In 2019, the Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services (IPBES) sounded the alarm. In its Global Assessment, the independent body tasked with providing policymakers with scientific assessments about the state of nature concluded that biodiversity was declining faster than at any time in human history. The IPBES found that the global rate of species extinction was at least 10-100 times larger than the base rate over the past 10 million years and quickly accelerating, with about a quarter of animal and plant species groups threatened and widespread local extinctions from particular ecosystems. The IPBES concluded that “the great majority of indicators of ecosystems and biodiversity show rapid decline.”
In the years since this Global Assessment, biodiversity loss has increasingly attracted the attention of policymakers in Europe and beyond. Some of this interest has come from financial regulators focused on the possible risks to economic activity and financial stability from a loss of biodiversity. For example, in June 2023, Frank Elderson, Vice-Chair of the Supervisory Board of the European Central Bank (ECB), wrote that “destroying nature means destroying the economy,” announcing that the ECB would “address the cascading effects of nature degradation and climate change on the economy and financial stability.” Despite mounting concerns about biodiversity’s economic impact, there is a notable lack of research towards a fuller understanding and quantification of these interactions.
In The Economics of Biodiversity Loss, we develop an ecologically-founded model that captures how biodiversity affects economic activity. Our model has a hierarchical structure: aggregate ecosystem services depend on multiple complementary ecosystem functions (like pollination and water purification), with each function supported by multiple species playing similar roles. This structure generates important non-linearities. Within each function, species loss initially has little effect due to functional redundancy—other similar species can compensate. However, as biodiversity decreases, remaining species become “keystone species” whose loss severely impacts ecosystem productivity. The complementarity across functions amplifies these effects: once a function’s productivity falls sufficiently, it becomes a constraint on the entire ecosystem. As a result, economic output is an increasing but highly concave function of species richness, with the marginal economic value of each species depending on three factors: (i) the number of similar species within its function, (ii) the function’s importance for ecosystem productivity, and (iii) how much ecosystem services constrain economic output.
This model structure allows us to characterize ecosystem fragility—how sensitive ecosystem services are to further biodiversity loss. This fragility measure, which depends critically on how past species losses are distributed across functions, can help policymakers assess risks 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.
We provide empirical evidence that (future) biodiversity loss materially affects countries’ economic output. We show that spreads on country-level credit default swap (CDS)—a measure of investors’ perceived probability that a country will default on its debt—increase substantially when investors receive negative news about aggregate biodiversity loss, as measured in Biodiversity Risk. In line with our model’s predictions about ecosystem fragility, we find larger increases in countries that have more depleted ecosystems or where ecosystem services more likely constrain production.
We view biodiversity loss as a conceptually distinct challenge to climate change, but the two clearly interact in important ways. In Nature Loss and Climate Change: The Twin-Crises Multiplier, we extend the model to study the interaction of nature loss and climate change, incorporating important aspects of both processes. We capture the distinct ways in which they affect economic activity—with nature constituting a key factor of production and climate change destroying parts of output—but also the many ways in which they interact: climate change accelerates nature loss, while nature provides both a carbon sink and adaptation tools to reduce climate damages. Our analysis of these feedback loops reveals a novel amplification channel—the Twin-Crises Multiplier—that systematically affects optimal climate and nature conservation policies.