The economics of forest management

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The economics of forest management

• National and international forest policy

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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?

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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

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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

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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.

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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)

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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

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Forest concessions

• Government-owned forests (e.g. Natl 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 dont own it.
• May require environmental bond.

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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

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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

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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 govt 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)

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US Natl Forests Grasslands
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(No Transcript)
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Public forest management (US)

• USFS 156 Natl 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 lt market value, sometimes p lt mc
• Infrastructure often provided free
• (1) few buyers, (2) external costs ignored
• Tenure length lt rotation interval (implication??)

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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?

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Shape of Q(t)
Vol. Q(t)
Time, t
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Alternatively
Look Familiar?
Change in Volume, dQ(t)/dt
Time, t
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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

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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.

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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
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Add economics A bio-economic model

• Incorporate price, harvest cost, discounting.
• p price per MBF, c cost per MBF, rdiscount
  rate ? (p-c) rent
• maxT (p-c)Q(T)/(1r)t
• Or, since trees grow continuously, we could
  discount continuously 1/(1r)t ? e-rt
• maxT (p-c)Q(T)e-rT

Harvest when rent peaks
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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.

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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.)

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Multiple Rotations An infinitely lived forest

• Let V be the value of the plot of land with the
  forest
• VmaxT (p-c)Q(T) Ve-rT
• Need to first find T by differentiating
• How does this differ from before?
• Is T larger or smaller than before?