Two combined recent experiences gave rise to this blog post: I recently taught a course in environmental economics, and last week a group of NGOs, scientists, farmer organizations , and a bank published the “deltaplan biodiversiteit (in Dutch)” (Delta plan biodiversity), a combined vision and plan on how to save and restore biodiversity in the Netherlands.
Biodiversity decline has been quite dramatic in the Netherlands. It’s a small and densely populated country with very intensive agriculture. The latter has boosted our agricultural production, but has at least in part also been responsible for some of the large declines in insects and farm birds.
I grew up in the countryside, and still live close by the edge of town. It always was and still is a true joy to cycle in the countryside in spring and spot — and especially hear — the characteristic sound of e.g. the Northern lapwing (Vanellus vanellus) or Black-tailed godwit (Limosa limosa). Also a great sighting around my house is the ever more rare Eurasian oystercatcher (Haematopus ostralegus). And these days it’s even more enjoyable now that I get to share that with my kids. I therefore wholly support the plan, and very much like the integrated science-based view it advocates.
What does all that have to do with teaching environmental economics and the complex world of 2nd best? I currently teach at Windsheim Honours College, where we try to teach students to become project and global change managers that can deal with complex problems. Restoring biodiversity is clearly complex: in an earlier post I described the difficulties of just measuring biodiversity. Add to that the context of the Netherlands with the dense population and intensive agriculture. Then the fact that we do not (yet) understand the relations between actions on the ground and outcomes in terms of biodiversity, plus all the non-linear network effects that can kick-in and we have a nice mess.
The plan recognizes that and calls for integrated policy and measurement. As part of the policy, farmers are to be compensated for measures they take to improve biodiversity, among others, through subsidies. Given that the relation between input and outcomes is not clear, the compensation is to be based on input and not outcomes. As an example a farmer should be compensated for the percentage of “herb rich meadows” they have rather than the increase in farmland birds this generates. And this is exactly where environmental economics and the world of 2nd make their appearance.
In introduction to environmental economics courses pollution targets are typically taught as a trade-off between the marginal damage of the pollution, or, almost equivalent, damage of biodiversity loss, and the marginal costs of reducing pollution, known as the marginal abatement cost. A typical graph would look like this:
On the horizontal axis we have biodiversity loss, on the vertical axis the cost of an additional unit of biodiversity loss (marginal damage) as well as the cost of undoing an additional unit of biodiversity loss (marginal abatement cost). Note that the latter one is read from right to left: if there is no reduction, we have no costs of abatement, and marginal costs of undoing biodiversity loss rise, as we have less biodiversity loss and as a consequence more biodiversity. The total damage, and total costs of reducing biodiversity loss, are represented by the area under the curve. The usual assumption is that we start at A (lots of biodiversity loss, no abatement) and want to move to B (where total costs of damage plus abatement are minimized) .
There are several instruments that can be used to get there, and in these introductory courses we typically point out that a tax on “causing biodiversity loss” and a subsidy on “preventing biodiversity loss” are in essence the same thing, they just differ in distribution of costs and benefits.
What is interesting is that ethically many people would find a subsidy to reduce pollution less appropriate, as it is not in line with the “polluter pays” principle. When it comes to farmers and biodiversity loss, however, I typically hear fewer such objections, with possible exception of nitrogen or phosphorus leaching. The above mentioned plan also talks about compensation, be it via a subsidy or via higher prices. Given that the plan has been formulated with farmers, that is perhaps not surprising, but it is a general observation that also applies to e.g. the agri-environmental payment schemes that are in place all over the EU. Are farmers better lobbyists than industry? Is it the stereotype of the farmer that “works in harmony with nature” as opposed to the “evil factory owner that spoils the environment”? Perhaps, but there is something else…
One other important thing is that the world is much more complex than the model I have just shown. Dutch farmers operate in an international market that is murderously competitive. Taxing them for biodiversity loss would push some or perhaps even a lot of them out of the market, if other countries do not undertake similar tax schemes. Also the aforementioned unclear relationship between actions and outcomes muddies the water. What if we are taxing farmers for something that is not at all effective in terms of reducing biodiversity loss in the first place? I think some of these are the reasons why we do consider compensation for farmers more than taxing them. A complex world is more difficult to analyze than what we teach in environ econ 101, but it is also a LOT more interesting….
 I am brushing over a LOT of problems here, among others that biodiversity is a stock problem rather than flow, that not all species are created equal, that we can value the biodiversity losses and that the market in which farmers operate is perfectly competitive
Oyster catcher: Andreas Trepte [CC BY-SA 2.5 (https://creativecommons.org/licenses/by-sa/2.5)], from Wikimedia Commons
Northern lapwing (cover photo): Andreas Trepte [CC BY-SA 2.5 (https://creativecommons.org/licenses/by-sa/2.5)], from Wikimedia Commons