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The Economics of Ecosystem Services and Biodiversity: An International Assessment

The Economics of Ecosystems and Biodiversity reports were born out of an initiative in 2007 to produce an analysis of the economics of biodiversity loss parallel to that of existing analysis of climate change. The reports do not preach to the committed environmentalist who already values nature. They are geared instead to the sceptical public administrator and to the practical businessperson, aiming to make these actors realise - by means of convincing examples - that economics should go beyond its existing boundaries.


The Economics of Ecosystem Services and Biodiversity: An International Assessment

Pushpam Kumar, Joan Martinez-Alier

The Economics of Ecosystems and Biodiversity reports were born out of an initiative in 2007 to produce an analysis of the economics of biodiversity loss parallel to that of existing analysis of climate change. The reports do not preach to the committed environmentalist who already values nature. They are geared instead to the sceptical public administrator and to the practical businessperson, aiming to make these actors realise – by means of convincing examples – that economics should go beyond its existing boundaries.

Views expressed in this paper do not necessarily reflect those of the United Nations Environment Programme.

Pushpam Kumar ( is at the University of Liverpool, and also with the United Nations Environment Programme, Nairobi. Joan Martinez-Alier ( is at the Universitat Autonoma de Barcelona.

onservationism as a social endeavour has a long history. In this tradition, conspicuous efforts have been made in India to save the tiger. Conservation biology and ethnoecology, for example, are recent fields of science study ing threats to biodiversity and the social institutions that are useful for preserving biodiversity, from sacred groves to natural parks. Perhaps paradoxically, the conservation movement and associated sciences have grown precisely as biodiversity has been lost over the last 50 years.

At the Rio de Janeiro United Nations (UN) Earth Summit of 1992 (which plans to reconvene in 2012 under Rio+20, to focus on the so-called green economy),1 a convention was signed on the need to conserve biodiversity at three levels – ecosystems, species, and genetic diversity. This convention dealt with two main issues – first, the attribution of property rights on biodiversity to states (or, possibly, to indigenous communities), and second, the regulation of access to biodiversity resources by corporations, who would have to pay for them. Bioprospecting became the buzzword, predictably interpreted by some as a modern form of biopiracy and seen by others (somewhat naively) as an effective way of providing economic incentives for conservation. Most states ratified this convention, with the notable though not unusual exception of the United States (US).

The treaty and subsequent protocols did not stop the loss of biodiversity. The solemn calls from the UN to halt biodiversity loss by the year 2010 were recanted before that year was reached (Secretariat of the Convention on Biological Diversity 2010). In India, despite some successes in maintaining small village forests under Joint Forest Management (JFM), the same trend is observed as elsewhere.

The number of existing species (including microorganisms) in the world is not known. It is of the order of 20 million or so. This wealth was created by evolution, driven by the sun’s energy, in the last four billion years. Several episodes of massive extinction took place over that long period. We are now in the sixth great extinction, this time caused by the human species.

What are the causes of biodiversity loss? For neoclassical economists, it is tempting to give an answer in parallel to Nicholas Stern’s famous description of climate change as “the greatest market failure ever”.2 Biodiversity loss is perhaps an even greater negative externality not incorporated into prices in the economy. According to conservation biologists, environmental historians, ethnoecologists (such as Madhav Gadgil in India), human ecologists and ecological economists, more attention should be placed on the driving forces than on the price pattern. This is a question of emphasis.

One driving force explaining biodiversity loss is human population growth (a fourfold increase in the 20th century). Population will peak probably at about 8.5 billion around 2045. Another driving force is the increased use of biomass by humans. Human appropriation of net primary production (HANPP) (Vitousek et al 1986) has increased in parallel to land use changes. Apart from land devoted to food, fodder, firewood, there are new demands for housing and infrastructure (for instance, destroying mangroves in many tropical coastal areas, not least in Mumbai), also for paper pulp in large uniform tree plantations, and for agro-fuels. The shift to more carnivorous diets is also an important factor in land use change. Land use for mining also destroys biodiversity and hampers human livelihoods in densely populated areas. Other drivers of biodiversity loss are invasive species and climate change.

