1. MARCH 7, 2013 CLASS 10. ACE, ECONOMIC IMPACTS, AND FOREST DEPENDENCY

2. ALLOWABLE CUT EFFECT (ACE) The Allowable Cut Effect exists where there are regulations or policies that constrain harvest levels Examples in BC are the metering out of old growth timber (key for it to work) Improvements in growth and yield are spread out over the entire rotation Conversely losses in timber are also spread out (regardless of whether or not timber was close to harvesting age)

3. USING ACE AS AN INCENTIVE

4. EFFECT OF ACE Standard CBA Cost of improving the stand -$1000 per hectare Result-doubling of growth (an additional 995 cubic metres) Standard cost-benefit: Discounted Benefit: $13,187/1.05 58 =$778 Cost: $1000 So NPV =-$222 Effect of ACE If you can take additional volume over the 58 years… ($13,187/58) Then it looks quite different Using a formula-the present value of a finite annuity Result with ACE Discounted benefit = ($13,187/58)*((1.05) 58 - 1)/.05*(1.05) 58 = $4,546 Same cost but NPV=$3,546

5. EXPERIENCE WITH ACE

6. ASSESSING ECONOMIC IMPACTS Whether for planning or cost benefit analysis we are interested in the economic impacts that flow from different decisions We can use Input-Output models that show the income an output relationship between different sectors of the economy This then allows us to determine the economic impacts that follow from an event such as Change in harvest level, Construction (or closure) of a sawmill or pulp mill or a project (such as improving infrastructure/road access) Often interested in impact on output, employment, government revenues, or GDP

7. BASIC ECONOMY Remember how the economy works from Econ 100? http://economics.about.com/od/economics-basics/ss/The- Circular-Flow-Model.htm

8. INPUT/OUTPUT MODELS OF ECONOMY Can use purchases and transactions in economy to develop simplified models that identify relationships between sectors These input-output models break out these income flows by different sectors and commodities These can be used to identify the potential impact of one event on a sector in a regional economy and the change in value-added and income earned by primary factors of production

9. DIRECT AND SECONDARY IMPACTS Direct impacts are associated with the initial change The secondary impacts follow as those changes work their way through the economy When a sector expands (contracts) it will buy more (less) from the either sectors In turn those other sectors will also buy more (less) The process keeps repeating itself into a new equilibrium is reached

10. BUILDING BLOCK These numbers represent how much of an input is required from each sector to produce output from that sector So for B to produce $1 of output, it needs to purchase 5 ½ ($.055) cents of inputs from sector C; And households (labour) contribute $0.283 for every $1

11. DERIVING THE COMBINED EFFECT For $1 change in output of sector A results in a $0.185 change in output for sector B and so on…by the time the new equilibrium is reached, the overall impact from an increase in output by A for $1 for the overall economy will be $1.985 Different multipliers reflect assumptions about how household income is treated, in-migration of resources, etc.

12. BC MULTIPLIERS Can be used to derive: Changes in overall output Employment GDP Government revenue Application can be tricky

13. BC MULTIPLIERS

14. EXAMPLE (FROM HORNE 2008)

15. IMPACT ON DIRECT OUTPUT Coefficient shows 2.89 jobs per million$; so dividing number of jobs by direct multiplier then shows decrease in output

16. TOTAL EMPLOYMENT IMPACT So now look at direct and indirect + SN induced SN=safety net, and induced counts effect from spending by households

17. AND THEN EFFECT ON GDP… Again use direct and own indirect and induced Note that overall impact is summe d up for all three sectors

18. AND GOVERNMENT REVENUES…

19. IMPORTANT ASSUMPTIONS Perfectly elastic supply of inputs All resources fully utilized (at capacity) Quantities (technical coefficients) fixed So Marginal equals average Static, not dynamic

20. I/O APPLICATIONS TO CBA (OR UTILIZING ECONOMIC IMPACTS FROM INPUT-OUTPUT MODELS AND OTHER SOURCES IN COST-BENEFIT ANALYSIS) Tempting to utilize Value-Added as measure of benefit But important to realize that those are payments to factors of production So this is the opportunity cost of utilizing them (since they were employed already) So net benefit could be zero But where resources are under-utilized or immobile there could be a net benefit So under utilized timber resource could earn a residual return that would count as a net benefit Or if workers were underemployed or unemployed then the increase in wages would count as a benefit Although this is considered more problematic in the long-term

21. ADDITIONAL FACTORS TO CONSIDER IN CBA Mobile resources (both workers and capital coming into region) Economies of scale Forward linkages aren’t quantified

22. FOREST DEPENDENT COMMUNITIES Mill closures—permanent (total number of mills closed) and indefinite (total number of workers laid off) by province, between January 2003 and December 2009: full mill closurejobs lost Alberta121 722 British Columbia7513 927 Manitoba1190 New Brunswick173 211 Newfoundland31 086 Nova Scotia3550 Ontario5210 855 PEI 136 Quebec9414 550 Saskatchewan111 668 Total26947 795 But had recovered by 32,000 as of Fall 2012 http://www.fpac.ca/index.p hp/en/economic- backbone/

24. BROADER VIEW Emphasis on economic dependence ignores other aspects Aboriginal communities Tourism not well- represented From Beckley 2008