The economics of forest management National and international forest policy

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

Forest management policies Common policies Subsidies, 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 and/or Correct for externalities Monitoring & information problems pose challenges, especially in developing world Statistics on harvested timber underestimates High-grading

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

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.

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

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

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)

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

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. max T Q(T)/T

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

Back to the optimization problem Problem: max T Q(T)/T (TQ’ – Q)/T 2 = 0 Q(T)/T = Q’(T) Average growth rate = marginal growth

Graphically Vol. Q(t) Time, t T1T1 Q(t) Average growth at time T 1 is slope of line from origin to Q(T 1 ) Marginal growth at time T 1 is slope of Q(t) at time T 1 Q(T*)/T* = Q’(T*) T*

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 max T (p-c)Q(T)e -rT

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.

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.)