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The Economics and Finance of Nature Loss

Paper Session

Friday, Jan. 3, 2025 8:00 AM - 10:00 AM (PST)

Parc 55, Cyril Magnin 1
Hosted By: American Economic Association
  • Chair: Olivier Wang, New York University

Emission prices, biomass and biodiversity in tropical forests

Lars Peter Hansen
,
University of Chicago
Jose Scheinkman
,
Columbia University

Abstract

We study the the impact of emission prices, inclusive of potential transfers to Brazil, on the robustly optimal reforestation of the Brazilian Amazon and its ramifications for biodiversity.
This impact depends on alternative land uses and on the dynamics of carbon accumulation of the forest’s trees. In this paper, we revisit and extend recent research by Assunção et al. (2023). The previous research uses a rich data set from the Brazilian Amazon, the largest tropical rain-forest, to show that: (a) in a business-as-usual scenario, the Brazilian Amazon would emit 17 Gigatons of CO2e in the next 30 years and (b) with transfers to Brazil of at least $25 per net ton of CO2e captured, the robustly optimal land use features substantial reforestation in areas currently used for low-productivity cattle ranching. Such transfers yield at least 18 Gigatons of CO2e capture in 30 years. The magnitude of these transfers compare very favorably with other carbon capture and storage schemes or with prices in carbon trading-markets. We extend this research by exploring the relationship between social emission prices and changes in biodiversity and biomass. There are more than fifteen thousand tree species in the Amazon, the overwhelming majority of which are rare. Appealing to the scientific literature on biodiversity in rainforests, we provide some initial estimates of the impact of carbon pricing on future changes in biodiversity. We also provide preliminary estimates of the incremental biomass losses induced by reductions in the biodiversity that resulted from past deforestation in the Brazilian Amazon.

Biodiversity and Blended Finance

Caroline Flammer
,
Columbia University
Thomas Giroux
,
ENSAE
Geoffrey Heal
,
Columbia University

Abstract

It is often difficult to monetize the rewards of biodiversity conservation, as a fraction of these are public goods whose benefits accrue to a very diffuse population. This means that the commercial return to investment in biodiversity conservation may be low, even though the social return is high. Under such circumstances it is difficult to generate adequate private finance for conservation. The solution is to blend concessional public funds and private finance in conservation investments in a way that raises the return to the private component. Theory suggests that the extent to which public finance is required will depend on the degree to which the biodiversity conservation benefits are public rather than private goods. Theory also suggests that some of the risks associated with investment in biodiversity conservation will be hard for a private investor to manage, and that blending can shift certain types of risk between the public and private investors. We test these ideas with several datasets on biodiversity investment and blended financing of projects, and find support for them. 

The Value of Land Conservation Investments: Evidence From Local Ballot Measures

Eyal Frank
,
University of Chicago
Joséphine Gantois
,
University of British Columbia
Dylan Hogan
,
Columbia University
Anouch Missirian
,
Toulouse School of Economics

Abstract

Investments in financing biodiversity are estimated to require an additional $700 billion in funding by 2030—yet we lack empirical evidence about the effectiveness of biodiversity investments. Here we use successfully approved local conservation funding decisions to estimate the biodiversity-financing elasticity. Across the United States, municipal, county, and state-level governments vote each year to raise public funds in support of local land conservation. In an average year, conservation ballot measures generate over $3 billion (2020 USD) for public land acquisition and protection, with state and local governments contributing about equal shares. We construct a novel dataset linking local conservation ballot measures in the US to populations of bird species, an indicator commonly used to assess overall ecosystem health. Using a vote share regression discontinuity design, we estimate the causal effect of land conservation investments on bird populations. Current results provide suggestive evidence that the impacts are small, but vary by species guild. These findings highlight the large heterogeneity across conservation efforts. 

The Economics of Biodiversity Loss

Stefano Giglio
,
Yale University
Theresa Kuchler
,
New York University
Johannes Stroebel
,
New York University
Olivier Wang
,
New York University

Abstract

We explore the economic effects of biodiversity loss by developing an ecologically-founded model that captures how different species interact to deliver the ecosystem services that complement other factors of economic production. Aggregate ecosystem services are produced by combining several non-substitutable ecosystem functions such as pollination and water filtration, which are each provided by many substitutable species playing similar roles. As a result, economic output is an increasing but highly concave function of species richness. The marginal economic value of a species depends on three factors: (i) the number of similar species within its ecosystem function, (ii) the marginal importance of the affected function for overall ecosystem productivity, and (iii) the extent to which ecosystem services constrain economic output in a given country. Using our framework, we derive expressions for the fragility of ecosystem service provision and its evolution over time, which depends, among other things, on the distribution of biodiversity losses across ecosystem functions. We discuss how these fragility measures can help policymakers assess the risks induced by biodiversity loss and prioritize conservation efforts. We also embed our model of ecosystem service production in a standard economic model to study optimal land use when land use raises output at the cost of reducing biodiversity. We find that even in settings where species loss does not reduce output substantially today, it lowers growth opportunities and reduces resilience to future species loss, especially when past species loss has been asymmetric across functions. Consistent with these predictions of our model, we show empirically that news about biodiversity loss increases spreads on credit default swaps (CDS) more for countries with more depleted ecosystems.
JEL Classifications
  • Q5 - Environmental Economics