The economics of forest management

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

2. Why manage forests? • Manage deforestation • Global forest  40% since pre-ag times. • Tropical deforestation • Biodiversity, carbon sequestration, etc. • 130,000 km2 per year • Timber supply • Incentives for private landowners to internalize externalities & provide public goods.

3. Forest management policies • Common policies • Subsidies, taxes, technology standards, silvicultural practice regulations. • Relatively new policies • Forest certification, carbon offsets, property rights

4. 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.

5. Taxes • Used on private forestland to • Capture scarcity rent and/or • Correct for externalities • Monitoring & information problems pose challenges, especially in developing world • Statistics on harvested timber underestimates • High-grading

6. 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

7. Forest concessions • Federally-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.

8. 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

9. Carbon offsets • Financial incentives to  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) • Several global carbon payment funds to which countries can apply. • Hard to verify what country would have done

10. Enhanced property rights • Most countries: state is largest forest landowner • 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)

11. US Nat’l Forests & Grasslands

13. 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 < c • (1) few buyers, (2) external costs ignored • Tenure length < rotation interval

14. A biological model • Managing tract of trees of certain age. • Choose rotation interval to maximize total volume per unit time (max sustainable yield)? • Q(t) = volume of wood at age t. maxT Q(T)/T

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

16. Back to the optimization problem Problem: maxT Q(T)/T (TQ’ – Q)/T2 = 0 Q(T)/T = Q’(T) • Average growth rate = marginal growth

17. 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

18. A bio-economic model • Incorporate: price, harvest cost, discounting. • p = price per MBF, c = cost per MBF, r=discount rate. • Since trees grow continuously, we’ll discount continuously: 1/(1+r)t  e-rt maxT (p-c)Q(T)e-rT

19. Result of bio-economic model • Take derivative, set = 0. • T* is place where % growth rate equal discount rate: Q’(T*)/Q(T*) = r • “Harvest when tree growth rate equals rate of growth of next best alternative”. • Think of trees as money in the bank.

20. 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.)