Ecosystem Services

The Economics of Ecosystems and Biodiversity (TEEB) reports were born from an initiative in 2007 to have an analysis of the economics of biodiversity loss parallel to that of Nicholas Stern’s for climate

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change. TEEB can be seen in the tradition of scientific assessments like the United Nations Environment Programme (UNEP) Ozone Secretariat’s Assessment,3 the Intergovernmental Panel on Climate Change (IPCC),4 the Millennium Ecosystem Assessment,5 the International Assessment of Agricultural Science and Technology for Development (IAASTD)6 and the Stern Review on the Economics of Climate Change for the United Kingdom (UK) Treasury.7

TEEB, needless to say, caters to the needs of policymakers.8 How to decide whether a forest in India should be flooded by a dam or destroyed by an open-cast bauxite or coal mine? Can we calculate the net present value of keeping the forest against the net present value of the new industrial development, reaching a conclusion accepted by society? Which are the relevant values and for whom? To give value to something is to give importance to it, not necessarily in economic terms.

The TEEB reports do what their title implies.9 They give a state-of-the-art account of the economic valuation of ecosystem services, rather than of a single species or of genetic variations. The ecosystem approach was strongly brought into conservation biology and ecological economics by the Millennium Ecosystem Assessment, involving over 1,300 natural and social scientists from all over the world (2005) and by individual experts like Gretchen Daily (1997a). These works not only provided evidence of declining ecosystem services but demonstrated the links between ecosystem services and the constituents and determinants of human well-being. The costs of such declining ecosystem services were described in terms of declining human welfare. The Millennium Ecosystem Assessment refrained from giving monetary valuations, but it provided extremely useful information.

What are ecosystem services? They can be defined as “the conditions and the processes through which natural ecosystems, and the species that make them up, sustain and fulfil human life” (Daily 1997b: 4-7). Such services are the foundations of human well-being; they encompass both ecological and socio-economic aspects, illustrating human dependence on ecosystem functioning. Although humans could not survive without such services, their availability is

not given through the Figure 1: Biodiversity, Ecosystem Services and Human Well-being

Biodiversity Ecosystem Constituents of well-being

market except in some special cases (payment for pollination services, for instance). The Millennium Ecosystem Assessment (2003, 2005) proposed a classification of ecosystem services encompassing four main categories (Figure 1):

(1) Supporting services

Width of arrow indicates strength of linkage.

Genes, populations, species,communities, ecosystems

Supporting services Provisioning services
Regulating services
Cultural services
Security Freedoms and choice
Basic material for good life
Good social relations

are those necessary for the production of all other ecosystem services;

  • (2) Provisioning services refer to products obtained from ecosystems;
  • (3) Regulating services are benefits supplied by the self-maintenance properties of ecosystems;
  • (4) Cultural services generate non-material benefits derived from ecosystems.
  • Biodiversity is the base for all four types of ecosystem services. Each ecosystem service strengthens and enriches the constituents of human well-being – the material minimum, physical security, social relations, health and the freedom to act and make choices.

    Against the Economic Invisibility of Biodiversity

    The Millennium Ecosystem Assessment was carried out by natural and social scientists from 95 countries. It provided clear information on the state and condition of ecosystems and found them to be on a declining trend. Against this backdrop, it was proposed in the meeting of the G8+5 Environment Ministers in Potsdam, Germany in March 2007 that a study on “the economic significance of the global loss of biological diversity” should be undertaken (TEEB 2008: 1-7). This initiative was originated under the German Environment Minister at the time, Sigmar Gabriel, and immediately taken up by UNEP’s Executive Director Achim Steiner. This global study, the TEEB, was to assess current approaches for using ecological sciences and economics for informed decision-making.

    On the one hand, TEEB intended to better inform conventional economic policy about its impacts on ecosystem health and biodiversity; on the other, it would suggest ways to mainstream the economic valuation of ecosystem services into national and local planning and policies as well as business accounting practices. A guiding idea was to combat the economic invisibility of biodiversity.

