Economic Analysis in the Context of Natural Resource Management Karen Liu, Ph.D. Economist (Land Management Planning) USDA Forest Service Washington, D.C

Discussion Topics Introduction Overview of Economic Analysis Economic Efficiency Analysis Economic Impact Analysis Ecosystem Services Valuation

U.S. Department of Agriculture Organizational Structure Six Mission Areas, 17 Agencies, 12 Offices -- Farm and Foreign Agricultural Services -- Food, Nutrition and Consumer Services -- Food Safety -- Marketing and Regulatory Programs -- Natural Resources and Environment Forest Service -- Research, Education and Economics Economic Research Service, Agricultural Research Service, Cooperative State Research, Education, and Extension Service -- Rural Development

U. S. Land Cover (Total U.S. Land Base = 2.3 billion acres)

Forests cover multiple State jurisdictions Forest Cover in the U.S. Forests cover multiple State jurisdictions 747 million acres .

Commercial Forest Land (490 million acres) Within States there are multiple forest ownership patterns.

America's Forests 4 levels of organization Forest Service 747 million acres America's Forests Forest Service (192 million acres) 4 levels of organization National Headquarter -- WO 9 regions; 155 National Forest 20 National Grasslands; 630 Districts

USDA FOREST SERVICE MISSION Caring for the Land and Serving People To sustain the health, diversity and productivity of the nation’s forests and grasslands to meet the needs of present and future generations 4 Strategic Goals: Ecosystem Health, Multiple Benefits, Scientific & Technical Assistance, and Effective Public Service

Role of Economic Analysis Advice decision-makers and those who work with them to consider social and economic contexts and consequences of decisions Provide information about the effects or consequences of management actions

Legal Basis Legal Basis requiring the agency to perform socio-economic analysis -- Multiple-Use Sustained-Yield Act of 1960 -- National Environmental Policy Act of 1970 -- National Forest Management Act of 1976 -- Forest & Rangeland Renewable Resource Planning Act of 1974 -- National Forest Land Management Planning Regulations -- NEPA Handbook -- Office of Management and Budget Circular A-4 Economic analysis of federal regulations under Executive Order 12866

Legal Basis for Economic Analysis Multiple-Use Sustained-Yield Act of 1960 During administration of NF’s that consideration be given to relative value of various resources National Environmental Policy Act of 1969 When economic, social and physical environments are interrelated, these effects on human environment are to be analyzed Terminology “effects” and “impacts” have same meaning in this act

Legal Basis for Economic Analysis Forest & Rangeland Renewable Resource Planning Act of 1974 Calls for assessment of NFS resource inventory with an evaluation of opportunities for improving yield of tangible & intangible goods & services National Forest Management Act of 1976 requires programmatic level analysis for land management plan Public Rangelands Improvement Act of 1978 Act is tiered to NEPA; environmental impacts as pertains to lands will be assessed

Programmatic Level Analysis 36 CFR 219 Regulations to Implement Sections 6 & 15 of National Forest Management Act Requires social and economic sustainability analysis and monitoring of trends and conditions At Programmatic level FS performs a comprehensive economic and/or social analysis of resources affecting the human environment via: PNV of all resource programs Impact analysis on local economy (IMPLAN) Environmental Impact Statement (EIS) is necessary

Project Level Analysis Project level effects analysis required under NEPA If effects occur, analysis is done “incrementally”; change from current condition An Environmental Impact Statement (EIS), Environmental Assessment, or Categorical Exclusion is required

Office of Management and Budget Office of Management and Budget (OMB) Circular A-4 related to regulatory analysis Requires: Benefit-Cost or cost-effectiveness analysis of federal programs or policies For regulatory impact analysis For analysis of decisions to lease or purchase For asset valuation & sale analysis

Two Main Types of Economic Analysis Economic Efficiency or Cost-Efficiency Economic Impacts

Economic Efficiency or Cost-Efficiency Analysis Examines how well (i.e., how efficiently) resources or inputs are used to produce outputs and benefits; analyses typically involve a comparison of discounted benefits to discounted costs. If there are multiple ways to achieve the same objective or benefit, the way with least cost is most cost-efficient.

