The economics of forest management

1. The economics of forest management National and international forest policy

2. Hypothetical Group Project • Spotted owl habitat is on lands that are highly productive for timber. Can rules be developed to change timbering practices to protect owl with minimal impact on timber harvest?

3. Why manage forests? • Manage deforestation • Global forest down 40% since pre-ag times. • Tropical deforestation: • Benefits--Biodiversity, carbon sequestration • Often commons issue – incomplete property rights • Losses: 130,000 km2 per year (200x200 miles) • Temperate deforestation • Biodiversity loss • Habitat for endangered species (NW Spotted Owl) • Timber supply • Often publicly owned, privately harvested – mismatch of incentives

4. Forest management policies — account for external benefits of forests • Common policies • Subsidies, taxes, technology standards, silvicultural practice regulations. • Relatively new policies • Forest certification, carbon offsets, property rights

5. Subsidies • Free seedlings, management assistance, financial aid – common in developing world • Tradeoff often between forest and agriculture • Success depends on relative prices of forest vs. agricultural products • Developing world: • Collection of wood for fuel a major problem. • Some success with subsidies for woodlots.

6. Taxes • Used on private forestland to • Capture scarcity rent for govt and/or • Correct for externalities • Monitoring & information problems pose challenges, especially in developing world • Statistics on harvested timber underestimates • High-grading can result • High-grading = taking only the highest quality, leaving the rest (not optimal)

7. Regulations • Government may dictate silvicultural method • Seed-tree, shade-tree, even aged, clear-cut • Regulations mitigate environmental harm • Buffer strips, wood in streams, structured canopy, reforestation requirements, road stipulations

8. Forest concessions • Government-owned forests (e.g. Nat’l Forest in US) grant concessions to private forestry companies. • Typically auction off right to harvest a certain tract of forest, may be corrupt. • Fees usually not market value (unless auction) • Property rights problem – no incentive to care for land since don’t own it. • May require environmental bond.

9. Forest certification • A form of “green labeling” • Provides information to consumers • Consumers will be paying for a public good • Internationally-recognized certifiers • Forest Stewardship Council • Certified 30 million hectares in 56 countries • Acts like distinct (substitute) market

10. Carbon offsets • Financial incentives to increase storage of carbon by keeping trees in ground, reforesting, or planting high C-sequestering species. • Problem: usually ignores biodiversity considerations (e.g. native vs. exotic fast growth) • Several global carbon payment funds to which countries can apply. • Hard to verify what country would have done • Called the “counterfactual”

11. Enhanced property rights • Most countries: state is largest forest landowner • Problems: monitoring, ignorant of local needs, poor revenue collection, poaching (open access), limited info • Problems when gov’t takes over from community management – ignores local customs and laws • Property rights can be shared with locals • “Panchayat forestry” (Nepal), “joint forest management” (India), “community-based” forestry (Philippines, others), “communal tenure” (advocated by World Bank). • Combination with other instruments (e.g. taxes)

12. US Nat’l Forests & Grasslands

14. Public forest management (US) • USFS: 156 Nat’l Forests, 194 million acres • Concessions: terms of contract affect • Rotation interval, nature of harvest, non-timber values, depletion of forest • Pricing of concessions • Often p < market value, sometimes p < mc • Infrastructure often provided free • (1) few buyers, (2) external costs ignored • Tenure length < rotation interval (implication??)

15. A biological model • Managing tract of trees of certain age (all the same age). • Choose rotation interval (how long before cutting) to maximize total volume per unit time (max sustainable yield)? • Q(t) = quantity of wood at age t. • Harvest at time T and start process again • What should be T?

16. Shape of Q(t) Vol. Q(t) Time, t

17. Alternatively Look Familiar? Change in Volume, dQ(t)/dt Time, t

18. Management: What should our objective be? • Physical: Average growth of the forest stand • Economic: Net present value of the forest stand • Full economic: managing for a sustainable and infinitely-lived forest

19. Naive model: pick rotation to maximize average annual forest growth Problem: maxT Q(T)/T Solution: (TQ’ – Q)/T2 = 0 Q(T)/T = Q’(T) • Average growth rate = marginal growth • Not quite right since we have neglected discounting: payoff 50 years from now not the same as today.

20. Graphically Q(T*)/T* = Q’(T*) Vol. Q(t) Q(t) Marginal growth at time T1 is slope of Q(t) at time T1 Average growth at time T1 is slope of line from origin to Q(T1) T1 T* Time, t

21. Add economics:A bio-economic model • Incorporate: price, harvest cost, discounting. • p = price per MBF, c = cost per MBF, r=discount rate  (p-c) = rent maxT (p-c)Q(T)/(1+r)t • Or, since trees grow continuously, we could discount continuously: 1/(1+r)t  e-rt maxT (p-c)Q(T)e-rT Harvest when rent peaks

22. Result of bio-economic model • Take derivative, set = 0. • T* is place where % growth rate equal discount rate (continuous discounting): Q’(T*)/Q(T*) = r • “Return” on trees (Q’(T)) equals interest on trees [rQ(t)] • “Harvest when tree growth rate equals rate of growth of next best alternative”. • Think of trees as money in the bank: when bank payoff drops below interest rate, withdraw your money.

23. Extensions of this model • Can include • Multiple rotations • Replanting costs • Non-timber values of forest (water, recreation, biodiversity, etc.) • Extended models will allow us to analyze different economic policies (e.g. tax, site fees, license fees, etc.)

24. Multiple Rotations: An infinitely lived forest • Let V be the value of the plot of land with the forest: • V=maxT {(p-c)Q(T) + V}e-rT • Need to first find T* by differentiating: • How does this differ from before? • Is T* larger or smaller than before?