Overview of Economic Valuation Methodologies Suzie Greenhalgh World Resources Institute

Total Economic Value

Major Uses of Coral Reefs Direct Uses – Consumptive Resource is consumed or extracted/destroyed Mainly provisioning services Examples: Reef Fishing Catching other associated fish populations, crustaceans and shell fish Reef gleaning Coral/vegetative matter collection

Major Uses of Coral Reefs Direct Uses – Non-Consumptive Resource condition remains the same after use Mainly cultural services Examples: Snorkeling Scuba diving Sailing/glass bottom boats Surfing Tourism/general recreation

Major Uses of Coral Reefs Indirect Uses Resource provides a service that results in something else we value Mainly regulating and supporting services Examples: Fish nursery/forage grounds for pelagic fish Shoreline Protection Wave Energy dissipation/storm surge protection Protection of harbour/port infrastructure

Major Uses of Coral Reefs Non-use Values Coral reef values that don’t involve direct or indirect uses Mainly cultural services Examples: Option values—value attached to option of using/visiting the reef later Bequest values—value placed on protecting the reef for future generations Existence values—value of knowing the reef exists

Some Useful Terms Consumer Surplus Producer Surplus Amount people are willing to pay for a good or service (e.g., diving on a reef) above what it actually cost to use that service (e.g., cost incurred to dive) Producer Surplus Amount people are willing to offer their services at below what they actually charge for that service

Categories of Valuation Methods Market-Based, e.g., Change in Production/Effect on Production Production Function/Market Price Revealed Preferences, e.g., Replacement Costs Travel Cost Hedonic Pricing Stated Preferences, e.g., Contingent Valuation

Production Function Also known as market prices or net benefits Values direct uses, e.g., fisheries, tourism/rec Uses market prices to determine value Should include both revenue and costs of providing the service Example: Used to estimate the economic value of the commercial reef fishery in Belize~US$1.9mill net return on investment in 1998

Production Function Advantages Disadvantages Easy to use Fewer assumptions Little modelling or statistical analysis Disadvantages Many goods/services do not have markets or have highly distorted markets

Change in Production Also known as Effect of Production Values direct uses, e.g., fisheries and tourism/rec Uses differences in output/prodn as basis for valuing reef services Used to estimate effect of an impact/management change Example: Sumilon Island (Philippines) had decline of US$54,000 in reef catch in 1990 after breakdown in protective management

Change in Production Advantages Disadvantages Applicable to a wide range of goods and services Disadvantages Difficult to collect data to accurately predict bio-physical response relationships May be other market impacts that need to be included, e.g., change production—prices change—people switch to different good

Replacement Cost Values indirect uses, e.g., shoreline protection Cost of infrastructure for coastal protection is a proxy for the protection provided by coral reefs Example: ~US$91,000 in coastal defenses had to be built on Tarawa Atoll, Kiribati to replace coral reef protection

Replacement Cost Advantages Disadvantages Simple to apply and analysis Useful when there is limited time/finances available Disadvantages Difficult to find perfect replacements that provide the same quality as the coral reef. It is questionable as whether (total) expenditure would be made if resource disappeared

Avoided Damages Also known as Stock at Risk Values indirect uses, e.g., shoreline protection Value based on the damage that is avoided by presence of the coral reef This is a proxy for the protection provided by coral reefs Example: Annual cost of erosion from coral mining in Sri Lanka ranged from ~US$160-172,000/km2 of reef, depending on land prices and landuses.

Avoided Damages Disadvantages Values are hypothetical Never sure whether the damages would ever occur

Hedonic Pricing Values non-consumptive direct uses and indirect uses, e.g., shoreline protection, enjoyment of a clean beach and healthy reef Uses price differences to determine the value of a good or service (e.g., presence of a reef or clean beach) Typically uses property values or wage rates Example: Used to value the benefit of coral reefs on Kihei Coast, Hawaii—65% of total annual reef economic benefit—based on property value

Hedonic Pricing Disadvantages Need large data sets and detailed information on all aspects that affect prices, e.g., distance from beach, housing characteristics, nearby amenities, crime rates, etc. Relies on assumption that prices are sensitive to reef quality

Travel Cost Values direct non-consumptive uses, e.g., tourism/recreation related benefits The travel time and cost spent to reach the destination is used to: construct a demand curve for the coral reef or its services estimate consumer surplus Examples: Total consumer surplus of visitors to Bonaire Marine Park was ~US$19.2 million Value of Vessigny Beach in Trinidad, ~US$202,000

