Incentives and Biodiversity

by Randal O'Toole
Smithsonian Earth Day Conference on Biodiversity

Takings: What Works to Protect Biodiversity

I have six points to make followed by a brief proposal for using incentives to protect biodiversity. But first I would like to add my two cents worth to the debate over takings. We've heard people talk about the legality, constitutionality, and morality of takings, but I am not interested in those. Nor do I care what the Supreme Court says about takings.

What I care about is what works to protect biodiversity. A society in which the government has the power to take, seemingly at random, 50 percent, 20 percent, or any percentage of a person's property without compensation will not work very well. We've already seen signs of that in the wise-use backlash against the Endangered Species Act.

Imagine that freedom of the press meant that the government could censor "only" 20 percent of U.S. News & World Report or the Wall Street Journal. Or imagine that freedom of assembly meant that the government could forbid "only" 20 percent of all public or private meetings. Anyone would agree that such freedoms would be meaningless under these conditions.

So what does work to protect biodiversity and endangered species? I will present six rules that biodiversity advocates must follow to protect rare species. Then I will outline a proposal that follows these rules.

Rule 1: Do No Harm

More than half of all listed species are largely or primarily threatened by government-subsidized activities. Eliminating these subsidies should be the first priority for biodiversity advocates.

But we won't get very far asking Congress just to eliminate other people's subsidies. We have to eliminate all resource subsidies out of tax dollars--even subsidies for endangered species. That may be a hard pill to swallow, but the benefits from eliminating subsidies to destructive activities will outweigh the tiny amount of money Congress appropriates to endangered species.

Rule 2: Understand and Use Incentives

This may seem obvious. But Congress ignored the incentives created by virtually all the natural resource laws--including the Endangered Species Act--that it passed in the past hundred years. Most proposals for new or revised natural resource laws similarly ignore incentives. Instead, these laws and proposals are based on the same assumptions upon which the Soviet Union based its entire economy--assumptions that people will do what they are told or follow some moral principle even if their incentives run in the opposite direction.

For example, the Forest Service is supposed to practice multiple use and protect the environment. Yet a number of laws effectively reward national forest managers for losing money on environmentally destructive activities--especially timber cutting. Given a national forest conflict between timber and the environment, these incentives mean that the environment too often loses.

Imagine that Congress tried to build the Interstate Highway System the same way it designed the Endangered Species Act. If so, planners would decide where the highways should go, and then all private landowners whose land was cross by one of the planned highways would be required to build the road at their own expense. It doesn't seem likely that, using this method, we would have more than a few hundred or possibly a few thousand miles of highways today.

In redesigning the Endangered Species Act, we have to carefully consider the incentives created by every part of the law, or we will suffer from consequences that we don't expect and probably don't want.

Rule 3: Decentralize

There is always a powerful tendency to support centralization in the hope that this will make sure everybody does it right. In fact, centralization almost always guarantees that everybody does it wrong.

A good example is the Forest Service's fire suppression policy, developed in response to Congressional pressures, which has devastated more public land ecosystems than clearcutting. Another example is the Park Service's natural regulation policy, which is destroying park ecosystems yet is being imposed on parks nationwide. Decentralization, not centralization, is the key to protecting biodiversity and other natural resources.

Rule 4: Fund Out of User Fees, Not Tax Dollars

A practical reason for this rule is that, in a few years, there won't be any tax dollars for the environment. Within two decades, all federal receipts will be consumed by social security (and related entitlements) plus interest on the national debt. There will be little or no money for national defense, much less natural resources.

Even if budget shortfalls weren't a problem, funding out of user fees rather than tax dollars has the positive benefit of linking users to managers, which insures that managers provide the resources that user want the most. By contrast, funding out of tax dollars requires the intermediary of Congress, which insures that managers provide the resources that special interest want. This leads to rule 5.

Rule 5: Keep Biodiversity Out of Politics

Funds from user fees dedicated to biodiversity should go straight to a biodiversity program without Congressional appropriations. The Land & Water Conservation Fund shows what happens when Congress has to appropriate funds each year. First, Congress fails to spend most L&WCF funds on land acquisition. Second, most of the funds it does spend are earmarked to Congressional pork projects, not to recreation or biodiversity as intended.

