Abstract
The objectives of this paper are to understand the factors leading to biodiversity loss and examine possible solutions to this problem. Market failure causes environmental degradation; this is one of the primary causes for losses in global biodiversity. The paper will examine four leading causes of biodiversity loss, examine the relationship between market failure and policy failure it will examine the role of measurement tools such as the Environmental Performance Index (EPI) and give some recommendations for a sustainable strategy to mitigate these market failures in the future.
“In the model that we grew up with, governments rule physical territory in which national economies function, and strong economies support hegemonic military power. In the new model, already emerging under our noses, economic decisions don’t pay much attention to national sovereignty in a world where more than half of the one hundred or two hundred largest economic entities are not countries but companies.”
Market failure causes environmental degradation; this is one of the primary causes for losses in global biodiversity. The ongoing deterioration of the environment through the depletion of natural resources, destruction of ecosystems combined with the increased effects of climate change can only be reduced through policy instruments aimed at correcting these market failures. The paper will examine four leading causes of biodiversity loss, examine the relationship between market failure and policy failure it will examine the role of measurement tools such as the Environmental Performance Index (EPI) and give some recommendations for a sustainable strategy to mitigate these market failures in the future.
Scarcity is the fundamental problem that the world is facing today; with growing populations and a limited amount of natural resources how we value these goods is significantly important. Without the understanding of this initial resource problem it will be difficult to adequately respond to the pressures of biodiversity loss. Market failure can be described by the failure to recognized three problems: Uncertainty of tenure, undervaluation of land resources and under-regulation of negative externalities. When these three questions remained unanswered and unaccounted for market failure ensues.
Uncertainty of tenure results from the lack of secure property rights. When people lack ownership there is loss of incentive and motive to add value to the land. therefore deterioration continues. With unsecure property rights the roles and responsibilities are ambiguous, having land and then having property rights that are without a legal definition, that are not enforced and are poorly valued will lead to market failure. Land owners, whether it be the government or private firms are left without confidence and have feelings of insecurity with a lack of property rights. Therefore these problems would need to be initially solved in order to not have market failure.
Secondly the undervaluation of natural resources is a common problem worldwide. The undervaluation not only discourages open markets, it also cuts market opportunity, which could possibly lower the price. Without some valuation of the natural resource we cannot show how this would effect society in a cost/benefit analysis. There is also no measure to show the reflection of value to society. Lack of markets leads to a lack of opportunity it also leads to policy driven market distortions. Distortions such as export bans, increase profit margins, vertical price integration all lead to an undervaluation of natural resources and again market failure. Policy instruments that may have good intent can in turn lead to an under valuation of a countries natural resource, for example, a subsidy that could encourage environmental degradation by subsidizing a harmful fertilizer “If market failures are severe, farmers could become locked into low levels of productivity, even when the technology and economic opportunity exist, since they cannot access and afford the seeds and inputs to take advantage; and thus they remain trapped in poverty, too poor to work themselves out of this condition” (Dorward et al., 2004; Duclos & O‘Connell, 2008). Another error made by governments is inappropriate resource taxation, whereas the governments over tax the resource instead of the negative externality or producer extracting the good, ultimately leading to overuse and market failure.
Lastly what is import in moving out of market failure into successful governance and ultimately environmental protect is the adequate regulation of negative externalities. These initiatives must adhere to specific codes of conduct that are: transparent, inclusive, responsive, timely and accountable. Policy failure occurs when this under regulation and un-enforcement takes place in the market place. As a result there is corruption and the government is seen as centralized which creates a displacement between the land and the government. There are potential problem in the supply chain for corrupt blending, or arbitrage from rent seekers. Market failure has a causal relationship on environmental degradation, the disconnect that occurs been physical and economic value of the resource manifests itself into market failure that will then require various supplementary environmental management plans to remedy.
The previously mentioned market failure can be further explained by the disconnect that occurs between resources and policy. When policies fail to incorporate the linkages of resources to: a) scarcity and price, b) benefit and cost c) rights and responsibilities, the tradeoffs that typically occurs can further exacerbate the problem. Factors that lead to loss of biodiversity come directly from the market failure. Now that there is an understanding of what market failure is and how it originates it will now be used as an instrument to demonstration the factors that lead to loss in biodiversity.
Under provision of environmental assets is a problem because it fails to attribute a value to such factors such as physical/human value, social value or natural resource value. Assets are typically under provided and create waste and deadweight loss, which are inefficient. Most natural resources are pure pubic goods; the idea that they are limitless abundant renewable resources often creates a challenge in management of the resource as a result there is overuse and under pricing. Subsequently the result of this under provision leads to increased environmental degradation: rapid deforestation, land degradation, soil depletion and erosion, water contamination, over fishing, depletion of biological diversity and increased air pollution are all negative effects due to market failure. This problem is further hindered by development implications and constrains on development.
