IMPORTANCE OF BIODIVERSITY AND ECOSYSTEMS IN ECONOMIC GROWTH AND EQUITY IN

LATIN AMERICA AND THE CARIBBEAN:AN ECONOMIC VALUATION OF ECOSYSTEMS

UNDP

Latin America and the Caribbean: A Biodiversity Super Power

Analyzes sectoral outputs at a micro-economic level, comparing costs and

benefits between different types of natural resource management practices

While acknowledging that there exist a wide range of such practices, to simplify the analysis the Report

focuses on two contrasting, archetypical categories, or scenarios, into which virtually all the

practices can be fit

Business as Usual (BAU): The more conventional set of management practices

optimizes short-run gain without consideration to ecosystems or to externalized costs

Sustainable Ecosystem Management (SEM): This scenario focuses on long-term output, inclusive of all impacts and costs

Basic facts on the Report’s methodology

A sectoral analysis based ReportTimber and non-timber forest time products (NTFP)

Tourism

Fisheries

Agriculture

Water and hydrological services

Protected Areas

Cross-cutting areas

Sectoral ES benefits provided by Protected Areas –as a cross-cutting area

Agriculture

Low sediment irrigation

water, genetic

resources, pollinatio

n, economic

ally-important

wild species

FisheriesEssential

habitat for breeding, nurseries

and juveniles; no-take areas to rebuild

stocks and diversity; protection

of vulnerable habitats like coral reefs and mangrove

stands

ForestryTimber

and NTFP concessio

ns, carbon

storage, revenue

flows that sustain

conservation

Nature-based

tourismWater for

consumption,

attractive natural

features, wild

species to watch, local

job and income

creation, fiscal and foreign

exchange revenues

Urban settleme

ntsDrinking water,

disaster mitigation

, hydropow

er

Ecosystem services

contribute to the

economies of LAC

countries through

benefits to different sectors

Relations amongst ecosystem services (ES) and other inputs, production practices and sectoral outputs

Technology

Labor

Capital

Ecosystem services

Production

practices

Sectoral outputs

negative

positive

Source: A. Bovarnick

Approach to Ecosystem Services (ES) and Biodiversity

Focuses on ecosystems that interface with economic processes

Tangible

contributions of ES

to produc

tion and

value creation are

through

these proces

ses

Ecosystem

services are used

as proxies

for biodiversity that feed into economi

c process

es –since

they are easier to connect

with sectoral outputs

The term ES is

used as shorthand for

the value

of ecosyst

ems and

biodiversity

throughout the

Report

On the methodological approach to ESES are viewed as one of several inputs required for production, along with labor, technology and capital

ES both affect and are affected by production practices

Their relative value will vary, depending on ES abundance, the costs and impacts of other inputs and the policy framework

Methodology does not attempt to isolate the input function of each ES and the resulting economic value (as in “1ha of forest supports X pollinators which increase by Y% the yield of nearby crops, resulting in a gain of $Z”)

Inference is used to approximate the economic value of ES inputs into production

ES under SEM and BAU

There are certain production practices which maintain and use ES (grouped under SEM)

There are other production practices which degrade ES and rely more heavily on other inputs (categorized as BAU)

An example in agriculture might be the difference in

farm yields with the application of organic

compost in a SEM agroforestry context versus yields using

chemical fertilizer in similar situations (e.g.,

hillside farming) under BAU

On comparing the available evidence for many

countries on the costs and benefits of these different production practices the Report has noted that, in those cases where a full

accounting is made, the net benefits are, on average,

consistently greater for the SEM practice

On BAU and SEM methodology

Enables entrepreneurs and policy makers to

perceive overall patterns and to make

decision about specific management practices

with a better understanding of the

overall costs and benefits related to ES

value and maintenance

Displays the frequently

hidden costs –as indirect or

externalized costs- of ES value and

maintenance

Provides data beyond a focus on production

output –crop yield for agriculture, stock

harvest for fisheries and visitor flow for tourism –

and allows a fuller trade-off analysis of the

hidden (external and future) costs of depleting ES

Organizing economic data around BAU

(without ES) and SEM (with (ES) allows

decision makers to compare the costs and

benefits of different management practices

and focus on the practices that make

most sense

The BAU and SEM concepts enable the approximate capture of ES value over time –to infer that ES of some sort are operating at a level that permit additional production (over BAU) or lower costs

Figure 2.2 shows the hypothesis that under BAU, net revenues decline over time, while those of SEM may start lower but remain constant or rise. This leads to a point at which SEM replaces BAU as the optimal

management approach.

