The Insurance Value of Biodiversity in the Provision of Ecosystem Services

Abstract

Biodiversity provides insurance against the uncertain provision of ecosystem services which are being used by risk-averse economic agents. I present a conceptual ecological-economic model that combines (i) current results from ecology about the relationships between biodiversity, ecosystem functioning, and the provision of ecosystem services with (ii) economic methods to study decision-making under uncertainty. In this framework I (1) determine the insurance value of biodiversity, (2) study the optimal allocation of funds in the trade-off between investing into biodiversity protection and the purchase of financial insurance, and (3) analyze the effect of different institutional regimes in the market for financial insurance on biodiversity protection. I conclude that biodiversity acts as a form of natural insurance for risk-averse ecosystem managers against the over- or under-provision with ecosystem services. Therefore, biodiversity has an insurance value, which is a value component in addition to the usual value arguments, such as direct or indirect use or non-use values. In this respect, biodiversity and financial insurance are substitutes. Hence, the availability, and exact institutional design, of financial insurance influence the level of biodiversity protection.

Keywords: biodiversity, ecosystem functioning, ecosystem services, insurance, risk aversion, uncertainty

JEL Classification: Q20, Q57, G22