    Understanding the economics of ecosystems can inform decisions on where to stop and how much to conserve in the world of conflicting choices and competing demands for resources. Credible and transparent economic valuations of ecosystem services are useful for this purpose. Economics can also indicate how indirect drivers, apart from the main driving forces, are affecting the flow of services from forests, wetlands, marine and other ecosystems. There are many examples where a seemingly unrelated change in the exchange rate (an indirect driver) has had an impact on soil erosion, or where agricultural subsidies have caused eutrophication of lakes, or where subsidising the price of fuel has caused overfishing. Economic tools can be helpful when applied in a positive analytical framework for understanding and predicting outcomes, but can be quite challenging if the preferred framework is a normative one for evaluating and ranking outcomes.

    Economic valuation of impacts, both benign and malignant, on human welfare, consequent to a policy choice or intervention related to management of ecosystems play a central role in the economics of ecosystem services. TEEB has been successful in clarifying the context and purpose of valuation. Biophysical structures yield core ecosystem processes like the water cycle which provide ecosystem functions. This can be mapped into ecosystem benefits (Pascual et al 2010), as given in Figure 2 (p 80).

    The work on TEEB was conducted in two phases. Preliminary findings were

    June 11, 2011 vol xlvi no 24


    presented at the Ninth Confer-Figure 2: Water Provision as Ecosystem Service ence of the Parties to the Convention on Biological Diversity

    Functioning Resilience Structure Insurance value

    (CBD COP-9) in Bonn, Germany,


    in May 2008. The second, more

    capacity to e g, water cyclingCore ecosystem processes

    maintain a

    substantial phase of the study

    sustained flow

    of benefits Ecosystem functions

    ran through until end of March

    2011. TEEB Phase 2 focused on

    e g, water provisioning, purification and regulation

    improving understanding of the

    Output value

    economic costs of biodiversity

    Ecosystem service benefits

    Value attached to loss and ecosystem degradation, Water for households, industry and irrigation

    direct ecosystem’s services and

    and communicating this under


    Source: Pascual et al (2010).

    standing to key stakeholders. TEEB Phase 2 has produced, and is still producing, a suite of five deliverables:

  • (1) TEEB Ecological and Economic Foundations: A report on the concepts and methodologies for the economic valuation of biodiversity and ecosystem services. This report provides the scientific foundation for the other reports (Kumar 2010).
  • (2) TEEB for National and International Policymakers: A report providing analysis and guidance on economic valuation of ecosystem services for international and national policymakers (ten Brink 2011).
  • (3) TEEB for Local and Regional Policy: A report providing analysis and guidance, with many practical examples, for regional and local administrators;
  • (4) TEEB for Business: A report providing analysis and guidance for business and industry;
  • (5) A website providing information and guidance for citizens and consumers and building a dynamic online community.10
  • Like any other assessment, TEEB presents numerous findings and gives rise to hypotheses for further research. These can broadly be summarised as follows:
  • (1) Make nature’s values visible: Although critical for societal well-being, the contribution of ecosystem services remains outside the domain of mainstream economic thinking and decisions. It needs to be made explicit and visible through economic valuation, not forgetting however, that visibility is also achieved by the salience of non-economic values (for example, the sacredness of the Niyamgiri Hill in Orissa to the local population).
  • (2) Pricing the priceless: Pricing every element of nature is neither feasible nor desirable but, if suitable, pricing can change the options available to society
  • and individuals for comprehensive efficiency and sustainability.

  • (3) Accounting for risk and uncertainty: In every economic approach to ecosystems and biodiversity, risks and uncertainty are inevitable. How do we handle them is key to efficient management.
  • (4) Valuing the future: Inter-temporal choice over ecosystem services entails how we value future benefits and costs. Discounting the future seems to be a trait of human nature, but how much we discount will have implications for the use pattern of natural capital. Discounting because of expectations of future growth can give rise to the “optimist paradox” (Martinez-Alier 2002:45). We discount the future because we expect our descendants to be better off, and thereby undermine their future welfare by leaving less natural capital and more pollution to them.
  • (5) Measuring better to manage better: If losses of natural capital are not measured properly, or if they are not measured at all (zero price), there is a likelihood that they will not get managed well. Accounting of ecosystem services based on consistent methodology and an analytical approach is helpful here.
  • (6) Natural capital and poverty reduction: Ecosystems and biodiversity availability have direct and indirect relationships with the incidence of poverty. TEEB introduced the notion of “the GDP of the poor” to describe such situations (ten Brink 2011: 113). How the linkages of ecosystems and poverty are identified, and interventions designed are key to the success of poverty alleviation goals.
  • (7) Beyond the bottom line: Business and industry are major stakeholders in the management of natural capital. Their daily operations including reporting, labelling,
  • June 11, 2011

