Tourism and the Environment in the Caribbean:
An Economic Framework
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Tourism is one of the most important economic activities in the Caribbean, contributing a third to a half of GDP in most countries. Whether tourism is land-based, or via cruise ships, Caribbean countries rely on their natural environment as the main lure to visitors (as well as an important source of welfare for their own citizens.) The resource base upon which all of this economic activity is based is fragile, however. Sustaining the tourism sector and the economic benefits it brings thus requires ensuring that the environmental resources the sector relies upon are managed sustainably. This management should be seen as a shared responsibility by three main groups: the countries and peoples of the Caribbean, the tourism/ travel industry, and the visitors themselves. Each group has a role to play, and each stands to benefit from a healthier and a more sustainable environment.
II. Links Between Tourism and Environment
The fundamental environmental resources used in Caribbean tourism are relatively basic – the so-called “three ‘S’s” of Sun, Sand, and Sea. Except for the sun, each of these resources, as well as supporting resources such as potable water, are subject to damage and depletion. Threats to environmental resources used by the tourism sector can arise both within and outside the sector. Establishing the relative impact of different threats is important, but often difficult. For example, in St Lucia tourists generate twice the amount of waste per day that residents generate. They contribute, however, only about 5% of total waste, because of the short length of their stay. The magnitude of the threats posed by environmental damage to tourism ranges from minor inconveniences to threats so severe that entire classes of resources become unusable. For example, disposal of waste and untreated wastewater and sewage into the sea in Negril, Jamaica, severely curtailed diving, leading to a substantial reduction in visitors. As tourists become both more environmentally aware and better informed of possible environmental problems, it is likely that the costs of inaction will rise.
Information and Certification. The severity of the impact of environmental problems on the tourism sector depends crucially on what potential visitors know about the extent and nature of these problems. A particularly critical point in this regard is that it is easier to acquire a bad reputation for poor environmental quality than to establish a good reputation. A variety of certification schemes have emerged to provide potential visitors with information on environmental conditions; the ‘Blue Flag’ and ‘Green Globe 21’ initiatives are examples of such schemes.
Incentives of Different Stakeholders. Understanding the pattern of incentives faced by actors within the system can help policymakers develop management systems that leverage incentives rather than working against them, thus helping increase their chance of success and decrease their cost.
- The tourism sector has strong incentives to address self-inflicted environmental problems Certification schemes such as Green Globe and Blue Flag can provide powerful tools in such situations, since they allow the tourism sector to credibly advertise its environmental quality. However, when the tourism sector includes a wide variety of different actors, it may be difficult to achieve cooperation within the sector.
- When environmental problems that affect tourism originate outside the tourism sector, the tourism sector has incentives to address them but cannot do so directly. In such cases, intervention by the government may be required to address the problem. When the non-tourism source of pressure is identifiable, and the impact on the tourism sector is clear, bargaining between the tourism and non-tourism sectors may allow a solution to be found.
- When problems originate from a mix of sources, self-regulation alone cannot address the whole problem – separate measures may also be needed to address the other causes. The greater the contribution of non-tourism sources, the less likely it is that either self-regulation by the tourism industry or externally-imposed regulations targeted solely at the tourism industry will be sufficient.
This type of analysis is important because it can help target scarce monitoring and enforcement efforts on cases where it is most needed, such as when problems created by one sector affect another.
III. Capturing “Rents” from Tourism
The distinctive and attractive environmental assets of the Caribbean are a source of pleasure and wellbeing for the citizens of the Caribbean countries. These same assets are also an important economic resource and producer of economic “rents” To the economist, a ‘rent’ is an excess return to an asset, a profit above normal rates of return that accrues to assets that are scarce and fixed in supply. Beachfront property earns economic rents above inland property, just as Sammy Sosa earns economic rents above other baseball players. . The rents are, in effect, payments for the use of the resources. In some cases the rents can be captured directly from the user. For example, a very common example of this phenomenon is the differential pricing of identical hotel rooms in coastal areas where the ocean-front rooms command a premium over those facing away from the beach. In other cases, the rents are harder to capture. For example, a visitor driving around an island and enjoying the beaches, the mountains, and small towns pays no one directly for this experience. In this case the economic rent stays with the visitors themselves. Hence, the struggle between different actors in the tourism sector is often over who captures the rents – the country, the developers/entrepreneurs, or the visitors. In all cases, however, if the assets that generate rents are not managed appropriately the rents will be dissipated.
Size of Rents. For the sun-sea-sand class of resources there are clearly many substitutes for the Caribbean islands, making per-person rents relatively small. The substantial number of visitors to the Caribbean means that the total economic rent may still be substantial. There is always a creative tension between larger numbers of visitors with smaller rents per person, versus very small numbers of up-scale visitors that generate larger rents per-person, and the development path that each approach implies.
Capturing Rents. As the owners of the sun, sea, and sand resources, the populations of the Caribbean (through their governments) should be the beneficiaries of these rents. The policy question for governments is how to most effectively capture and use these rents. There are several mechanisms to capture rent:
- User Fees. When access to a particular environmental resource can be controlled, charging user fees provides a simple mechanism to capture part of the rents being generated. Failing to charge foreigners for such access means they take the extra benefit from the use of the resource home with them when they leave, so that the country is subsidizing an increase in the social welfare of the countries sending the visitors – usually much richer countries.
