Economics in Forestry John Perez-Garcia Guest Lecture ESRM 101 – May 22, 2007

Economics zAllocation of scarce resources zIf there is no scarcity, there is no problem zScarcity rent zExternalities zWillingness to Pay

The Different Aspects of Forest Economics zProduction Economics yTimber supply: How to meet growing demand for wood products zEnvironmental Economics yHow much of environmental services to produce (i.e. carbon, biodiversity)

The Supply and Demand of Forest Products Worldwide United States Canada (see Map 3) Central America and Mexico (CAM) Northern South America (SAN) Brazil (BRA) Southern South America (SAS) Chile Western Europe (EUW) Sweden Finland Eastern Europe (EUE) Japan Korea China Taiwan-Hong Kong Former Soviet Union, West and East (SUW, SUE) Middle East (MDE) India (IND) Indochina (ICH) Malaysia West (MAW) Malaysia East (MAE) Indonesia (IDN) Papua New Guinea (PNG) Australia (AUS) Rest of Oceania (OCN) New Zealand East Africa (AFE) Africa West (AFW) Africa South (AFS) Africa North (AFN) Philippines (PHL)

Key Consumers United States Canada (see Map 3) Central America and Mexico (CAM) Northern South America (SAN) Brazil (BRA) Southern South America (SAS) Chile Western Europe (EUW) Sweden Finland Eastern Europe (EUE) Japan Korea China Taiwan-Hong Kong Former Soviet Union, West and East (SUW, SUE) Middle East (MDE) India (IND) Indochina (ICH) Malaysia West (MAW) Malaysia East (MAE) Indonesia (IDN) Papua New Guinea (PNG) Australia (AUS) Rest of Oceania (OCN) New Zealand East Africa (AFE) Africa West (AFW) Africa South (AFS) Africa North (AFN) Philippines (PHL)

New Suppliers Servicing Pacific Rim Markets United States (see Map 2) Canada (see Map 3) Central America and Mexico (CAM) Northern South America (SAN) Brazil (BRA) Southern South America (SAS) Chile Western Europe (EUW) Sweden Finland Eastern Europe (EUE) Japan (JPN) Korea (KOR) China (CHN) Taiwan-Hong Kong (THK) Former Soviet Union, West and East (SUW, SUE) Middle East (MDE) India (IND) Indochina (ICH) Malaysia West (MAW) Malaysia East (MAE) Indonesia (IDN) Papua New Guinea (PNG) Australia (AUS) Rest of Oceania (OCN) New Zealand East Africa (AFE) Africa West (AFW) Africa South (AFS) Africa North (AFN) Philippines (PHL)

What Does the Global Consumption Picture Look Like?

Global Consumption for Wood Fiber (w/out Russia)

Consumption Projections Based on Historical Growth

An Alternative Projection GDP (1995 US Trillion $ PPP) Million Cubic Meters 1.4% %

Global Capacity Surplus at the End of the Decade GDP (1995 US Trillion $ PPP) Million Cubic Meters Capacity Contraction 1.4% Capacity Expansion 0.5%

On the Road to Recovery zRecovery from a global recession zUS domestic market strong zWeakening dollar puts pressure on importers to US

Projections for Demand Growth zMid term projection: 300 to 800 MMm3 z(60 BBbf to 160 BBbf)

Global Supply Analysis zWhich regions will supply this increment yDepends on available resources yLocation yInfrastructure

Supply-side Players zOld Guard yPacific Northwest yAlaska yRussia zNew Guard yChile/New Zealand yScandinavia (Sweden/Finland)

New Plantations zLatin America yUruguay, Argentina, yChile, Brazil zAsia yAustralia, New Zealand, yIndonesia, China

Uruguay Argentina Chile Brazil Inventory Projections

New ZealandAustralia IndonesiaChina Inventory Projections

Supply Demand Balance Total Volume In Age Classes Greater Than Rotation Age

Supply Analysis with Global Trade Simulation Model zAdds economic parameters to physical resources zAllows trade flows zConsiders harvesting and delivery costs zNot limited to newly established plantations zAnalysis assumes no growth in demand

Who Will Supply the Next Increment of Softwood Sawlogs Million Cubic Meters Based on cost competitiveness for 2010

Supply and Demand Balance Brazil (BRA) Chile Sweden Finland Russia New Zealand Japan 1 -3 China Korea EU

Summary of Points zThere’s plenty of supply just waiting for demand to kick in. zPlantations have expanded in regions outside of US. zEconomics of getting the wood fiber to market will decide who gets to harvest their wood fiber. zUS market will remain the strongest market globally.

Environmental Economics zApplying economic theory to environmental goods and services. zIncludes the demand for environmental goods and services. zIncludes the supply of environmental “bads” (Pollution and wastes).

Economics and The Environment Firms Households Output Input The Economy

Economics and The Environment Firms Households Output Input The Economy The Environment

Economics and The Environment Firms Households Output Input The Economy The Environment Energy Air Water Amenities Raw Materials

Economics and The Environment Firms Households Output Input The Economy The Environment Energy Air Water Amenities Raw Materials Pollution Wastes

Economics and The Environment: Strategies Firms Households Output Input The Economy The Environment Energy Air Water Amenities Raw Materials Pollution Wastes Conservation Recycle Substitutes

Economics and The Environment: Strategies Firms Households Output Input The Economy The Environment Energy Air Water Amenities Raw Materials Pollution Wastes Conservation Recycle Substitutes Remediate Restore Remove

Population With a larger population and increased technology, society has a greater impact on the environment.

The Sustainability Paradigm zReviving growth. zChanging the quality of growth. zMeeting essential needs (jobs, food, energy, water and sanitation). zConserving and enhancing the resource base zReorienting technology. zMerging environment and economics in decision making.

The Key Issues zWhat is the correct level of environmental protection? zHow should this be decided? zHow should this level be achieved? zWho should bear the cost? zRequires an interdisciplinary approach yEconomics, Ecology and Ethics

Economics and The Environment zMarket failures and externalities yCost of production are external to the price of the product yLack of well-defined property rights yInternalizing environmental values

Decision Making zCost benefit analysis yProject definition yClassification of impacts yConversion into monetary terms yDiscounting yProject assessment ySensitivity analysis

A Cost Benefit Analysis of Forests and Fish Rules: A Case Study

Existing Buffers A sampled section with a single ownership and stream data.

Proposed Buffers A sampled section with a single ownership and stream data.

Net Buffers A sampled section with a single ownership and stream data.

Potential Costs: CBA

Timber asset, road planning and lost wage costs range from 7.15 to 8.18 billion dollars

Potential Benefits: CBA

Fish Values As A Function of Incremental Project Success High Status Quo

Fish Values As A Function of Incremental Project Success Low Status Quo

Summary Table for Benefit Cost Analysis (Billion dollars)

Summary Points zBreak even point suggests that probable benefits exceed probably costs for the 1 st 5% increment in fish population zIf the project produces an increase of less than 5% than the costs outweigh the benefits zThe proposed rules are assumed to produce the first 5% increment over all other projects

Questions?