What price should we put on the head of a red squirrel or a turtle dove? What value does a woodland, heath or fen bring to the economy? Under radical new Conservative proposals to stop biodiversity loss in the UK, all would be given a cash value.

The scheme is designed to halt the decline of hundreds of habitats and species by assigning a cost to be paid by proposed development schemes that would lead to their destruction. The damage done by a project would be given a cash value and developers asked to compensate for that damage by investing an equivalent amount in projects to protect or improve biodiversity at another location.

The plan being put forward by the new Conservative shadow environment secretary, Nick Herbert, is modelled on similar "bio-credits" initiatives, including in the US, Malaysia and Australia, which have created markets in biodiversity worth tens of millions of pounds a year.

Conservation groups said they welcomed new ideas to improve biodiversity. However, there will be concerns about aspects of the policy including Herbert's proposal that a scheme could be voluntary, and it should not impose extra costs on business, and the wider risk that a trading policy would encourage development on rare ecosystems which could not be replaced. There will also be many questions over how species and habitat are valued and compared.

The Department for Environment Food and Rural Affairs has also asked consultants to examine the idea, which is also known as bio-banking, conservation banking or ecological offsetting.

Herbert said many concerns would be considered by a consultation with environment experts, but the policy was intended to be additional to existing protection and not to encourage more development. "We do not want this to be a substitute for environmental, landscape or habitat protection," Herbert told The Guardian. "What we have in mind is schemes likely to go ahead anyway. There is, whether we like it or not, going to be development going forward, and the risk is that will mean further biodiversity loss. The question is how can we prevent that: we should, therefore, start looking at a system for not just preventing biodiversity loss but also enhancing it."

The UK and the European Union have targets to halt biodiversity decline by 2010. However the latest figures from Natural England, the government's advisory body on the natural environment, show continuing declines in four out of 10 of the most rare and threatened "priority" habitat, including chalk rivers, fens, wood-pasture and coastal sand dunes; and more than a quarter of priority species, such as red squirrels, turtle doves and juniper.

At the same time there is a growing recognition of the importance of "ecosystem services" such as clean water, fertile soil, medicines and pollination of plants.

Experts say development is not the only threat to biodiversity – pollution and climate change are also serious problems. However, development was damaging individual sites, and the fragmentation caused by building over particular habitats would make it harder for species to adapt to climate change, said Herbert. "The problem is this is something society places a high value on but economics places no value on," he added.

Dr Tony Whitbread of The Wildlife Trusts said: "The bio-credits idea is interesting but, as always, the devil will be in the detail. Bio-credits raise many questions, for example: how would they work with the current planning system? How would they be funded, especially if they don't put extra costs on businesses? And where would raised funds be spent? It is also vital that any new system recognises that some habitats are irreplaceable and cannot be traded."

David Hill, a professor in ecology at Oxford Brookes University who also runs a consultancy on conservation issues, said money spent on conservation at development sites could often be better spent on extending existing nature reserves or Sites of Special Scientific Interest, or creating new ones in better locations. He said that house builders have indicated they would be willing to pay around £5,000 per new home built if a scheme similar to the Tory proposals was up and running. "Multiply that by 240,000 homes a year to be built: you suddenly realise the figures that could go into the natural environment go into the 100s of millions [of pounds]," he added.

In the US, where bio-banking is widespread, the trade in wetland bank credits reached $350m in 2006, and the trade in "endangered species credits" was around $40m between 2002 and 2005.

One academic study in 1997 has estimated the value of global ecosystems as $33tn a year, double the economic wealth circulated - a figure criticised by different groups as too high and too low.