Travel Cost Disadvantages Depends on large detailed data sets and relatively complex analytical techniques Surveys are expensive and time consuming Reason for traveling to a place may be difficult to isolate—may not be the reef

Contingent Valuation Estimates non-value uses Uses surveys to determine how much people are: willingness to pay for a benefit (e.g., improvement in reef condition) or willingness to accept to compensate for a loss (e.g., loss in income from reef-related activities) Examples: Estimate value of increased coral cover in Montego Bay and Curacao Estimate consumer surplus for existing reef and reef improvement in Negril Marine Park, Hol Chan & Grand Anse

Contingent Valuation Advantages Disadvantages Doesn’t rely on markets or observed behaviour Applied to any good or service Disadvantages Requires large and costly surveys Complex data sets and analytical techniques Relies on hypothetical scenarios that may not reflect reality Highly susceptible to bias as rely on people to state their preferences

Gross Value vs Net Benefit Gross Value—use revenue only Net benefits—use revenue less costs Net benefits is more correct form of analysis Use net benefits for estimating marginal gains/losses associated with different conditions of reef health

Economic vs Financial Analysis Economic analysis uses distortion-free prices to estimate gross revenue/net benefits (e.g., price without govt subsidy) Better measure of social welfare Often difficult to get all the required info Financial analysis uses observed prices for fuel, labour, etc. to estimate gross revenue/net benefits Helps explain how people react Often used as a first-best proxy for economic analysis

Avoiding Pitfalls Use net benefits rather than gross benefits Include opportunity cost, where necessary Only use replacement costs in right circumstances Only use benefits transfer in right circumstances Don’t use estimates of small changes for large changes

Avoiding Pitfalls Be careful of double counting Only use national benefits when interested in national perspective Adjust price distortions Do a reality check

Tobago Diving Value Assumptions Sensitivity analysis Number of tourists Number of tourists that dive (10%)*** Number of dives/diver (80% 6+ dives, 20% 2 dives) There is no renting of dive equipment Average wage expenditure/operation All divers pay by credit card All divers are tourists (not residents) Consumer surplus based on Hawaii study (not perfect) Sensitivity analysis Level of consumer surplus % of revenue going to operating costs

Estimated Dive Values--Tobago All values in US$ millions and Annual Total Revenue Total Costs Value added CS1* 9.5% CS2* 19% CS5* 28.5% Assume 50% Operating Cost 5.2 3.7 0.8 0.5 1 1.5 Assume 75% Operating Cost 5 * Sensitivity analysis around consumer surplus Notes: Income tax/green levy not deducted Direct Impact multiplier not included

Estimated Net Benefits for Diving Notes: Income tax/green levy not deducted Direct Impact multiplier not included

Known Omissions from Dive Value Income tax deductions Green levy deductions Direct economic multiplier for local suppliers of fuel, etc. Indirect economic multiplier for general expenditures by dive operator employees 2004 tourist numbers used with 2006 prices (need price adjustment)

Tobago Accommodation Value Assumptions Occupancy rates: peak=85%, high=50%, low=50%, ave=65% Only used advertised rates—no special room rates Room rates based on double occupancy of predominant room type Assumed taxes/charges included if not stipulated on website Assume 1.5 hotel employees/hotel room, 1 employee if < 2 rooms Average wage rate used—TT$10/hr for 40 hour week Sensitivity analysis Percent of accommodation values attributed to the reef % of revenue going to operating costs

Data Issues: Accommodation Value Only 70% of hotels had accessible information Occupancy rates are expert opinion Possibility of double counting with villas Room rates, number of rooms, inclusion of taxes and charges for some hotels uncertain Local vs foreign room rates and proportion of rooms at local rates

Estimated Accommodation Values--Tobago All Values in US$ Millions and Annual Operating Costs (50% of Revenue) (75% of Revenue) Revenue Value Added Costs Net Benefits Net Benefits Assume 30% of Values Attributed to the Reef 29.3 5.1 21.3 8 27.4 1.9 Assume 60% of Values Attributed to the Reef 58.7 10.1 42.7 16 54.8 3.9 Notes: Income tax/green levy not deducted Direct Impact multiplier not included

Estimated Accommodation Net Benefits Notes: Income tax/green levy not deducted Direct Impact multiplier not included

Known Omissions: Accommodation Value Income tax deductions Green levy deductions Direct economic multiplier for local suppliers, e.g., laundry, etc. Indirect economic multiplier for general expenditures by hotel employees