There is a lack of understanding between root and proximate causes of a problem, and because of this misinterpretation inappropriate policies are implemented and typical responses from institutions are insignificant. In some countries there is the presence of misleading measurement indicators – there is overharvesting, draconian policy and zero compliance for the preservation of what the state owns. The constraints highlight the differences between physical indicators and economic indicators. Problems arise when there is deterioration in natural capital, this can transition is a qualitative reduction in that capital, the resource then ends up depreciated and devalued. From an economic perspective there needs to be better use of natural capital, stronger laws, rules and regulation to alleviate the negative externalities. Generally policies that fail are counter-intuitive and inefficient, they lack investment and have high costs, in addition there is insufficient valuing of biodiversity and ultimately improvements do not occur.
Loss of biodiversity continues because there is a lack of property rights defining who owns what. An example of a government intervention that increased the likelihood of a policy failure was the government support for the Trans-Amazonian highway through Brazil, this was a national development, resulting in extreme deforestation and encroachment issues and as a result should little sustainable economic development. (V. Dale, S.Pearson, H. Offerman R. O’Neill 2002) These property rights are essential in outlining what rights and responsibilities the property owner has, they should be enforceable, transferable and legally permissible but unfortunately this does not exist in all cases where biodiversity is threatened. Some developing countries have the added constraint of political instability and inadequate public institutions; these challenges make it difficult to focus support on environmental sustainability programs. Frequently there is corruption in both the public and private sector, which leads to mistrust in the government and the policies they implement further adding to market failure and loss of policies to support the environment and protect biodiversity. Ideally governments would deregulate polices which are detrimental to the environment and the economy and correctly regulate and tax macroeconomic initiatives instead for example moving from a subsidy to an incentive. This deregulation would help in the reduction of further induced market distortions. Consequently losses in biodiversity result from a mismanagement and misallocation of natural resources. The government’s failure to respond to this leads to market failure.
There are four primary sources that will be further investigated to help explain loss of biodiversity, these direct causes: Land-use changes, pollution, unsustainable natural resources and climate change substantially impact the maintenance of global biodiversity.
Changes in land-use have a significant effect on the current and future stages of biodiversity levels globally. Modifications that transform the existing ecosystem into something new are key sources of biodiversity loss. According to the World Bank, world population growth annual change 2010 was 1.1%( http://www.worldbank.org) with the growing population, demand for food and food production also increases. Agricultural expansion in developing countries will shift land use into food production and as a result habitat is lost and converted into food crops. This also occurs in developed nations where the food for fuel debate has developed in the past decade. “biofuels have already been shown to negatively impact biodiversity when direct conversion of natural ecosystems or indirect land conversion of non-degraded land occurs. The expansion of biofuel production in the tropics has resulted in the loss of tropical forest and wetlands, and in temperate regions biofuel production has encroached into set-aside lands. Biofuel feedstock plantations (particularly oil palm and maize plantations), have been shown to support far lower levels if biodiversity than natural ecosystems, and can cause soil erosion and the pollution of watercourses.” (A. Campbell, N. Doswald 2009)
Pollution is defined as the presence or introduction into the environment of a substance or thing that causes instability, disorder, damage or distress to the ecosystem. Pollution is another direct cause for losses in biodiversity it can effect the air, water and land. For example only 15% of mangrove forests in Pakistan are considered healthy, the mangroves have deteriorated due to increases in upstream pollution from the industrial sector and forest degradation. Currently 7 of the 8 species of mangroves have become rare or extinct in Pakistan, unfortunately environmental laws are largely unenforced and there is little accountability for the pollution producers to stop polluting and little incentive on conservation. (A.Wood, P. Stedman-Edwards, J. Mang 2000) Pollution simply eradicates ecosystems and results in losses to biodiversity.
Unsustainable natural resources that are pure public goods are very difficult to manage. In 1986 the New Zealand government implemented a quota management system (QMS) it attempted to stop the overfishing of inshore fisheries; this overfishing was thought to be the result of a 1970s initiative to increase fishing and expand exports, it wasn’t until this policy was implemented did the policy failure start to subside. Pure public goods are non-excludable and non-rival this causes people to overuse the resource to maximize their own profits, unfortunately this theory does not align with conservation theories. Fisheries, mines, and commercial farms are annex land and extract the natural resource; this depletes the current ecosystem and reduces biodiversity. “In case of wood extraction as a proximate cause for biodiversity loss, commercial logging is mostly mentioned and fuel wood collection is mentioned to a lesser extent. After the 1950s, increasing demand for Asian timber led to the extension of commercial logging activities.” (N.Sodhi 2004)
Climate change increases stress on the environment; it can aggravate the effects of other pressures, including loss of habitat, conversion of land, over-exploitation, introduction of alien species, and pollution. Climate change is broadly defined as a significant statistical change in properties over time in a climate system. As global temperatures rise fragile ecosystems that are unable to cope become extinct directly impacting ecosystem biodiversity. Climate change is having significant impacts on the health of the ocean, coral reefs, artic ice and some species that lack the natural ability to adapt will assume the negative externalities of climate change. Contrasting yet similar to the effects on the ocean desertification also negatively effect other ecosystems globally, for example “Climate change has also been implicated in the decline of amphibians in tropical montane forests. (Pounds, Fogden and Campbell 1999) Overall increases in climate change increase the likelihood for biodiversity loss, due to increases in global temperature and vulnerable species inability to adapt loss in biodiversity is inevitable.
