Overview of Economic Valuation Methodologies Suzie Greenhalgh

1. World Resources Institute Overview of Economic Valuation Methodologies Suzie Greenhalgh

2. Total Economic Value

3. 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

4. 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

5. 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

6. 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

7. Some Useful Terms Consumer 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

8. 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

9. 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

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

11. 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

12. Change in Production • Advantages • 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

13. 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

14. Replacement Cost • Advantages • 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

15. 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.

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

17. 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

18. 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

19. 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

20. 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

21. 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

22. Contingent Valuation • Advantages • 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

23. 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

24. 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

25. 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

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

28. Tobago Diving Value • Assumptions • 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

29. Estimated Dive Values--Tobago All values in US$ millions and Annual * Sensitivity analysis around consumer surplus Notes: Income tax/green levy not deducted Direct Impact multiplier not included

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

31. 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)

32. 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

33. 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

34. Estimated Accommodation Values--Tobago All Values in US$ Millions and Annual Notes: Income tax/green levy not deducted Direct Impact multiplier not included

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

36. 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