Biodiversity offsets: The price of survival

Not only can we put a value on nature — we must. Offsets will be an essential part of the fight against biodiversity loss

September 2021

Words by Scott Cole

Illustration of Scott Cole

“By failing to put an explicit price on nature’s benefits, even an imperfect one, we are essentially allowing somebody else to impose their price on us … And that price is very often zero”

Scott Cole

When bread crusts sat on the counter for too long, Grandma Goodwin would put a stop to it: “Chuck those — they’re for the birds.” Grandma wasn’t just saying that we should stop wasting good butter: her choice of phrase reflected a deeper meaning about a resource that no longer had value for us. It was worthless.

As an economist, I see price as one way of signalling value. It also helps us to decide how best to employ society’s limited resources. Should we spend on protecting wilderness or providing recreational access? Should we keep land for producing food, or enhance habitats for wildlife? How much should we invest in greenhouse gas reduction today versus tomorrow? There are no easy choices, nor obvious lenses through which one “should” view such questions.

The so-called dismal science does have a few suggestions. For example, economists have long argued for taxing “bads”. Under the “polluter pays” principle, it is commonly accepted that those who generate pollution should bear the costs of managing it, which includes addressing the adverse impacts for society. As a result, carbon taxing is gaining traction, and evidence continues to mount that pricing emissions creates an effective incentive to reduce them.

Biodiversity offsets — which aim to enhance or recreate environmental “goods” including habitat, species and services provided by nature such as recreation — also create effective incentives by communicating to polluters or developers that there is a cost associated with damaging the environment, and to entrepreneurs that it can pay to invest in environmental goods.

Requiring polluters and developers to finance environmental compensation measures that generate value is an attractive policy, even if that value falls short of the full environmental value lost. So, what are the implications?

Nature always has a price

Today, nature’s worth is not factored into the price of land. Developers must pay for a site, permits, and all of the materials, labour and professional services it takes to erect a building or new infrastructure. But they don’t have to pay for the nature they destroy at any point in the process — that’s free. It is the public who bear the costs in terms of a slow-but-sure decline in things like biodiversity and recreational access — both of which are highly valued commodities in our fast-growing cities.

I have heard some ecologists and philosophers suggest that nature is priceless, that it’s impossible or even immoral to put a monetary value on biodiversity or other services that nature may provide. But here’s the problem: by failing to put an explicit price on nature’s benefits, even an imperfect one, we are essentially allowing somebody else to impose their price on us. And when it is set not by a body acting in the public interest but by a private actor responsible primarily to its own shareholders, that price is very often zero. If we choose not to value nature, we will have to live with the consequences.

In contrast, where a society requires developers to purchase biodiversity offsets, it is explicitly valuing nature’s benefits. This not only penalizes those who damage nature, but rewards those who create it — establishing a marketplace for “habitat entrepreneurs” who invest in restoring nature in return for payment for the compensation credits they create. Such credits are sold via habitat banking systems, which are well established in the US, Germany and Australia, and in development in the UK. The potential of these banks has spurred policy suggestions in a number of other countries including Sweden.

Observe how decisions are made in the world today and you will see that resources flow towards goods and services whose price reflects their high value to consumers, from the latest iPhone to rare minerals to organic food (even if market failure means that the price still doesn’t reflect the true value of the resources consumed during their production). Because non-marketed goods like national parks, recreation and biodiversity lack an explicit price, they are often undervalued. The result is that society invests too little in these goods and misses opportunities to prosper.

The cost of an offset may fall short of the true value to society of the damaged resource. But as our ability to measure and recreate nature’s benefits improves, so too will the price signal, leading to even better incentives for addressing the full suite of lost values.

Requiring developers to purchase biodiversity offsets not only penalizes those who damage nature, it rewards those who create it

By humans for humans

Any credible economist will tell you that estimating environmental value is wrought with challenges, methodologically and practically. But they will also tell you that doing so is unavoidable given the anthropocentric basis of environmental policies generally, and compensatory offsets specifically. This reflects the way that we humans see the planet: as an instrument to improve our long-term standard of living. We create such concepts as “no net loss” and“sustainability” because of our capacity for long-term thinking and because we worry about our children’s wellbeing.

This is not necessarily to the detriment of the planet’s other inhabitants. In addition to providing compensation for the direct value that nature provides us, we may also be motivated to require offsets because our wellbeing improves just by knowing that species and habitat exist around us, even if we may never “use” these species or benefit from them directly.

Others reject this approach and instead insist that nature be protected for its own sake. This is another way of viewing offsets, a perspective that economists describe using the concept of intrinsic (or non-instrumental) value. This emphasizes nature’s own moral standing, where the value of other species can be motivated by their own existence, independent of any benefit they may provide to humans.

Nearby and similar

Once we have established that we are compensating humans rather than the animals themselves, then we can start to ask interesting questions about how to design offsets. The conventional assumption in many guidance documents is “nearby and similar” — that is, that a compensatory offset should benefit those who are most affected by an environmental loss, and that they should be provided with the same type of resource that was lost.

But since we’re talking about the welfare of complicated, messy humans, we can’t avoid difficult questions. For example, whose welfare matters when we design an offset? Would it be reasonable to instead require a “far away and different” offset to benefit a group in society that is under-represented, vulnerable or that lacks access to resources like parks and green space?

This — equally subjective — criteria could expand net wellbeing, but may leave those directly affected by the loss uncompensated, and may not replace the lost biodiversity in kind. These hypothetical alternatives not only underscore the possibilities and the risks of offset design, but also make clear the inevitable trade-offs that must be addressed.

Any credible economist will tell you that estimating environmental value is wrought with challenges. But they will also tell you that it is unavoidable

So what kind of offsets do people want? I was part of a Swedish-funded research project that asked citizens in Skåne County (almost 15% of Sweden’s population) to choose between alternative ways of compensating the loss of green space caused by urban development. We developed a statistical model to determine which attributes affect choice and how citizens value these attributes. Our findings confirmed that public preferences were in many ways consistent with guidance documents produced by experts.

For example, all the attributes we tested mattered in predicting choice, but their effects differed. Holding all else constant, increasing the size of a compensation site led to a 23% increase in the probability of a respondent choosing that option to compensate for the lost green space. Increasing the distance between the damaged site and the compensation site decreased the probability by 10%.

Perhaps even more relevant for policymakers is that choice depended on a combination of the attributes we tested. For example, a larger compensation site mattered more when it was relatively further away, which is consistent with US and European guidelines that suggest longer distances can be overcome with greater size.

Applying this kind of empirical data will be critical for improving acceptance of offsetting as a policy. Expert knowledge is unequivocally important for understanding and communicating environmental loss — and for ensuring credibility of the process — but citizen preferences will play an important role if offsets are to garner broad public support. A separate piece of research carried out by WSP in the UK with the think tank Bright Blue found that people were more likely to support development near them if it would benefit nature.

In an ideal world, prices would be superfluous. Goods, services and access to nature would be dispensed equally and fairly in just the right proportion to need. But even though price may be an imperfect mechanism for deciding who gets what and how much, it’s the one we have today. In my view, it’s better to make that system work for, rather than against, people. You may view the world through a different lens, but we can probably all agree that prices are, in any event, not “for the birds”.

Scott Cole is a senior environmental economist with WSP in Sweden. Read more about the MuniComp survey project, which was co-authored with Linus Hasselström, researcher in the Department of Sustainable Development, Environmental Science and Engineering at KTH in Stockholm. Scott would also like to thank all members of the MuniComp team for their input

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