Biodiversity and ecosystem’s role in sectoral growth in LAC: Agriculture (I)

About 73% or water withdrawn in LAC is devoted to agricultural

production; 8.5 million ha of crops in the region require

irrigation, making management of water resources critical to the

viability of the agricultural sector

Pollination is another key service provided by nature, with around 35%

of crops worldwide supported by natural

pollinators

Many ES are free inputs into agriculture production

If damaged or lost they need to be replaced by human-

made interventions that can act as substitutes (e.g. loss

of soil fertility may be compensated by increased

use of fertilizers)

However, some ES such as supporting services

(e.g. nutrient cycling, pest regulation and pollination) cannot be substituted for by human-made capital

Biodiversity and ecosystem’s role in sectoral growth in LAC: Agriculture (II) SEM can harness ES and provide higher returns to farmers

than more traditional farming systems The ecological benefits associated with agroforestry include

carbon sequestration, biodiversity protection, soil improvements, crop pollination and water provision

World Bank study on agroforestry systems across Central America (Current et al. 1995): Profitability is dependent on the site resources and markets Of the 21 systems analyzed, 40% had significantly higher returns

than traditional systems. One agroforestry system had a net present value (NPV) of $2,863/ha (over 10 years, 1992 values) compared to $1,423/ha for contour planting and $764/ha for woodlots

Only 10% performed less well than traditional systems However in this and other SEM agricultural systems incentives and

technical assistance are usually needed to promote uptake, since returns can lag in the early years until trees mature

Resource degradation lowers the delivery rate for ES, and is approximated in the distance by which the ES line falls under BAU

Figure 2. 3 indicates what changes are behind the drop in net revenues under BAU. For SEM, the ES line maintains its level or rises in response to improvement in the natural resource

base under SEM, as shown here. In specific cases, the ES being delivered might be measure in m3/hour of sediment free water, number/night turtles available for watching on the beach, or tons/year of fish biomass grown (in the fishery stock itself or in the prey eaten). Depletion of these ES-related resources would lead to lower BAU revenues in the previous graph, Figure

2.2.

The BAU paradigm: Externalized costs

In its simplest form the paradigm shows net revenues from BAU that are either constant or start decreasing only at a late date. Yields for the BAU model are above those of SEM for most of the planning horizon. Standard discounting of private net revenues, even if a very low discount rate is used, will favor BAU, because SEM generates more revenues

than BAU only in a very distant future. The case for SEM against BAU is based on the observation that BAU may be associated with negative externalities that, if accounted for, would switch the relative advantage of each alternative. That is, though BAU might initially make financial sense from a private perspective (the green BAU curve running above the SEM curve) it might not make sense after externalities are accounted for (i.e. the red BAU curve running below SEM after accounting for

negative externalities).

Market forces

Figure 2.9 depicts a situation in which consumer preferences for certified products raise the revenues of goods produced under SEM, but only up to a point, after which the market premium is reduced and

certification becomes a market access requisite. High premiums can still be observed for certified organic vegetables and fruits, but in the case of certified timber, the market is already more likely at the latter stage of the graph. Revenue increases also stem from gains in efficiency from better farming practices.

BAU net revenues have fallen because demand and prices for non-certified produced have dropped.

Introducing policy instruments into the construed scenarios (I)

Governments can create incentives and other conditions to change the balance in favor of BAU or SEM. For example, Figure 2.10 shows a situation in which a policy is introduced that lowers the profitability of BAU.

This could be the elimination of “perverse” subsidies that favor BAU practices (like subsidies for purchase of fuel or fishing ships in over-exploited fisheries, or subsidized agrochemical products for industrial cropping

schemes). Other examples include introduction of pricing of natural resources as inputs into productive activities or the use of green taxes to correct for negative externalities (e.g., a tax on emissions, elimination

of fuel subsidies for fishing boats in the Galapagos).

