Overview of Economic Valuation Methodologies

Suzie Greenhalgh World Resources Institute

Total Economic Value

Direct Use Values Total Economic Value Use Values Indirect Use Values Non-Use Values Consumptive/Extractive Uses Non-Consumptive/Non-Extractive Uses World Resources Institute

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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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/km 2 of reef, depending on land prices and landuses.

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Avoided Damages

• Disadvantages – Values are hypothetical – Never sure whether the damages would ever occur

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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

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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

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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

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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

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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

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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

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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

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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

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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

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Avoiding Pitfalls

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

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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

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Estimated Dive Values--Tobago

All values in US$ millions and Annual Total Revenue Total Costs Value added CS1* 9.5% CS2* 19%

Assume 50% Operating Cost 5.2

3.7

0.8

0.5

1

CS5* 28.5%

1.5

Assume 75% Operating Cost 5.2

5 0.8

* Sensitivity analysis around consumer surplus

0.5

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1 1.5

Notes: Income tax/green levy not deducted Direct Impact multiplier not included

Estimated Net Benefits for Diving

50% operating costs 75% operating costs

4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0

CS 1 World Resources Institute CS 2 CS 3 Consumer Surplus Sensitivity CS 4 CS 5 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)

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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

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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

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Estimated Accommodation Values--Tobago All Values in US$ Millions and Annual Operating Costs Operating Costs Revenue Value (50% of Revenue) Costs Net (75% of Revenue) Costs Added Benefits Assume 30% of Values Attributed to the Reef Net Benefits

29.3

5.1

21.3

8 27.4

Assume 60% of Values Attributed to the Reef

1.9

58.7

10.1

42.7

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16 54.8

3.9

Notes: Income tax/green levy not deducted Direct Impact multiplier not included

Estimated Accommodation Net Benefits 6 4 2 18 16 14 12 10 8 0 50% Operating Costs 75% Operating Costs 30% of Net Benefits Attributed to Reef World Resources Institute 60% of Net Benefits Attibuted to Reef 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

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