Appendix II: Economic Appraisal

The BIOFIN Process prioritizes finance needs and biodiversity results in the FNA (Chapter 5) and finance solutions in Chapter 6 using expert interpretation of the evidence generated (such as the costs of biodiversity results). The reliance on expert judgment is partly due to the difficulty in measurin biodiversity results and subsequent impacts on people (e.g. improvements in ecosystem services) in quantitative terms.

In many policy assessments, cost-benefit analysis (CBA) and cost-effectiveness analysis (CEA) are used for this prioritization. However, these are not always reliable for biodiversity, due to the difficulties of:

  • Valuing environmental outcomes, due to factors such as market failure, as required in CBA, and
  • Consistently measuring the effectiveness that sustainable biodiversity management actions might achieve, as required for CEA.

Nevertheless, CEA and CBA are powerful tools to provide evidence to decision makers that biodiversity finance solutions will be efficient and effective. Therefore, where possible, they should be used within the BIOFIN Process, particularly in making a detailed business case within the Biodiversity Finance Plan, as long as data are considered reliable enough to overcome the above difficulties.

Cost-Effectiveness Analysis of Biodiversity Results

CEA is a tool to determine the most effective actions to achieve an objective. It is used when significant variables, often including environmental impacts (particularly those on biodiversity) cannot be valued for cost-benefit analysis. However, unlike cost-benefit analysis, CEA cannot determine whether a given objective is worth achieving; but it can assist in prioritizing one alternative over the other. A comparison of biodiversity results and associated costs using cost-effectiveness analysis may be useful in Step 6.5 to select biodiversity results or targets for finance solutions to prioritize.

The NBSAP may have already considered the cost-effectiveness of different ways of achieving biodiversity results. If required, we can develop CEA by building on that work, and/or the biodiversity cost/priority comparisons. Note that comparisons of detailed effectiveness scoring of different biodiversity results are potentially a complex and time-consuming exercise. It is unlikely to be feasible for the majority of a country’s NBSAP targets, but could be undertaken for a subset of biodiversity results, selected from the prioritization.

Effectiveness criteria may be expanded to consider: delivery capacity and delivery risks (such as the certainty in the scientific basis for an action), and links to ecosystem services and other socio-economic development objectives. The complexities of effectiveness scoring mean that CEA is likely to remain qualitative to some extent and rely on expert judgment. Where expert judgment is used, it is important to state which experts are involved.

Note that in the Biodiversity Finance Plan CEA may be used to select and/or justify specific approaches within the technical proposals for specific biodiversity finance solutions

Using Cost-Benefit Analysis and Monetary Valuation

CBA is a decision-making tool that compares the economic and financial costs and benefits of a proposed policy or project in monetary terms. It compares as many benefits and costs of an option (project, policy or programme) as feasible, including impacts on environmental goods and services. In principle, it can be applied both ex ante and ex post, and should note major costs and benefits which are not possible to value in monetary terms. However, the latter does not always occur in practice, meaning that environmental impacts are inadequately considered in decision-making due to their valuation challenges.

Perhaps the most important aspect of CBA is that it is designed to target two of the most crucial policy questions: “Is a given objective worth achieving?” and if so, “What is the most efficient way of doing this?” Another CBA question that policymakers might need to consider is which biodiversity objective can also generate the highest multiple benefits (e.g. social benefits, such as job creation and higher local income as a result of biodiversity enhancement) and contribute to the highest welfare in society. Recent studies have tried to quantify environmental impacts in monetary terms and recognize economic and social benefits through job creation and ecosystem services.1

As well as appraisal of these overall economic impacts, CBA results are useful because they can indicate the distribution of costs and benefits across different groups (e.g. social groups, locations, economic sectors). This can be important information to help design effective and socially and politically acceptable finance solutions.

A particular CBA challenge is attributing monetary values to natural environment impacts. Many environmental goods and services are not bought and sold, at least not directly, and so there are no market prices with which to value them (see Chapter 1). Also, complex ecological interactions weaken the effectiveness of direct cause-effect models. However, nonmarketed environmental goods and services can be just as important as, and in some cases more so than, things we do buy and sell.2

Because monetization of social and environmental costs and benefits is very useful for comparing options, economists have developed different methods that put a value on certain benefits of biodiversity: hedonic pricing, benefit transfer, avoided costs, travel cost method, willingness-to-pay surveys and others.3 For example, using a willingness-to-pay method, one study estimated that the total annual economic value of the National Parks in the United States to the American public is US$92 billion.

When we don’t know some environmental costs and/or benefits, we use different kinds of evidence for decision-making, such as subtracting ‘known’ (i.e. monetized) benefits from costs, and then assessing whether the non-monetized benefits might influence the decision.4

As evidence on the value of ecosystem services improves, more CBA of biodiversity actions is becoming possible. For example, Switzerland conducts a CBA for all proposed actions in its NBSAP as stated in the Swiss Biodiversity Strategy.5