaining over Global Biodiversity I) The Unique Asymmetries in the Biodiversity Context II) The Biodiversity Bargaining Problem – Supply and Demand of Biodiversity What is the likely structure of the Global Biodiversity Bargain that should Result? Asymmetries in Global Biodiversity Most biodiversity exists in a relatively small part of the (developing) world Very small proportion of global biodiversity existing in the wealthier (developed) world Most Biodiversity Exists in Relatively Small Portion of World e.g. “Top Ten” Countries with Greatest Diversity Mammals Birds Reptiles Indonesia (515) Colombia (1721) Mexico (717) Mexico (449) Peru (1701) Australia (686) Brazil (428) Brazil (1622) Indonesia (600) Zaire (409) Indonesia (1519) India (383) China (394) Ecuador (1447) Colombia (383) Peru (361) Venezuela (1275) Ecuador (345) Colombia (359) Bolivia (1250) Peru (297) India (350) India (1200) Malaysia (294) Uganda (311) Malaysia (1200) Thailand (282) Tanzania (310) China (1195) Papua N.G. (282) Source: McNeely et. al. 1990. Conserving the World's Biological Diversity. International Union for the Conservation of Nature: Gland,Switzerland. Locus of Biodiversity The same outcome results from other ways of counting biodiversity e.g. Biodiversity “hotspots” (IUCN) Or, the “last great refugia” (Amazon, central Africa, Indonesian rainforests) (Myers) There is a great global asymmetry in the distribution of remaining biodiversity There is another asymmetry regarding the locus of biodiversity Table: GDP per capita in the Diversity-Rich States Country2003 GDP p.c. (PPP) Country2003 GNP p.c (PPP) Tanzania Uganda India Ecuador China Papua,NG Indonesia Bolivia Colombia Brazil World Average OECD Average $ $ $ $ $ 600 1400 2900 3300 5000 $ 8,200 $ 26,300 Source: The World Bank 2006. OECD 2006. $ $ $ $ $ 2200 3200 2400 7300 7600 Asymmetry between Suppliers and Demanders of Bio-diversity • Developing (lower income) Countries retain Biodiversity • Developed (higher income) Countries demand Biodiversity The Biodiversity Bargain must Occur in the Context of this Fundamental Asymmetry between hosts and non-hosts II) The Biodiversity Bargain Most Supply existing in Developing World – Why? Most Demand exists in Developed World What? Solution is to enable D=S Market Failures New Payment Mechanisms Force Generating this Fundamental Asymmetry in Biodiversity Conversion as path to development • Society selected small set of specialised species (compatible with scale, capital, technology) • Society diffused the specialised species with technology embedded within them • Society displaced existing species with the specialised, and converted natural habitats to specialised ones Society converged upon 4 great carbohydrate crops and small number of domesticated livestock Conversion- the diffusion of agriculture (wheat and barley) Force Generating the Global Decline in Biodiversity Conversion has been the process that generated the observed twin outcomes of “reduced biodiversity” and “increased wealth” - selection of different natural capital portfolio Declining marginal costs of conversions Global Conversion Process – the State-based Supply of Conversions Total Available Land Private (State) Perceived Costs of Conversion Global Lands Converted Externalities and Biodiversity Decline The individual making the conversion decision does not consider the uninternalised benefits from biodiversity (local: ecosystem services) (global: resilience, support to production system) Difference between PMC and SMC in the cost of the marginal conversion of natural habitat Sustainability and Global Costs of Conversions Clearly the human world cannot exist in absence of any biodiversity at all Considerations of sustainability imply that the cost of final conversions must go to infinity Sustainability - Limits to Global Decline in Biodiversity PMC- Individual and State Incurred Costs of NH Conversions SMCGlobally Incurred Costs of Biodiversity Decline PMC Global Lands Converted Total Available Land III) Demand for Halt to Conversions Demand is the force that should halt the conversion process 3 Types: 1) Declining demand for standard commodities 2) Demand for reduced competition on global markets 3) Demand for internalisation of externalities of biodiversity Demand for Diversity – Declining Terms of Trade for Standard Commodities Demand for goods and services from Converted Habitats Global Lands Converted Total Lands Available Globally Optimal Conversion Political Economy of Biodiversity Demand – Distinction between MR and AR The individual state receives AR (on Demand curve) However, the global market for commodities only achieves MR - the difference lies in the decline in prices accruing to the previously-converted (developed) countries Another cause of Demand for (uncompensated) Halt to Conversions Demand for Biodiversity (2) – The Political Economy of Biodiversity Demand for G&S from Converted Habitats Total Lands Available Marginal Revenue Optimum from N perspective Globally Optimal Conversion Global Lands Converted Demand for Biodiversity (3) – The internalisation of the global values of biodiversity PMC- State Incurred Costs of Conversions SMCGlobally Incurred Costs of Biodiversity Decline SVBD Global Lands Converted Total Available Land The WTP for Biodiversity Demand for biodiversity encompasses several objectives of N versus ongoing conversions • • • loss of natural habitat goods and services competition in global commodity markets potential collapse of system based on conversion and monoculture Several interacting objectives that could all be expressed in a market for non-conversion The Biodiversity Bargaining Problem • BBP • Incremental Costs Contracts as Extreme Point Solutions • “Rational Threats” Centralised Bargaining- The BD Bargaining Problem Centralised BargainingFundamental Problem Simply a restatement of the problems: 1) How does the bargaining surplus get distributed between N and S? 2) What is the price to be paid to S for nonconversion? 3) How is the price paid by N determined and implemented? Need for Mechanism to set these prices and determine distribution of surplus BBP • “Incremental Cost Contract” offers the provider state with any additional or incremental costs incurred in making the choice to provide the global public good Additional costs are not surplus-based but based on the “participation constraint” i.e. the minimum required for participation BBP • Moving “conflict points” through unilateral actions is capable of shifting the frontier UN Bargaining frontier 1 U ' N U Na1 U a3 U 1a Bargaining frontier 2 U Na 2 U 2a U Sa1 U Sa 2 U 'S US “Rational Threats” • A threat to destroy surplus may be a credible means of shifting the discussion UN U* U U * N UT T N U Na U ND 0 Ua UD U Sa U S* U TS US Bargaining over Distribution Cooperative Bargaining Theory places Distribution at the Core of the Enquiry Discussion is Based on Conflict Point – NE or what would be obtained in absence of agreement Result is determined by power, offers, and threats (credibility)