Introducing policy instruments into the construed scenarios (II)

An alternative strategy would be to encourage SEM with the use of policies that raise the profits of cleaner or more sustainable management strategies, or that facilitate transition to them. A well-known example is the use of payments for ES, and of subsidized access to credit that leads

to green investments. Figure 2.11 captures this situation.

Typical practices included under BAU and SEM for the Agriculture Sector

BAU

Monoculture

Intensive use of agrochemicals (pesticides, fertilizers)

Intensive irrigation systems with high water loss

Land clearance resulting in loss of primary habitat and soil fertility

SEM

Agroforestry systems: multiple cropping/greater diversity in crops; selection of crops that are more resilient to climate change (where that

is a concern); maintenance of native varieties and cultivars

Use of organic fertilizers; integrated pest management (IPM)

Integrated soil and water conservation to (i) mitigate soil erosion and (ii) maximize rainwater harvest and conservation

Low need for inputs by better fertility management

Examples of SEM/BAU analysis for the agriculture sector Analysis show that

coffee farms produce higher yields partly because the forest supports pollinators for the coffee Then the Ministry of

Agriculture can weigh the economic benefits to coffee farmers of conserving adjacent forest versus those benefits of converting the forest to new farms

Another example is with pesticide application in agriculture

Ministries can compare farms that undertake BAU practices (i.e. heavy application of pesticide without due treatment with resulting pesticide contamination of adjacent water bodies) affecting downstream agricultural production…

…with farms that undertake SEM practices (reduced pesticide use and cost, with more reliance on integrated pest control and natural predators), as well as reduced water contamination The downstream costs of water

contamination can help policy makers make a more informed decision about the economic value of pesticide application, as well as the flip side –the economic value of maintaining the ES of natural pest control, which can reduce costly reliance on pesticide use (ever higher and more complex as the pests develop resistance)

Costs of soil erosion (I)

Aggregate supply

or price of agricultural output

Consumption by

poor farm househol

ds

National

wealth

Agricultural income

and economic

growth

Recent evidence suggests that

more than 40% of the world’s

agricultural land is moderately to

extremely degraded,

resulting in a 13% reduction in crop

productivity. This can affect:

Source: Wood et al. 2000; Winters et al. 2004

Costs of soil erosion (II)

Ecuador

• 38% of Ecuador is considered at high risk of degradation

• Losses in soil fertility have resulted in the purchase of costly imported agrochemicals

Guatemala •BAU agriculture is estimated to generate 299 million m3 of soil loss per year•This has resulted in sedimentation of waterways and high levels of eutrophication•The costs to recover just two lakes for tourism -Izabal and Atitlan- exceeds $653 million

Costa Rica

• Yearly erosion from farm and pasture land removes nutrients worth 17% of the crop value and 14% of the value of livestock products

The associated

costs of BAU are partly

externalized, as

downstream

sedimentation and loss in fertility

Benefits and costs of pesticides (Case studies)

Ecuador: Economic burden of illness from pesticide

In fifty reported cases in the Montufar region (1991-1992), the estimated average treatment cost was approximately $17/case, which is 11 times the daily agricultural wage in the region

The agricultural workers affected by the poisoning tend to be very poor, with the costs of treatment representing a heavy

financial burden

Sources: Cole et al. 2000; Lins 1996 in Dasgupta 2001

Conditions under a SEM scenario

Long term gains

•10-20 years•Costs of impacts are internalizedDegrad

ation of ES is

avoided

•Long-term flow of ecosystem goods and servicesSupport

ecosystem

sustainability

•As a practical, cost-effective way to realize long-run profits

Valuation examples of key ecosystem services provided to agriculture

Ecosystem services

Quantitative estimates

Monetary estimates

Threats

SOIL FERTILITY Soil conservation in S. Brazil raised corn productivity 40%, soybeans 21%, beans 3%, and tobacco 32%

Soil conservation in S. Brazil raised corn productivity 40%, soybeans 21%, beans 3%, and tobacco 32%

Poor land management practices both on- and off-farm that result in soil degradation or erosion

WATER / CLIMATE REGULATION SERVICES

73% of water used is devoted to agriculture

73% of water used is devoted to agriculture

Increasing demand/over-abstractionIntensification of irrigationWater pollution caused by point and diffused sources including agricultural ones

