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Managing increasing environmental risks through agro-biodiversity and agri-environmental policies
(2008)
Agro-biodiversity can provide natural insurance to risk-averse farmers by reducing the variance of crop yield, and to society at large by reducing the uncertainty in the provision of public-good ecosystem services such as e.g. CO2 storage. We analyze the choice of agro-biodiversity by risk-averse farmers who have access to financial insurance, and study the implications for agri-environmental policy design when on-farm agro-biodiversity generates a positive risk externality. While increasing environmental risk leads private farmers to increase their level of on-farm agro-biodiversity, the level of agro-biodiversity in the laissez-faire equilibrium remains inefficiently low. We show how either one of two agri-environmental policy instruments can cure this risk-related market failure: an ex-ante Pigouvian subsidy on on-farm agro-biodiversity and an ex-post compensation payment for the actual provision of public environmental benefits. In the absence of regulation, welfare may increase rather than decrease with increasing environmental risk, if the agroecosystems is characterized by a high natural insurance function, low costs and large external benefits of agro-biodiversity.
We develop a comprehensive multi-level approach to ecological economics (CML-approach) which integrates philosophical considerations on the foundations of ecological economics with an adequate operationalization. We argue that the subject matter and aims of ecological economics require a specific combination of inter- and transdisciplinary research, and discuss the epistemological position on which this approach is based. In accordance with this understanding of inter- and transdisciplinarity and the underlying epistemological position, we develop an operationalization which comprises simultaneous analysis on three levels of abstraction: concepts, models and case studies. We explain these levels in detail, and, in particular, deduce our way of generic modeling in this context. Finally, we illustrate the CML-approach and demonstrate its fruitfulness by the example of the sustainable management of semi-arid rangelands.
Strong sustainability, according to the common definition, requires that different natural and economic capital stocks have to be maintained as physical quantities separately. Yet, in a world of uncertainty this cannot be guaranteed. To therefore define strong sustainability under uncertainty in an operational manner, we propose to use the concept of viability. Viability means that the different components and functions of a dynamic, stochastic system at any time remain in a domain where the future existence of these components and functions is guaranteed with sufficiently high probability. We develop a unifying and general ecological-economic concept of viability that encompasses the traditional ecological and economic notions of viability as special cases. It provides an operational criterion of strong sustainability under conditions of uncertainty. We illustrate this concept and demonstrate its usefulness by applying it to livestock grazing management in semi-arid rangelands.
Agro-biodiversity can provide natural insurance to risk averse farmers. We employ a conceptual ecological-economic model to analyze the choice of agrobiodiversity by risk averse farmers who have access to financial insurance. We study the implications for individually and socially optimal agro-ecosystem management and policy design when on-farm agro-biodiversity, through ecosystem processes at higher hierarchical levels, generates a positive externality on other farmers. We show that for the individual farmer natural insurance from agro-biodiversty and financial insurance are substitutes. While an improved access to financial insurance leads to lower agro-biodiversity, the e_ects on the market failure problem (due to the external benefits of on-farm agro-biodiversity) and on welfare are determined by properties of the agro-ecosystem and agro-biodiversity’s external benefits. We derive a specific condition on agro-ecosystem functioning under which, if financial insurance becomes more accessible, welfare in the absence of regulation increases or decreases.
We analyze the optimal dynamic scale and structure of a two-sectoreconomy, where each sector produces one consumption good and one specific pollutant. Both pollutants accumulate at di_erent rates to stocks which damage the natural environment. This acts as a dynamic driving force for the economy. Our analysis shows that along the optimal time-path (i) the overall scale of economic activity may be less than maximal; (ii) the time scale of economic dynamics (change of scale and structure) is mainly determined by the lifetime of pollutants, their harmfulness and the discount rate; and (iii) the optimal control of economic scale and structure may be non-monotonic. These results raise important questions about the optimal design of environmental policies.
In the face of uncertainty, ecosystems can provide natural insurance to risk averse users of ecosystem services. We employ a conceptual ecological-economic model to analyze the allocation of (endogenous) risk and ecosystem quality by risk averse ecosystem managers who have access to financial insurance, and study the implications for individually and socially optimal ecosystem management, and policy design. We show that while an improved access to financial insurance leads to lower ecosystem quality, the effect on the free-rider problem and on welfare is determined by ecosystem properties. We derive conditions on ecosystem functioning under which, if financial insurance becomes more accessible, (i) the extent of optimal regulation increases or decreases; and (ii) welfare, in the absence of environmental regulation, increases or decreases.
Abstract. The ecological literature suggests that biodiversity reduces the variance of ecosystem services. Thus, conservative biodiversity management has an insurance value to risk-averse users of ecosystem services. We analyze a conceptual ecological-economic model in which such management measures generate a private benefit and, via ecosystem processes at higher hierarchical levels, a positive externality on other ecosystem users. We find that ecosystem management and environmental policy depend on the extent of uncertainty and risk-aversion as follows: (i) Individual effort to improve ecosystem quality unambiguously increases. The free-rider problem may decrease or increase, depending on the characteristics of the ecosystem and its management; in particular, (ii) the size of the externality may decrease or increase, depending on how individual and aggregate management effort influence biodiversity; and (iii) the welfare loss due to free-riding may decrease or increase, depending on how biodiversity influences ecosystem service provision.