To insulate funds from Congress, I look to the federal reserve boards as a model. These boards do not depend on Congressional appropriations and their members are appointed for nine-year terms so that, once appointed, they are not beholden to the president. This makes them the most politically independent arm of the federal government.

Rule 6: Find Win-Win Solutions

As with rule 2, this seems obvious. But the Endangered Species Act debate has become so polarized that few people are searching for win-win solutions. Polarization is such a powerful organizing tool that few organizations can resist using it. While polarization may be good for an organization's short-term health, however, it is bad for the organization's long-term goals. This is because polarization is a two-edged sword: It helps your opponents as much as it helps you.

A popular slogan during Earth Day 1970 was "We have met the enemy and he is us." Today, polarization has convinced many people that environmental problems result from enemies of the environment. This leads to solutions that make the "enemies" pay but relieves the "friends" of bearing their fair share of the costs.

In reality, the environment has no enemies; only people with different incentives. Win-win solutions work by coordinating incentives so that people will work together rather than against one another.

A Proposal to Use Incentives to Protect Biodiversity

These rules suggest that something more is needed than mere revisions of the Endangered Species Act. Instead, we need a new philosophy of government, and of public resource management in particular. When the first Earth Day took place twenty-five years ago, most Americans still believed that the federal government could solve problems like racism and pollution.

Today, two-thirds of all Americans believe that "government always manages to mess things up." After two decades of monitoring the Forest Service, Bureau of Land Management, and other federal resource agencies, I tend to agree.

I have come to think like Henry David Thoreau, America's first environmentalist. Thoreau said, "in wildness is the preservation of the world." But he also said, "that government is best which governs least." So I want to propose a plan to protect biodiversity that follows Thoreau's small-government ideal and the six rules I've listed above.

First, we can find an important win-win solution on public lands, because most of the resources on public land are currently sold well below fair market value. Of all resources in the national forests, national parks, BLM lands, and fish and wildlife refuges that make up 25 percent of this nation's land, Congress allows land managers to charge fair market value only for timber and oil & gas. (Given their poorly designed incentives, Forest Service and BLM managers don't always charge market value even for those resources.)

According to the Forest Service, charging market value for national forest recreation alone would bring in more than $6.6 billion per year. Extending this to the lands managed by the other three agencies brings the total to $11 billion. Even if we assume that Forest Service figures exaggerate by five times, the potential recreation fees are greater than the receipts from all public land commodities combined.

As David Secunda pointed out in his presentation, recreation often makes a good proxy for biodiversity. Recreation fees will give land owners and land managers powerful incentives to protect wildlife habitat. In turn, this will reduce the conflicts between endangered species and other land uses.

So I propose to allow public land managers to charge fair market value for all resources. The total funds generated will be sufficient to fund these agencies out of their own net income--thus saving taxpayers $5 billion per year. I also propose to dedicate 20 percent of the total receipts to a biodiversity trust fund to be managed by a board of trustees modeled after the federal reserve boards.

This board can use these funds--which I estimate will be between $750 million and $1 billion per year--to do anything it feels is best to protect and enhance biodiversity. This would include grants to state natural heritage programs, buying conservation easements, paying public or private land managers to use or avoid certain practices, or even pay people bounties if they have breeding pairs of a listed species on their land.

Some people may say that $1 billion per year is not enough to protect U.S. biodiversity. But $1 billion per year, combined with the proxy of recreation fees, is a lot more than we have now. If this amount turns out to be insufficient, then the solution is to find more user fees that can be partly dedicated to biodiversity, not to impose the costs on a few private landowners.

Incentive-based solutions avoid all of the antagonism and perverse incentives to destroy wildlife habitat that the current act generates. These proposals are also appealing to Republicans and fiscal conservatives. By changing the focus from central control to decentralized incentives, we can protect species on a nonpartisan basis and end up with better protection than under our current system.

Speech given April 22, 1995. Return to the Electronic Drummer.