    disclosure, compensation and accounting will determine the use and misuse of natural capital. TEEB draws attention to large environmental liabilities of companies, liabilities that are not


    value of the included so far in the balance


    sheets. TEEB also assesses practices described as “net positive impact” (TEEB 2010: 21-22), based on compensation and restoration methods.

  • (8) Changing the incentives: The design of incentives or disincentives is an integral part of effective policy response for ecosystems and biodiversity management. A judicious mix of incentives and disincentives would yield promising results for the management of ecosystems.
  • (9) Protected areas offer value for money: There is a strong economic rationale for the existence of protected areas, both terrestrial and marine, as shown by appropriate economic analyses.
  • (10) Ecological infrastructure and climate change: Ecosystem restoration activities, for example replanting of mangroves, not only enhance ecosystem services and create employment but are also cost-effective measures to combat the adverse impact of climate change.
  • (11) Mainstreaming the economics of nature: Incorporation of ecosystem services into conventional developmental planning, including fiscal and monetary measures, will help in bringing the economy onto a less unsustainable path.
  • Economic Valuation of Ecosystem Services

    A large number of countries have welcomed the findings from the TEEB and they plan to follow some of the recommendations emerging from it. Notice, however, that the TEEB reports do not provide an estimate of the monetary value of

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    ecosystem services for humans, compared for instance to world GDP. There is demand for such a number from journalists and perhaps some politicians, but the TEEB team resisted such demands.

    What TEEB does provide is a range of monetary estimates, a meta-analysis of hundreds of studies done with somewhat different methodologies that give monetary values to ecosystems services. Coastal wetlands, different kinds of forests, grassland, coral reefs, and the open oceans are among the biomes considered. TEEB becomes therefore a crucial reference work for such economic valuation studies.

    Particular emphasis is placed on accounts for the Amazon, not only because of its role in carbon storage and capture, or its biodiversity at species and genetic levels, but also because it is a water pump for a large area outside the Amazon itself. All this is explained in terms that can be understood not only by professional ecologists and economists but also by policymakers, business leaders and environmental activists.

    Framing Issues

    TEEB emphasises the growing need for collaboration between ecologists and economists for a coherent perspective on the trade-offs reflected in individual and societal choice (Bateman et al 2011). The framework of economic analysis at the firm or individual industry level masks potential spillovers associated with actions taken in one sector of an economy on other sectors, and corresponding impacts on macroeconomic variables like GDP, aggregate savings rates or trade patterns. Similarly, sectoral composition, i e, the structural changes accompanying economic growth, trade and consumption patterns can have far-reaching impacts on the health and condition of ecosystems. Two examples of such impacts are:

    (1) The intensification of agricultural production accompanying economic growth, and its impact on soil salinity and waterlogging, and on genetic diversity. The impact of the green revolution on soil and water in Punjab, Haryana and western U ttar Pradesh (UP) is a good example of this. (2) Regional and national subsidies to fish-harvesting and the corresponding impacts on fish stocks and marine biodiversity.

    The export of aquaculture and its impact on local people and biodiversity in West Bengal and Orissa demonstrates this (Chopra, Kapuria and Kumar 2009). At the macroeconomic level, corrections to GDP accounting have to be made more visible too.

