A Valuation Case Study: the Great Barrier Reef

A valuation of the Great Barrier Reef illustrates many common issues in the economics of environmental valuation.

A recent report by Deloitte Access Economics (1) estimates the asset value of the Great Barrier Reef at A$56 billion (2).  This is the sum of:

  • Value to local recreational users and tourists from elsewhere in Australia: A$32 billion, estimated by the travel cost method (pp 39 & 40).
  • Value to Australians of the Reef’s existence, regardless of having visited it or intending to do so; A$24 billion, estimated by contingent valuation (p 34).

The main data source was a representative survey of over 1,000 Australians (p 30). The survey also included 500 residents of 10 other countries world-wide.

The report also identifies the following components of value for which it does not offer numerical estimates:

  • Value to tourists from outside Australia: not estimated due to data limitations (p 85).
  • Existence value to non-Australians: not estimated as difficult to allow for contextual cultural factors, language barriers and purchasing power differences in using survey responses from some countries (p 35).
  • The value of certain ecosystem services provided by the Reef such as maintenance of water quality and storm protection for the adjacent coast (pp 40 & 42): not estimated as difficult to separate from ecosystem services provided by neighbouring terrestrial and river ecosystems (p 84).
  • “Traditional owner value” to peoples who have lived in the vicinity of the Reef since before Australia was settled by Europeans, relating to cultural heritage, sacred sites and archaeological sites: not estimated because such unique sites lack the substitutability on which non-market valuation relies (pp 45-7).
  • Brand value, that is, the contribution of the Reef to “Brand Australia”. This is given a whole chapter of the report (pp 50-7) which is not easy to summarise.  One key point is how far the contribution is from the existence of the Reef and how far from perceptions of Australia’s performance as guardian of the Reef (p 56).

Taking the above together the report suggests, reasonably, that the full value of the Reef is much more than A$56 billion.  Some, though not all, of the points below tend to reinforce that conclusion.

There are other components of value which the report does not mention.  One is the possible medicinal use of plants and animals found in the Reef (3).  A negative component – illustrating the general point that natural capital is often associated with natural hazards  –  is its role as a shipping obstacle and hazard (4).

As is common with environmental valuation studies, therefore, the components of total economic value fall into three categories: those that can be measured with the available data; those that are in principle measurable but for which the necessary data is difficult to obtain; and those that are intrinsically unmeasurable (but still perhaps important).

As a contingent valuation sceptic (see this post), I would have been inclined to put the existence value of the Reef in the unmeasurable category.  A specific difficulty with the approach adopted is that respondents were asked how much they would be willing to pay weekly to “guarantee” that the Reef is “protected”, having been told that such a payment would be in the context that all Australians would have to pay (p 80). This is a strange question given that global climate change is a major threat to the Reef.  It seems quite possible that some respondents viewed the payments as to guarantee that the Australian government would do what it could to protect the Reef (eg from risks originating within Australia such as mining activity), while others viewed them as guaranteeing the preservation of the Reef, implying protection against all risks including climate change.

The remainder of this post considers the method used to estimate the value of the Reef to tourists from within Australia. The individual version of the travel cost method was used, given that individual data was available and showed good variation between individuals in visit numbers (p 78), so that it could be expected to give more precise results than the alternative zonal method (5).  The variation between individuals was not just due to luck: it was facilitated by the decision to ask respondents how many times they had visited the Reef in the last five years (not merely the last year).

With the individual method, the first step is to regress individual visit numbers against individual travel costs to the Reef and other variables that may influence visit numbers.  The report does not state the full regression model, but from the survey questions (pp 76-82) it appears that the other variables included age, gender and education.  Variables that seem not to have been included are income and travel costs to one or more substitute sites.  Although income is mentioned in discussion of the method (p 85), there is no indication that income data was collected.  This may have been because it was anticipated that such data would be difficult to obtain (US studies often collect income data but it may be that willingness to disclose one’s income varies between cultures).  The issue of substitute sites may have been ignored because of the complexity of allowing for many possible substitutes, and lack of consensus in the literature as to how this should be handled.  Whatever the reasons, omission of these variables can result in omitted variable bias leading to a biased estimate of the travel cost coefficient and hence of the site value, although the magnitude and direction of bias will depend on the circumstances (6).

Mention of substitute sites may seem surprising given the unique nature of the Great Barrier Reef.  But a substitute, in economics, does not have to be a perfect substitute.  One definition is that two goods are substitutes if their cross-elasticities of demand are positive.  Applied to two tourist sites, that would be the case if a higher travel cost to either were associated with a higher demand for visits to the other – a plausible scenario.

The decision effectively to ignore travel time (p 85) is surprising. Common practice is to include the value of time as well as expenditure on transport and accommodation within travel cost to the study site.  The report cites three Australian studies which applied a zero value to travel time, but this is rather selective even among Australian studies (7), and certainly not representative of the global literature including US and UK studies.  Admittedly there is no consensus on how the value of time should be determined.  But to assume a nil value is likely to result (other things being equal) in under-estimation of the value of the Reef.  A fairly simple and still conservative alternative would have been to value time at a suitably small fraction (say a quarter) of the average hourly wage, and to include the effects of different fractions in the sensitivity analysis.

The statistical methods used to estimate the trip-generating function and then derive the value (consumer surplus) per visit (A$662) are not described in full, but appear from the outline provided (pp 85-6) to have been appropriate.  As is common in individual travel cost studies, negative binomial regression was used because of overdispersion (p 86), which is a slightly misleading term for a feature (not a defect) often found in the distribution of individual visit numbers, namely that the variance is greater than the mean.

