The economics of forest management

National and international forest policy

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?

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

Forest management policies — account for external benefits of forests

Common policiesSubsidies, taxes, technology standards,

silvicultural practice regulations.

Relatively new policies Forest certification, carbon offsets, property

rights

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.

Taxes

Used on private forestland to Capture scarcity rent for govt and/orCorrect for externalities

Monitoring & information problems pose challenges, especially in developing worldStatistics on harvested timber underestimates

High-grading can resultHigh-grading = taking only the highest quality,

leaving the rest (not optimal)

Regulations

Government may dictate silvicultural methodSeed-tree, shade-tree, even aged, clear-cut

Regulations mitigate environmental harmBuffer strips, wood in streams, structured

canopy, reforestation requirements, road stipulations

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.

Forest certification

A form of “green labeling”Provides information to consumersConsumers 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

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”

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)

US Nat’l Forests & Grasslands

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??)

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?

Shape of Q(t)

Vol.Q(t)

Time, t

Alternatively

Time, t

Change inVolume, dQ(t)/dt

Look Familiar?

Management: What should our objective be?

1. Physical: Average growth of the forest stand

2. Economic: Net present value of the forest stand

3. Full economic: managing for a sustainable and infinitely-lived forest

Naive model: pick rotation to maximize average annual forest growth

Problem: maxT Q(T)/T

Solution: (TQ’ – Q)/T2 = 0Q(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.

Graphically

Vol.Q(t)

Time, tT1

Q(t)

Average growth at time T1

is slope of line from originto Q(T1)

Marginal growth at time T1

is slope of Q(t) at time T1

Q(T*)/T* = Q’(T*)

T*

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

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.

Extensions of this model

Can includeMultiple rotationsReplanting costsNon-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.)

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?

rVTQcp

TQcp

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