Viewing coral reefs as an economic asset

Reefonomics

Introduction

We start by acknowledging that value is a construct of human beings. This simple concept will help us understand the subjectivity of coral reef conservation and why we should always discuss it in monetary terms.

Even assigning an economic value, "What portion of the Gross Domestic Product (GDP) comes from coral reefs," is complex because it involves ecological, protective, cultural- heritage, and intrinsic values. GDP only mandates incomes from economic activities related to the reef or linked to it; for example, for some Caribbean nations, the contributions account for around 10%—15% of their GDP.

Types of assigned values

Ecological value: Coral reefs support about 25% of all marine species while covering less than 1% of seafloor. They are among the most prolific ecosystems on the planet. This biological diversity is viewed as a resource because it provides food, medicine, and other essential products. Scientists are still investigating the uses of many of the chemical compounds obtained from these organisms. The pharmaceutical industry has developed different treatments for cancer, antiviral and antibacterial agents, painkillers, anti-inflammatory drugs, etc.

The human chain supply also depends on the health of this entire ecosystem. For many islands, fish account for a substantial portion of daily protein intake, specifically in rural communities, which rely on it as their primary source of animal protein. Knowing this, how do you value biodiversity for future generations?

The challenge is determining how much people would be willing to pay for preserving or improving these resources. This method is called contingent valuation, but it is imperfect because of cultural bias.

Natural carbon sequestration value: Carbon sequestration is a natural process in which plants, trees, soil, algae, and coral reefs absorb CO₂ through photosynthesis and store it in biomass or organic matter.

Many industries and countries have embraced this concept and developed an economy known as carbon credits. The idea is simple: companies earn carbon credits by financing environmental conservationist projects or carbon capture technologies and then selling them in the market.

Honestly, the damage caused by this practice outweighs the potential for good, as it is common for companies to buy cheap offsets instead of cutting their emissions. Sometimes, this creates injustice situations, as green projects have been delayed for years, and the lack of verification creates a distrustful market. In addition, the credits obey the cap-and-trade system, and in the end, the value depends on faith in the actors.

Coastal Protection: Coastal protection refers to the reef acting as a natural barrier against storm surges. Studies have shown that coral reefs can save billions annually by preventing property damage and economic losses. [1]

Economic data integration and flood risk maps are used to calculate savings. The financial data include property value, infrastructure, and income from economic activities, and the maps are drawn from past experiences and hydrodynamic models. Hydrodynamic models simulate and analyze coastal water movement.

Method and metrics

Before describing other metrics, let us zoom in on how often economists use coral reef valuation:

Calculate revenue from activities linked to the reef, like fisheries, tourism, exploitation (e.g.pharma), etc.

Estimated cost of building areas to protect the coast.

Opportunity cost is the value of using or saving the resource for the future.

We have already discussed social or cultural values and how to assess them through qualitative value; nonetheless, many commercial activities exist around this, such as cultural tourism based on food, way of life, mental health, recreation, etc. Calculating only the revenue from tourism left aside some of these cultural values. I always like to mention the intrinsic value, which is the non-use value or how much people are willing to pay for coral reef conservation, even if they never directly interact with them. This is strongly related to the cost of opportunity. Ethics drive Much of the opportunity cost and will depend on public view.

In practice, economists must decide which of the abovementioned components to include in their framework, then collect data—metrics based on the framework—and apply a model.

The model could be based on a mix of economic activities and intrinsic values or listing all services linked to the geographical zone.

Evaluating remote coral reefs presents its own set of challenges. Undeveloped countries also underestimate scientific and economic studies of these ecosystems because they have other social priorities.

Ultimately, we are taking this kind of study too lightly on a global scale because there is much to discover from these ecosystems; we only view the tip of the iceberg.

Gaming with policy-making

When dealing with uncertainty and decision- policy-making, mathematicians build models to work within this scope; one of the most successful has been Game Theory. This theory addressed the decision process as a zero-sum game where the participant's gains or losses are balanced. In other words, the benefits of one player are equal to the expense of the other player.

Game theory is used in logic, social science, computers, and systems. To apply it objectively, we need a means of quantifying; for the sake of the example, let's keep it simple, shall we?

From the start, we know that what is unknown has zero value; scientists already understand that we need a healthy Coral Reef for many biological reasons, which adds "value" to this "resource," but not everything is known about these habitats. As described earlier, the total economic value will depend on many components, some of which are intangibles.

For our explanation, we use the term resource as "use" and the term value in two acceptions: non-use value and use. It could be unclear, but we are applying hierarchy and categorizing. For example, coral mining and scuba diving are direct uses of this resource. The difference is that mining depletes the ecosystem if it is not managed. An example of an indirect use value is storm surge protection or a fish nursery area.

Now that we have a better perspective on how we value this resource, we can ask what monetary price to assign to each variable.

One thing to note is that economic analysis can't value biodiversity per se; that's in the realm of biology (however, economic calculations could be a powerful tool for obtaining financial funds from the government).

Identifying financial returns within the market regarding direct use is easy because it measures the transaction within the gross domestic product, adds revenue from tourism, subtracts flawed areas, etc. The assessment needs to be done case by case. For example, poor countries tend to have poor coral reef management, but their livelihood mainly depends on the reef. It sounds like a dichotomy, but this is how humans behave, explained in game theory under "human irrational decisions." Coral Reef has an inherent value (biodiversity) that eventually serves at the expense of today's financial return. That is why policymakers should consider all economic activities attached to the Coral Reef.

We see this conflict when a decision is divorced from one of the economic players; a distinctive case is destructive fishing practice that affects other financial activities of the reefs, like tourism. If the established policy is taking only the tourist site without giving the fishermen other means to do fishing at the level they are used to and on which many families depend, the situation worsens. Not only will the fishermen not comply with the law, but their opinion of the coral reef will be severely affected, diminishing its overall value. Who benefits, who loses?

In other cases, like the Napoleon Wrasse live trade stock for the Chinese market, the number of individuals affected in society is few. Still, their private "gain" (financial return) is significant. So, to make better political decisions, we need to know the number of individuals involved and their economic situation. Again, who benefits and who loses?

The economic term for the postponed use of the reef is deferred-use value. This concept increases the reef's value in public perception. Public information awareness is important in helping to create this value. It is no coincidence that the Cousteau Society used dolphins as symbols. Simply put, those images help to raise money.

As we explained, monetary values could be detached from reality; for example, a coral reef that is constantly visited for recreation with an active population will appear to have a higher value than a reef in a remote location, but scientifically, we know that remote areas are significant for the health of the entire world. That is a good reason for public awareness and having science-literate politicians.

Biodiversity and biological mass are key parts of this puzzle because we may obtain future products from them in medicine and other industries. We only grasp the surfaces of what we have, and we recently understood the role of the coral reef in the scope of climate and food change.

Conclusion

Decision policy-making should be evaluated regarding interactions among the players who economically benefit from the reef. We should search for a strategy with the best outcome for everyone, knowing that some players will get the best payoff. This is not a one-time decision; it's an ongoing cooperation among players that requires trust, law, and enforcement for long-term gains for everyone.

[1] The Value of U.S. Coral Reefs for Risk Reduction | U.S. Geological Survey