Economic Efficiency Efficiency is about considering the benefits and costs of producing goods, uses and services. The benefits and costs can be quantitative measures such as dollars, or they can be qualitative measures such as desirability

Evaluating Economic Efficiency Evaluations of economic efficiency can assist decision-makers by: evaluating and ranking alternatives or options (i.e., ‘is a proposed action a sound investment’), selecting an efficient combination of activities within an action, measuring tradeoffs among resource outputs, and considering incremental unit costs. Although not all benefits and costs can be assigned dollar values, Present Net Value and other measures of efficiency are valuable integrators of costs and benefits that can be used in combination with other indicators to facilitate decision-making.

Economic Analysis of Federal Regulations under Executive Order 12866 According to Executive Order 12866, if a federal agency is proposing a regulatory action, and if OMB determines the proposed regulation is economically significant, then the agency is required to conduct a regulatory analysis (cost-benefit analysis) for the proposed action.

Examples of Cost-Benefit Analysis of Federal Regulations Liu, Karen, “Cost-Benefit Analysis-- Categorical Exclusions for Oil and Gas Exploration and Development Activities,” USDA Forest Service, December 2005 Liu, Karen, “Cost-Benefit Analysis for the Final Rule (36 CFR 219) for National Forest Land Management Planning,” USDA Forest Service, July 2004. Liu, Karen, “Cost-Benefit Analysis for the Proposed Rule to Exempt the Tongass National Forest from the Applicability of the 2001 Roadless Area Conservation Rule,” USDA Forest Service, July 2003. Liu, Karen, “Cost-Benefit Analysis for Categorical Exclusions for Limited Timber Harvest Notice of Final Interim Directive,” USDA Forest Service, July 2003.

Economic Impacts Examines changes in economic conditions, including distribution and stability of employment and income in affected local, regional, and national economies. This is the classic “jobs and income” impact of implementing a program, plan, or project, imbedded in the context of a changing social and economic climate. Economic Impact analysis has been used in the science of regional economics

Measures of Economic Impact In assessments of economic impact, effects such as direct, indirect, and induced effects on each measures of economic impact are considered Measures are the changes in employment and income due to impacts upon the affected economy

Regional Impact Analysis Regional economic modeling of effects on local economy Input/Output analysis -- IMPLAN (Impact on planning) -- REMI (Regional Impact Modeling) -- Input Output Model Primary Data, secondary data, combination of both primary and secondary data

Regional Modeling IMPLAN and Other I/O Models -- Quantify the sales and purchases of all the sectors producing goods and services -- Quantify all the payments and final demand in the study area -- Quantity total gross output and total gross outlay -- Generate multipliers Output, employment, income multipliers

Economic Considerations for various resource areas Range Recreation Timber Wildlife, fish, and sensitive plant habitat Minerals and geology Forest Pest Management Fire Land Ownership, Right-of-way Special areas

Range Cost effectiveness requirement Permits serve long term economic and social needs Cost benefit for pest management Accountability for conservation programs Economic efficiency screening for range improvements

Recreation Consider cost efficiency when developing sites Site closures New sites: compare benefits of alternative land use Site-specific economic/social impacts Cash flow analysis for concessionaires

Timber Economic Considerations for Timber Sale program development Timber sale preparation, Bidding Gate 1 analysis—initial planning Gate 2 analysis Project analysis and design Reforestation Nurseries Stand improvement

Wildlife, fish, and sensitive plant habitat Valuation and economic impact Wildlife viewing Bird watching Minerals and Geology Mining and minerals policy act requirements Objectives, surveys, appraisals/values Evaluation of proposed actions

Forest Pest Management Economic evaluation Cost-benefit analysis of pesticide use Specific pests Risk assessment Fire Management Wildland fire situation analysis Fire use planning Fuels management

Land Ownership, Right-of-Way Road analysis Construction and agreements Special Areas Fee development and administration

Knowledge Management We are developing Social and Economic Evaluation Knowledge System (SEEKS) as a web-accessible “knowledgebase” of technical guidance for social and economic analysis

Social and Economic Evaluation Knowledge System (SEEKS) provide an open forum to present, evaluate, and discuss economic and social evaluation guidance etc. serve as public source for all technical guidance and a more general “body of knowledge” related to economic and social evaluation. provide a distribution outlet for economic and social evaluation technical guides and other forms of guidance.

