Incremental Cost in the Convention on Biological Diversity

Raffaello Gervigni ()

Environmental & Resource Economics, 1998, vol. 11, issue 2, 217-241

Abstract: The Convention on Biological Diversity stipulates the principle of incremental cost for the international financing of biodiversity conservation. The international debate about the exact meaning of the concept and about its practical application focuses on the issues of baseline determination and treatment of incremental domestic benefits. This paper uses some standard tools of partial equilibrium demand analysis to illustrate theoretical solutions to the indeterminacy of the Convention. The allocation of resources resulting from an incremental cost scheme is compared with a 'domestic optimum', and with a hypothetical 'global optimum'. Regarding the behaviour of the country hosting biodiversity, a distinction is proposed between 'quantity-' and 'transfer-' taking behaviour. The issue of price distortions in the baseline is also addressed. It is shown that both the host country (H) and the Rest of the World (ROW) will have incentives for agreeing on a transfer of resources that entails only partial deduction of domestic incremental benefits. This transfer, despite failing to reach the utilitarian global optimum, still represents a Pareto improvement over the pre-convention status quo. By imposing a particular multiplicative functional form on the utility of both host and ROW, additional results can be obtained. In particular, the optimal transfer implies a clawback factor decreasing with relative income differentials, and incremental cost financing dominates the domestic optimum even when price distortions are present in the host country. If removal of price distortions is a precondition for incremental cost funding, the analysis illustrates the magnitude of incentives necessary for the host to give up the distorted baseline. Copyright Kluwer Academic Publishers 1998

Keywords: environmental and natural resource economics; global environmental problems; transboundary externalities; biodiversity; incremental cost (search for similar items in EconPapers)
Date: 1998
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DOI: 10.1023/A:1008293329546

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