POLLINATION 35% of plant based crops worldwide supported by animal pollinators

35% of plant based crops worldwide supported by animal pollinators

Changing land useAgrochemicalsClimate changeInvasive species

GENETIC RESOURCES Generally maintains agriculture productivity, protect against diseases

Generally maintains agriculture productivity, protect against diseases

Land conversionMonoculture

PEST CONTROL Bats in Mexico are estimated to reduce need for pesticides by 25-50%

Bats in Mexico are estimated to reduce need for pesticides by 25-50%

Habitat loss

Economic benefits from maintaining specific ecosystem services (Agriculture sector examples)

Soil fertility Water supply On-farm benefits of soil fertility can be

measured based on the lost productivity avoided through the adoption of soil conservation practices

Study of land use management in Lajeado, Sao José in Southern Brazil found that better soil management increased crop productivity Between 1990 and 1996, maize, soybeans,

beans and tobacco production rose by 40%, 21%, 3%, and 32% respectively

In monetary terms, total farm income increased $98,460/yr for maize, $56,071/yr for soybeans, and $10,730/yr for tobacco

Investments in the form of subsidies to farmers and road improvements to encourage the uptake of erosion control practices were expected to be recovered in four years|

The provision of water to agriculture is a key ecosystem service. However, deriving an economic estimate of this service is complex

In LAC irrigation water is provided free or at low cost, meaning that the market price does not provide a suitable proxy for the social cost of water

In addition, the cost of water extraction and irrigation vary depending on available technology and the water source Bassi (2002) found that reduced soil erosion,

improved basic sanitation and better management of animal waste led to a fall in the concentration of fecal coliform bacteria at two sampling points: one in the middle of the watershed and the other at the treatment station. Water treatment costs were reduced by 50% (from $3,000 to $1,500/month for 7,500 m3) due to lower need for chemicals

Cranford, Trivedi and Queiroz (2010), based on a preliminary analysis, provide a lower bound estimate of the gross benefits of precipitation, related to the climate regulating services of the Amazonian basin, to crops in Brazil and Paraguay at $8 billion a yearSource: Bassi

2002

Estimated net benefits of soil conservation in Central America

Country and Area

Conservation measure

Crop Net present

value ($)*

Internal rate of

return (%)

Years to soil

breakdown

COSTA RICA BARVA TIERRA BLANCA TURRUBARES TURRUBARES

Diversion ditchesDiversion ditchesDiversion ditchesTerraces

CoffeePotatoesCoco yamCoco yam

-920-334011104140

<0<084,260,2

>100>10023

DOMINICAN REPUBLIC EL NARANJAL Diversion

ditchesPigeon peas, peanuts, beans

-132 16,9 >100

GUATEMALA PATZITÉ Terraces Corn -156 16,5 >100

HAITI MAISSADE Residue barriers

Rock wallsCorn, sorghumCorn, sorghum

1180956

Positive**Positive**

01

HONDURAS TATUMBLA YORITO

Diversion ditchesDiversion ditches

CornCorn

90983

56,521,9

418

PANAMA COCLÉ Terraces Rice, corn,

yucca, beans34 27,2 8

SOURCE: CASE STUDIES IN LUTZ, PAGIOLA AND REICHE (1994B)

*Net present value is computed over fifty years using a 20% discount rate** Undefined, because net returns are positive from year one onward

Economic benefits from specific farm practices to maintain ecosystem services: Organic agriculture

Guerreiro Barbosa and Gomes, 2007

Organic agriculture basic facts and figures

Organic agriculture is now commercially practiced in 210

countries and represents 31 million

ha of certified cropland and pasture

(approx 0.7% of global agricultural

land), 62 million ha of certified wild lands

and a market of $40 billion in 2006 (2% of

food retailed in developed countries)

Organic production

occupies 4% of arable land in Uruguay, 1.7% in Argentina, 1.5% in Chile, 1.0% in Bolivia and 0.24% in

Brazil, Colombia and Panama

Latin America is an exporter of

organic products; domestic

markets are still developing

Benefits or organic farming vary depending

on the crop and the circumstances.