NFMA Land Management Planning Regulations (36 CFR 219), Sect 219 NFMA Land Management Planning Regulations (36 CFR 219),  Sect 219.10 (a) Sustaining Social and Economic Systems FSM 1920--Land Management Planning Directives FSM 1921.72 -- Social and Economic Sustainability FSM 1970—Economic and Social Evaluation FSH 1909.17— Economic and Social Evaluation Social & Economic Evaluation Knowledge System (SEEKS) -- Technical Guides -- TABs -- Tools, Methods, Models, etc. -- .....  

Social and Economic Evaluation Knowledge System (SEEKS)      Audience: Social and Economic Practitioners SEEKS includes: · Technical Guides, Technical Advice Bulletins · Community of Practice network support · Lessons Learned System · Methods (quantitative and qualitative for evaluation and analysis) · Complex methods and models Models ( IMPLAN, Quicksilver, etc), Tools

ECOSYSTEM SERVICES -- Concepts and Definitions -- Valuation -- Markets & Payments for ES

Valuing Ecosystem Services Ecosystem Services are commonly defined as benefits people obtain from ecosystems. The Millennium Ecosystem Assessment categorizes ecosystem goods and services as: * Provisioning Services such as food, fresh water, fuel, and fiber; * Regulating Services such as climate, water, and disease regulation as well as pollination; * Supporting Services such as soil formation and nutrient cycling; and * Cultural Services such as educational, aesthetic, and cultural heritage values as well as recreation and tourism.

Any Worth of Ecosystem Services Many of ecosystem services are not traded in developed markets and often fall under the category of public goods, and are considered free to society. At present, the true worth of ES is unknown, estimating the economic value of ecosystem services is evolving. For example: In 1997, Robert Costanza and others estimated the worldwide value of all ecosystem services at 33 trillion per year. In 2000, Forest Service economists estimated the minimum value of water from National Forest System lands to be $3.7 billion per year.

Valuation of Ecosystem Services Many ecosystem services are not traded in markets. People do not pay directly for many ecosystem services, and because people are not familiar with purchasing such goods or services, their willingness to pay may not be clearly defined.

Types of ecosystem values Two main categories of values – use values and non-use “passive use” values Use values are based on actual use of the environment/ecosystem Use value is defined as the value derived from the actual use of a good or service, such as hunting, fishing, bird watching, or hiking. Use values may also include indirect uses.

Second categories of values Non-use “passive use” values are values that are not associated with actual use, or even an option to use, an ecosystem or its services

Methods to Estimate Dollar Values Market Prices–revealed willingness to pay * The values of some ecosystem goods or services can be measured using market prices, such as fish or wood. * Some ecosystem or environmental services, like aesthetic or many recreational experiences, may not be directly bought and sold in markets. The prices people are willing to pay in markets for related goods can be used to estimate their values.

Methods to Estimate Dollar Values Circumstantial Evidence – imputed willingness to pay The value of some ecosystem services can be measured by estimating what people are willing to pay, or the cost of actions they are willing to take, to avoid the adverse effects that would occur if these services were lost, or to replace the lost services. Example: willingness to pay for the flood protection services of the wetland

Methods to Estimate Dollar Values Surveys – Expressed willingness to pay Use surveys to ask people directly what they are willing to pay, based on a hypothetical scenario. Or people can be asked to make tradeoffs among different alternatives, from which their willingness to pay can be estimated. Such as contingent valuation method or contingent choice method.

Market and Payments for Ecosystem Services Types of markets and payment schemes: -- public payments and support services -- private contracts or deals -- tax incentives and subsidies -- Trading of rights or credits under a regulatory cap -- eco-labeling

Examples of market-based conservation USDA Farm Service Agency’s Conservation Reserve Program (CRP) provides annual rental payments and cost-share to farmers and ranchers to reduce soil erosion, improve water quality, reduce sedimentation, establish wildlife habitat, and enhance forest and wetland resources.

Examples of market-based conservation In Costa Rica, the Ministry of Environment and Energy charges 20,000 water customers near San Jose a small charge on monthly water bills – the funds directed to upper watershed farmers who have agree to manage and conserve their forested land.

Summary Why are we interested in Economic Analysis? Assist with decision-making regarding proposed actions of management alternatives Facilitates public collaboration Inform the public of possible impacts of activities Required by laws, regulations, policy or executive orders

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