I would have liked to see some consideration of what potential visitors might have done instead if the Reef had not existed.  Many would probably have visited other tourist sites, increasing the value of those sites and offsetting to some degree the lost value associated with the Reef.  A case can be made that the most useful concept of value for a recreational site is not the gross site value but the contribution which the site makes to the total value of all such sites (8).

To obtain the total annual value to tourists, value per visit was multiplied by the annual number of visits to the Reef, which was estimated as 2.3 million (p 86).  This number was inferred from Tourism Research Australia (TRA) data on numbers of visits within Australia to regions adjacent to the Reef.  However, these numbers include visits to the regions but not to the Reef itself, and some crude round-number assumptions, claimed to be conservative, were made to eliminate such visits (p 86).  An alternative approach would have been to include in the survey a question designed to distinguish visits to the Reef itself from visits to the adjacent regions, and to use that data to estimate, for all visitors to those regions, the proportion who visit the Reef itself.

The final step was to capitalise the stream of annual values so as to obtain the asset value.  The result is heavily influenced by the choice of time horizon and discount rate, as is illustrated by the sensitivity analysis (p 88).  A time horizon of 33 years was adopted, one stated reason being the severe threats to the future health of the Reef (pp 87-8).  Within that time frame, annual consumer surpluses as calculated from the survey data were discounted at a rate of 3.7%, determined using the Ramsey formula (p 87):

Social discount rate  =  Rate of time preference + [Annual growth rate of consumption

                        x Minus the elasticity of marginal utility with respect to consumption]

Given assumptions of a very low rate of time preference (0.05%) and an elasticity of 1, the discount rate largely reflects the growth rate of consumption, which was assumed to equal the average GDP growth rate over the previous 30 years (which can be inferred to have been 3.65%).

While the particular figures used in the capitalisation could be challenged, there are some more fundamental issues here.  One could value the Reef on the assumption that it will degrade along a defined path, or on the basis of its remaining in its current condition.  The key question here is not which of these scenarios is more likely, but which basis of valuation will yield more useful information.  If what we are interested in is the value which is potentially at risk from degradation of the Reef, then it is valuation on  the ‘current condition’ basis which is more useful, and the ‘degradation’ argument for the 33-year time horizon does not apply.

Whether future economic growth is likely to be at a similar rate to that of the previous 30 years can be debated.  My instinct would be to calculate the central estimate of value on a zero-growth basis, and to consider the effect of positive rates within the sensitivity analysis.  If, however, a positive growth rate is assumed, then for consistency it needs to be considered that, since expenditure on tourism is discretionary, demand for tourism is likely to be highly income-elastic.  Subject to the condition of the Reef,  and to the adequacy of infrastructure to accommodate visitors, demand for visits might be expected to grow even faster than GDP.  The report, however, does not consider whether the number of visits to the Reef may change in future.  The implicit assumption is that annual visits and annual consumer surpluses will remain as estimated (9).

Notice that the combination of a very low rate of time preference and a zero rate of economic growth will yield, via the Ramsey formula, a very low discount rate.  In conjunction with a long time horizon this could imply an asset value many times higher than the report’s A$56 billion.

Notes and References

  1. Deloitte Access Economics (2017) At what price? The economic, social and icon value of the Great Barrier Reef  https://www2.deloitte.com/content/dam/Deloitte/au/Documents/Economics/deloitte-au-economics-great-barrier-reef-230617.pdf   All page references are to this report.
  2. A$ = Australian dollars. A$56 billion is equivalent to GB£33 billion or US$43 billion.
  3. Bruckner A (2002) Life-Saving Products from Coral Reefs Issues in Science and Technology XVIII(3) http://issues.org/18-3/p_bruckner/
  4. See for example The Guardian (6/4/2010) The Great Barrier Reef scandal https://www.theguardian.com/world/2010/apr/06/great-barrier-reef-ship-aground
  5. King D M. & Mazzotta M Ecosystem Valuation – Options for Applying the Travel Cost Method  http://www.ecosystemvaluation.org/travel_costs.htm#OPTIONS
  6. Re omission of substitute site variables see Caulkins P, Bishop R & Bouwes N (1985) Omitted Cross-Price Variable Biases in the Linear Travel Cost Model: Correcting Common Misperceptions Land Economics 61(2) pp 182-7
  7. Two Australian studies which applied positive values to travel time are: a) Lansdell N & Gangadharan (2003) Comparing Travel Cost Models and the Precision of their Consumer Surplus Estimates: Albert Park and Maroondah Reservoir Australian Economic Papers 42(4) p 403  b) Whitten S & Bennett J (2001) A travel cost study of duck shooting in the Upper South East of South Australia  Private and Social Values of Wetlands Research Reports No. 7  https://crawford.anu.edu.au/pdf/staff/jeff_bennett/wtlndrr07.pdf
  8. This point is briefly noted in Bateman I (1993) Valuation of the environment, methods and techniques: revealed preference methods, in Turner R (ed) Sustainable Environmental Economics and Management: Principles and Practice Belhaven Press, London  pp 218-9
  9. This is shown by the fact that a stream of consumer surpluses of A$662 x 2.3 million = A$1.523 billion annually for 33 years, discounted at 3.7% per annum, approximates to the A$29 billion stated on p 39.
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