Beyond the Basic Forest Resource Model Monday, April 10

Extending the Basic Model Future value of land, in trees or some other use, will affect opportunity cost of harvesting trees Future value of land, in trees or some other use, will affect opportunity cost of harvesting trees Changes in planting and harvest costs affect future value of land Changes in planting and harvest costs affect future value of land Timber prices have been rising over time. Timber prices have been rising over time. What about other values of forests beyond the timber products? What about other values of forests beyond the timber products?

Using Field’s Notation: V 0 : value of the wood that would result if harvested this year (p x q 0 ). V 0 : value of the wood that would result if harvested this year (p x q 0 ). V 1 : value of the wood that would result if harvest is delayed one year (p x q 1 ). V 1 : value of the wood that would result if harvest is delayed one year (p x q 1 ). ΔV: V 1 - V 0 or the change in value between the two years (what you lose if you cut in year 0) ΔV: V 1 - V 0 or the change in value between the two years (what you lose if you cut in year 0) C: cost of harvest (c x q) C: cost of harvest (c x q) r: discount rate r: discount rate S: PV of all future net benefits (all future timber harvests with efficient management or other known uses) S: PV of all future net benefits (all future timber harvests with efficient management or other known uses)

Proceeds if harvested this year Proceeds if harvested next year (Marginal cost of harvesting now) (Marginal benefit of harvesting now) (MC = MB)

ΔV: V 1 - V 0 or the change in value between the two years what you lose if you cut in year 0 Δ V = marginal cost of harvest (opportunity cost) (V 0 -C)r +Sr = marginal benefit of harvest (V 0 -C)r +Sr: what you receive if you cut in year 0

$ Time (years) (V 0 -C)r +Sr=MB ΔV=MC t Graphically:

Inefficiencies in Forest Management External costs of harvest External costs of harvest External benefits of standing trees External benefits of standing trees Planning horizons (public land) Planning horizons (public land)

$ Time (years) (V 0 -C)r+Sr=MB ΔV=MC t External costs associated with timber harvest: some C is external, MSB is less than MPB

$ Time (years) (V 0 -C)r+Sr=MB ΔV=MC t Policy option: limit road construction and enforce rules to limit erosion (increase C – internalize externalities)

$ Time (years) (V 0 -C)r ΔV=MC +Sr t ΔV + H External benefits of standing timber, e.g. habitat, means you give up more when you harvest

$ Time (years) (V 0 -C)r ΔV +Sr t ΔV + H Policy Option: Charge severance tax in the interest of habitat conservation – increase C to decrease MPB t

Policy option: what if the owner of trees can sell carbon sequestration “credits”? Trees as source of carbon sequestration

$ Time (years) (V 0 -C)r +Sr ΔV=MC t Market for carbon sequestration – owner of trees sells carbon sequestration services (and gives up those sales if the trees are cut) ΔV+cs t