A policy should be implemented when it corrects real or perceived market failures. To ensure that the benefits of the government intervention exceed the costs suitable planning, implementation and enforcement must occur. Before examining some ways to solve the market failure and make correct policy decisions, we will explore a realistic measurement tool currently in place to help assist countries in making environmental policy decisions. The Environmental Performance Index (EPI) acts as a standard of measurement for a countries environmental performance in relation to its government policy. This baseline acts as a reference point, contributing countries can then be compared or assessed and in the case of EPI ordered and ranked. These results are significant to many audiences; the government needs to see tangible results from investments in environmental protection in order to keep allocating resources to the environment. Private and public firms could potential see increases in costs from carbon taxes or new environmental requirements, contrary there could be a potential for a new emerging green sector where innovative investors could profit. The populace would also be able to use the results to evaluate the government, are whether the concerns for health and environment being replicated into policy. Overall the government can look at the ranking and use this as a benchmark on the evaluation of the current policy in place, is this a success or failure are we seeing improvements or deteriorations, and what are the plans for the future.
The EPI builds on the 2000 Environmental Sustainability Index (ESI) data-driven evaluation through quantitative metrics. 2012 EPI ranks 132 (*193 countries world wide) countries on 22 performance indicators in 10 policy categories, The 10 policies are grouped under 2 objectives “Environmental Health & Ecosystem Vitality”. 2012 EPI uses a set of core indicators that meet high standards, (direct measurement over modeled data) standardized time series and institutional commitments to maintain current and future data. Historical data has been recorded for the last ten years which allows governments to track overall performance. In each country an indicator or “proximity-to-target” value is created, this measures the gap between perceived and actual outcomes of a policy. The generic formula for the proximity-to-target indicator calculation in the context of the global EPI is as follows:
(International range) – (distance to target)
—————————————————- x 100
(International range)
Data is collected from international sources, research institutions, government agencies and academia. Data analyzed comes from formal reporting, spatial data, observations and modeled data. After the data has been transformed by dividing by GDP (creates comparability across countries) other distortions need to be adjusted for, logarithmic instruments differentiates between performers. Lastly the transformed and logged data is converted into indicators, the indicators are uniform and with a common unit to assess aggregate up to the index.
The EPI is a suitable measure because it sets up a critical value based on the countries own projected target, this way the government has some individual quantitative results to help analyze if the instrument or policy was successful or not. These results and standards should help guide policy planners in the future as to where society could see the most gains overall.
To overcome market failure there needs to be a reform of unsuccessful government policies: new or amended laws, taxes, subsidies, direct market interventions are a few examples of improvement policies that could ease market failure. In addition to the reform the strategy must have benefits that exceed costs, there should be a distinction between direct and indirect costs as well as an outcome based versus input based cost benefits analysis. Policies should aim to correct previous objectives that override the environment. They should also correct national competitiveness to increase sustainability of resources. The government needs to pay special attention to social equity, rent seekers and inefficient & inadequate policies; these will all need to be improved in order to stop increases in biodiversity loss.
In order to fully correct the market failure you need to also evaluate the previous policies in place, there are various market distortions that would have to be addressed. Typically taxes undervalue natural resources, for instance an export tax that causes distortionary prices in the market, the same goes for subsidies that encourage environmental degradation for example a fuel subsidies, decreased costs resulting from the subsidy lead to increased fuel use, subsequently increasing CO2 emissions. Another example is a policy supporting production is the use of quotas, this leads to wasteful or high grading extractions (deforestation, over fishing) a solution to this could be the incorporation of Individual transferable quotas (ITQ) The ITQ quotas are considered permanent but are subject to specific rules and regulations set out in the policy, such examples include restrictions on species type and fishable area. The quotas aggregate to a total allowable catch (TAC) this total acts as a safeguard to ensure that only a sustainable number of fish are harvested. The TAC can be increased or decreased depending on the health of the fish stock and the desired sustainable demands of the government. The benefit of this is mechanism is tradable individual property rights create the elasticity to lower production without large-scale losses in profits. Ideally governments would like to build on what is already preexisting, more importantly decision makers will need to reflect on the nature of the problem.
Once they identify proximate and root causes of the problem they can apply a practice of good governance to the new policies implemented. This implementation should be: transparent, inclusive, responsive, timely and accountable. Globally there needs to be a re-establishment of a link between resource scarcity and resource price, this will help stimulate efforts to seek out substitutes or green alternatives and focus attention on conservation.
A successful policy reform will include comprehensive development, planning and investment. It will remove distortionary subsidies and deregulate and reallocate rules and regulation with appropriate taxation. It should also allocate land tenure and maximize utilization. Policies should be decentralized and have a focus on determining a full value of the natural resource. This valuation will be difficult, valuing of natural resources is unexplored there needs to be value that reflects both a value to society as well as market value. Once these market and policy failure have been accounted for, policy planners and decision makers can then choose reform actions to create sustainable solution that will ideally reduce global biodiversity loss.
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