Samaniego Sánchez (2006), for example, did not identify significant

differences in soil nutrients and leaf tissue between conventional and organic production of red peppers in Costa

Rica. The benefits of organic coffee

production have been more widely examined.

Economic benefits from specific farm practices to maintain ecosystem services: Organic agriculture (IV)

Economic benefits of organic agriculture have been documented in several studiesIn Costa Rica and Nicaragua, comparison of various coffee conventional

systems with organic production showed that under appropriate technology organic can attain the same productivity as conventional

systems (Soto 2003)Soil acidity decreased in the organic coffee regime, while phosphorus, potassium and calcium rose

A major environmental benefit of organic coffee was reduced herbicide use

Organic producers may also enjoy financial advantagesIn a feasibility study of organic farmers in Brazil, income

generated on organic farms ranged from $366 to $2,505/ha (Guerreiro Barboso and Gomes Lages 2007)

Small scale coffee producers in Nicaragua were shown to achieve a 28% increase in net returns by their

participation in certified organic coffee cooperatives, despite coffee quality not always improving (Bacon

2005)Calo and Ise (2005) concluded that in Mexico, fair trade but not organic certification allowed organic coffee producers to

increase profits. Similar results were obtained in Brazil, Nicaragua, the Dominican Republic and Guatemala (Potts

2007; Arnould and Plastina 2006)Generally, fair trade certification not only gave higher

prices to farmers but also lowered market risk due to price variability and improved market access through participation in the cooperative (Bacon 2005)

Conclusions: Sectoral outputs are dependent on a variety of ES inputs, for example… (I)

Timber and non timber forest time products (NTFP) production in both natural forests and plantations depend on soil fertility, soil moisture, microclimate, photosynthesis and growth by using and releasing O2, biodiversity and gene pools, pollination and

seed distribution, soil stabilization, and forest water cycles

Productivity in agriculture depends, in fundamental ways, on the management and maintenance of certain ES: water availability, soil fertility, microclimate, pollination, and both pest and disease

control. Agriculture uses 73% of all water abstracted in LAC. Furthermore, ES will build resilience of the sector to climate

change, by protecting genetic resources, soil fertility, and water quality

In tourism, the most valuable ES for the sector are water quantity and quality, beach material, attractive viewscapes, and biodiversity for recreational activities

like bird and whale watching, or jungle treksFisheries are dependent on the provisioning and regulating ES. The most direct input of marine ES to fisheries is by providing

fish habitats essential to the life stages of fish species, including the underlying food chains that supply energy. Of particular importance to fisheries are habitats crucial for spawning and/or recruitment, such as mangrove stands,

seagrass beds, and coral reefs. Regulating and supporting ES (such as sediment retention, temperature control, water

filtration, and nutrient-cycling) are essential to fisheries but difficult to value directly

Conclusions: ES can provide access to emerging markets(II) In the past, maintaining ES was viewed as a

barrier to economic growth, evidence suggests that conditions are changing: ES are important for sustained growth — by providing access to emerging green markets, avoiding damage costs, building resilience to climate change, and increasing the efficient use of scarce resources and, thereby, reducing production costs.

Countries can increase the economic benefits of ES and SEM practice through specific policy changes and by supporting particular production and supply chains in the transition to SEM

Conclusions: ES can provide access to emerging markets(III) Firms respond to both policy and market incentives.

Consumers, increasingly, want the natural resources that are used as inputs to be sustainably managed. There are signs of companies taking early mover advantage and positioning themselves in the marketplace based on sustainable practices.

Access to affordable finance can also be an incentive. Several investment funds have been created to support sustainable ES use in LAC, including Root Capital, Verde Ventures, Futuro Forestales, EcoEnterprise Fund, and CAMBio. These funds have invested in numerous SEM enterprises in agriculture, forestry, and tourism.

Recommendations

Sectoral plans should undertake trade-off analysis between maximization of short-term production and ES maintenance

Level the playing field and incentivize SEM Develop economic instruments and planning to

reduce off-site degradation of ES Increase the asset value of biodiversity and ES Augment public sector revenues from use of ES Generate and capture data on ES

Where to download the main Report and related thematic and national reports

http://www.undp.org/latinamerica/biodiversity-superpower/Index.htm