    One current coastal ecosystems issue much discussed in TEEB is the impact of economic growth and the increased conversion of mangrove forests into urban, agricultural or aquaculture uses, and the corresponding impact on the ability of coastal ecosystems to support fish populations and to protect tropical coasts against cyclones or tsunamis. Another issue of concern is the destruction of delta ecosystems due to decreased river flow and the resulting lack of sedimentation. With terrestrial ecosystems, an issue that has received much attention, and will continue to in the near future, is carbon sequestration.

    The methodologies couched in microeconomic theory – externalities, market failure, valuation based on compensating or equivalent variation in consumer’s welfare

    – do not adequately accommodate interdependencies among different economic subsectors and ecosystem services. These methodologies also are not designed to measure the potential impact of a policy on the entire economy and its underlying ecosystems. The dependence of conventional economic sectors on ecosystems arises not only through the use of tangible factors like timber, water and fish, but also the use of intangible services like waste minimisation, climate regulations or the control of vector-borne diseases (Millenium Ecosystem Assessment 2003, 2005).

    One policy category is related to the economic forces associated with the evolution of an economy, for example, capital deepening and increased labour productivity, and impacts the exploitation of ecosystems. Policy instruments in this category, include taxes, subsidies, quotas, licences and property rights linked directly to ecosystems. Similar instruments linked to other sectors can have indirect impacts on ecosystems.

    Another set of policies are domestic macroeconomic policies such as monetary policy that cause major fiscal and trade imbalances. Until the imbalances are corrected and debt obligations met, household real disposable income is typically much lower than before the shock. Ecosystem depletion, for instance, harvesting of timber for cooking and fuel is exacerbated by those who are now poorer than before, at a time when government budgets for the management of these resources are even more constrained.


    One major objective of the TEEB initiative was to teach ecological sciences in a practical manner to policymakers, showing the relevance of concepts such as ecosystems services and resilience. Ecology is too important to be left to ecologists. TEEB intends to better inform conventional economic policy and business practices about their impact on ecosystems and biodiversity. TEEB seeks ways to mainstream ecosystem services into national planning and policies.

    Existing knowledge is sufficient to make visible the enormous importance of ecosystem services for human well-being to policymakers, to business and to civil society in general. This importance can sometimes be translated into economic valuations by a variety of methods. This does not imply that human livelihoods, the rights of other species to exist, indigenous territorial rights, or the sacredness of nature for some cultures, are to be left aside and forgotten.

    TEEB does not preach to the committed environmentalist who already values n ature. TEEB is geared to the sceptical public administrator and to the practical businessperson. It aims to make them aware, by means of convincing examples that economics should go beyond its existing boundaries. In theory, markets should allow for human needs for environmental services and products to be felt by adjusting prices. If the worsening conditions of the planet and its living fabric are not desirable outcomes, then prices and market forces should have engineered a reversal of fortunes. This has not been the case. Markets are myopic. Markets do not value the loss of biodiversity; they do not care for the needs of poor people or of f uture generations.

    TEEB’s recommendation is that mandatory economic valuation of ecosystem services should therefore become one more instrument for better policy at the business, sectoral, and macroeconomic

    June 11, 2011 vol xlvi no 24


    levels. Effective instruments for biodiversity conservation, including payments for ecosystem service, could be simultaneously implemented in some circumstances. These instruments, in theory, offer a mechanism to translate the non-market values of ecosystem services into real financial incentives for local actors to provide such services.

    Existing knowledge is similarly sufficient to develop more effective governance institutions, including property rights regimes and regulatory structures. Governance systems of common pool resources (Ostrom 2007, 2009) provide many lessons which are well understood in India, as the many successful experiences of water harvesting and local forest management show. Once such mechanisms are established, their effectiveness can be enhanced by improving the quality of available information on the effects of conservation on ecosystem service provision. The unintended effects of economic policies on the provision of non-market ecosystem services are also highlighted in the TEEB reports. Economic valuation of ecosystem services is one means to make such effects more visible.

    To summarise, modern society’s focus on market-delivered components of wellbeing, and its reliance on market prices to indicate value, together led to many environmental services not being given any value at all despite being essential for human well-being. The TEEB approach, by bringing together work done by many practitioners of economic valuation, shows the possibility of mainstreaming such valuations into policymaking and into business practices at different scales. Economic valuations can become a powerful feedback mechanism for a society that has mentally distanced itself from the biosphere on which its very survival depends. TEEB’s purpose is to make nature’s flows economically more visible, to gauge them against the measuring rod of money without simplifying the technical difficulties of doing so, while acknowledging that economic value is only one of the relevant values for society.