- Taxation and Investment Incentives. When environmental resources are public goods, user fees do not provide a practical means of capturing the rents being generated, and more general taxation schemes are required. Somewhat paradoxically, the tourist industry often benefits from a variety of incentive schemes. The majority of the tax revenues generated by the sector come in the form of sales taxes, both general sales taxes and those specific to hotels. There are, no doubt, positive externalities from tourism development (employment, skills generation), although their size has been poorly documented. Even so, there are strong reasons to think that the current incentive regime may not be the most effective tool to stimulate tourism development.
Opportunities and Constraints. If resource rents are not being captured very effectively in the Caribbean, what means exist to better capture rents? Although tourism operators should be expected to pay their fair share of taxes like any other good corporate citizen, for practical reasons taxing tourists is likely to be the most effective means of rent capture. There is also a certain logic to this, since the tourist is the ultimate user of the tourism resource, and they take the benefit from using the resource back to their own country when they leave. Tourists can be taxed either indirectly by taxing goods used primarily by tourists, or directly through arrival or departure fees. Economic theory suggests that taxing complementary goods (such as hotel services) is the way to maximize the benefits from tourism. As a source of rent capture, a hotel tax has the useful property that it is roughly proportional to the use of the tourism resource, since the total tax paid varies with the length of stay. Arrival and departure taxes do not possess this feature, but have the merit of administrative simplicity. Both hotel and departure taxes are currently being levied by many Caribbean countries, but the general impression is that these are minimal revenue generators. Any effort to raise them should be made carefully, however, to avoid killing the goose that lays the golden eggs.
Dividing the Pie. In addition to how to capture rents, who receives the additional funds, and how they are used are key questions. In a perfect world monies would go to the national treasury and would then be allocated to the highest-valued and most desired use, but in practice this has meant that environmental needs – the very source of the rents – are often shortchanged. Possible solutions include dividing total revenues between earmarked activities and general revenues, creating a separate entity to collect and manage funds (and in some cases to help provide management services), or earmarking certain types of income for specific uses.
Using Rents to Maintain the Rents. Money is a necessary but not a sufficient condition for improved, sustainable resource management. The wise use of these financial resources is equally important and poses important challenges in the Caribbean. Three important and linked types of expenditures will likely be required. First, specific investments are often needed. These may include investments in important environmental infrastructure such as wastewater treatment and solid waste management facilities. Second, resources are needed for operation, maintenance, and replacement of existing infrastructure. Third, there is an important need for capacity building.
IV. Conclusions and Policy Options
The more than 15 million visitors that come to the Caribbean each year are a powerful testament to the appeal of the region’s natural environment. But environmental resources are also fragile and require investments to maintain and manage. There is an important shared responsibility for managing this resource. The environment, a precious and fragile resource, generates important economic benefits or rents (both for nationals and for visitors) that can be used to both pay for improved environmental management and also to generate revenues for the country.
The following conclusions flow from this analysis:
- There is a need to take a broader view of the nature of the environment that tourism depends on, and the threats it faces. Although attention has focused on tourism-induced threats, they are not the only one, and may not be the most important. Threats external to the tourism sector appear to be important in some jurisdictions. Governments need to take a more integrated view of population centers and tourism areas, and design environmental interventions such as sewage treatment and waste management services that can reduce the threat to the tourism resource.
- There is a need to understand the incentives that different actors face in addressing different types of environmental threats. By doing so, it is more likely that an effective management strategy can be designed.
- There is an argument to be made for the existence of resource rents arising from tourism assets, and for taxation schemes to capture these rents.
- The particular nature of the tourism resource (sun-sea-sand, to over-simplify) in the Caribbean islands implies that these rents are liable to be modest per visitor, but substantial given the large number of visitors.
- Some combination of increases in hotel room taxes and entry/departure/port charges should be considered as the means to collect resource rents.
- It is key to ‘sell’ these resource taxes as fees or user charges for the enjoyment and preservation of the environment. This will certainly be important for tourists, and may help to sell the idea to the industry as well. The fee systems implemented for the Bonaire Marine Park or in Costa Rican National Parks are just two examples.
The recommended model for taxing tourism that results from this analysis is broadly as follows:
- Eliminate tax holidays for tourism investments (this should be coordinated across jurisdictions);
- design a straightforward and moderate-rate corporate income tax, as well as moderate tariff rates for tourism inputs; tariffs on materials and equipment during the construction phase of tourism projects could be waived (and preferential tariff rates considered for environmentally friendly equipment or investments);
- establish arrivals taxes for cruise ship passengers (but explicitly identify part of these charges as environmental or resource user fees);
- establish a room tax as the primary resource rent tax (this is preferred because the tax is proportional to resource use); room taxes may need to be harmonized with existing value added taxes;
- use a departure tax designed to collect resource rents to supplement room taxes; this tax should be reduced or waived for residents. Identifying some portion of these departure taxes as explicitly environmental charges would help to decrease consumer resistance, and provide earmarked funds for environmental management;
- charge user fees for sites where access is limited; these fees may be 2-tiered, with different rates for residents and visitors.