Environmental economics

 
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ECON359 Environmental Economics Tutorial 3: Forests
Part A (answers to be submitted via iLearn by 2pm on class day) A forest has the following characteristics: • The standing volume of wood in a stand is given by
V=50t+2t2-0.01t3, where t is the number of years; • The net unit stumpage value (P) of harvested wood is 100; • The interest rate (assumed equal to the forest
manager’s discount rate) (r) is 2%; • The cost of replanting undertaken (c) is 10000; • The wood has no commercial value until at least 20 years old;
For this forest, determine the optimal rotation period:
i. for a biological management regime ii. for a single rotation period only iii. for continuous rotation
In each case indicate and compare the returns from harvesting.
What is the effect on ii and iii of:
a. an interest rate of 3.5%? b. a net stumpage value of 50? c. A stumpage value of 100 that is equal to 100 until year 20 and thereafter rises at 0.5% per annum?
[Hints: don’t try to solve this analytically – unless you especially like polynomials ?. A spreadsheet will be your best bet. The calculations are not especially
challenging if you understand what it is you are trying to do and have read the text….]

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Forests ECON359 Environmental Economics
Forests Like fish, a renewable resource
same basic principles apply
Important differences
•? absence of population effects – able to generalise from individual growth dynamics to group (stand) dynamics with less emphasis on interaction effects (predation
etc) •? alternative use issues – forestry a use of land subject to opportunity costs relating to alternative use •? importance of environmental amenities – impact on
optimal harvesting rate (stand rotation)
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Harvesting decision Basic unit in forestry management: the stand •? grouping of like trees in a specified area •? forest a collection of stands •? extensive margin:
stands which yield no net return •? intensive margin: stands where returns to forestry cease to dominate returns from alternative uses
Basic question: when to cut?
Biological approaches based on tree growth rates •? mean annual increment (MAI) •? current annual increment (CAI) •? culmination of mean annual increment (CMAI)
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Biological harvesting rule Assume a normal forest (aka ‘fully-managed’)
•? number of stands equal to the rotation period (time between harvests) e.g. 30 stands each harvested every 30 years (N.B. example is alleged basis of teak forestry
management in Burma…..)
In order to maximise harvested volume (W) over time given growth in standing volume (V), need too choose the rotation period (T) to maximise
Biological harvesting rule Behaviour of harvested volume over time is
maximised when dW/dT=0, which implies
Rotate to achieve CMAI (analogous to MSY)
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Economic approaches As in fishery case, biological management fails to take into account time preference and discounting
•? ‘recruitment’ of trees a much longer process
Economic approach aims to maximise net present value of harvested timber as opposed to quantity of harvested timber
Outcome depends on:
•? number of rotations per stand •? extent of environmental amenities
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Single stand, one rotation One-shot use of land for forestry with no maintenance costs
NPV of harvesting at time T:
Maximised when i.e. when
Hence
Trees in the ground like money in the bank : optimal rotation when growth rate = discount rate
p
= PV T ( )[ ]e- d T
Single stand, continuous rotation Ongoing use of site for forestry – replanting after harvest (at cost c)
NPV of harvesting now relates to an infinite sequence of harvests each T periods apart
converging to
So
Cost of waiting implies shorter rotation (to exploit faster growth)
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Continuous forestry and site rent At the optimal rotation T* the NPV of continuous forestry is
•? capitalised value of forested land
The cost of waiting is expressible as
•? site rent: opportunity cost of using land for forest
So
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Environmental amenities Hartman model – forests provide value via timber extraction and environmental services (F)
Key issue is flow rate of environmental amenities relative to accumulation rate of stumpage value
•? presence of amenities lengthens rotation period •? sufficient amenity value may permanently postpone felling
Complications
•? non-convexities •? valuation
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Policy issues Private ownership: excessive discount rates, policy/ ownership uncertainty can lead to sub-optimally short rotation or abandonment of continuous forestry
(deforestation)
Public ownership: typical reliance on biological management regimes (Annual Allowable Cut based on CMAI criteria) can produce investment distortions relative to the
private ownership benchmark
•? Allowable Cut Effect
Deforestation costs Biodiversity loss
CO2 emissions
Watershed management
Degradation/Erosion/Desertification
Importance of accurate and comprehensive valuation to offset the ‘tyranny of long-rotation discount’ effect
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