    1 Accessed 24 May 2011: http://www.uncsd2012. org/rio20/index.php?menu=17 2 New Economist (2006), “Climate Change: ‘The Greatest Market Failure the World Has Seen’”, Accessed 26 May 2011:

    3 Accessed 26 May 2011: Assessment_Panels/SAP/Scientific_Assessment_ 2010/index.shtml

    4 Accessed 26 May 2011: 5 The Millennium Ecosystem Assessment is abbreviated as MA. Accessed 26 May 2011: http://www. 6

    26 M26 M
    y 20y 20
    : ht: ht
    -- 7 For an executive summary, see the following, accessed on 26 May 2011: http://siteresources. 8 The TEEB reports ( are published as books by Earthscan, London. They have been written by a large collective of authors under the leadership of Pavan Sukhdev, a banker on leave from the Deutsche Bank. Sukhdev has a long-standing interest in nature conservation through his work with the Green Indian States Trust (GIST) that researched, developed and published methodological and empirical work on green accounts for India. 9 The first volume in the TEEB series, on the ecological and economic foundations, has been edited by Pushpam Kumar (2010). 10 These deliverables have been supported by a comprehensive communications and outreach programme including press conferences, TEEB workshops, speaking engagements at external events and collaboration with a number of other organisations in order to extend the reach of the TEEB study.


    Bateman, I J, Georgina M Mace, Carlo Fezzi, Giles Atkinson and Kerry Turner (2011): “Economic Analysis for Ecosystem Service Assessments”, Environmental Resource Economics, 48(2):177-218.

    Chopra, K, P Kapuria and P Kumar (2009): Biodiversity, Land-Use Change and Human Well Being: A Case Study of Sundarbans (Delhi: Oxford University Press).

    Daily, Gretchen C, ed. (1997a): Nature’s Services: Societal Dependence on Natural Ecosystems (Washington DC: Island Press).

    Daily, Gretchen C (1997b): “Introduction: What Are Ecosystem Services?” in Gretchen C Daily (ed.), Nature’s Services: Societal Dependence on Natural Ecosystems (Washington DC: Island Press).

    Kumar, Pushpam, ed. (2010): The Economics of Ecosystems and Biodiversity: Ecological and Economic Foundations (London: Earthscan).

    Martinez-Alier, Joan (2002): The Environmentalist of the Poor: A Study of Ecological Conflicts and Valuation (Cheltenham: Edward Elgar).

    Millennium Ecosystem Assessment (2003): A Conceptual Framework for Assessment (Washington DC: Island Press).

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    Ostrom, E (2007): “A Diagnostic Approach for Going Beyond Panaceas”, Proceedings of the National Academy of Sciences, 104(39): 15181-187.

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    Pascual, U, R Muradian, L Brander, E Gómez-Baggethun, M Martín-López, M Verman, P Armsworth, M Christie, H Cornelissen, F Eppink, J Farley, J Loomis, L Pearson, C Perrings and S Polasky (2010): “The Economics of Valuing Ecosystem Services and Biodiversity” in Pushpam Kumar (ed.), The Economics of Ecosystems and Biodiversity: Ecological and Economic Foundations (London: Earthscan).

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    TEEB (2008): An Interim Report (Brussels: European Communities).

    – (2010): The Economics of Ecosystems and Biodiversity: Mainstreaming the Economics of Nature: A Synthesis of the Approach, Conclusions and Recommendations of TEEB (Brussels: European Communities).

    ten Brink, P, ed. (2011): The Economics of Ecosystems and Biodiversity in National and International Policymaking (London: Earthscan).

    Vitousek, P M, P R Ehrlich, A H Ehrlich and P A Matson (1986): “Human Appropriation of the Products of Photosynthesis”, BioScience, 36(6): 368-73.

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    Economic Political Weekly

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