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

Economics in Forestry

John Perez-Garcia

Guest Lecture ESRM 101 – May 22,

2007

Economics

Allocation of scarce resourcesIf there is no scarcity, there is no

problemScarcity rentExternalitiesWillingness to Pay

The Different Aspects of Forest Economics

Production Economics Timber supply: How to meet growing

demand for wood productsEnvironmental Economics

How 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 Americaand Mexico (CAM)

Northern South America (SAN)

Brazil (BRA)

Southern South America (SAS)

Chile

Western Europe (EUW)

Sweden Finland

Eastern Europe (EUE)

Japan

KoreaChina

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)



Brazil (BRA)


Chile


Sweden Finland


JapanKoreaChina

Taiwan-Hong Kong


Middle East (MDE)

India (IND)

Indochina (ICH)


Indonesia (IDN)


Australia (AUS)


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)



Brazil (BRA)


Chile


Sweden Finland


Japan (JPN)

Korea (KOR)China (CHN)

Taiwan-Hong Kong (THK)


Middle East (MDE)

India (IND)

Indochina (ICH)


Indonesia (IDN)


Australia (AUS)


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)

800

1000

1200

1400

1600

1800

2000

5 15 25 35 45 55

GDP (1995 US Trillion $ PPP)

Mil

lio

n C

ub

ic M

eter

s

19821975

1995

Consumption Projections Based on Historical Growth

800

1000

1200

1400

1600

1800

2000

5 15 25 35 45 55


Mil

lio

n C

ub

ic M

eter

s 1.4%

19821975

1995 2010

An Alternative Projection

800

1000

1200

1400

1600

1800

2000

5 15 25 35 45 55


Mil

lio

n C

ub

ic M

eter

s

1.4%

19821975

1995 2010

0.5%

Global Capacity Surplus at the End of the Decade

800

1000

1200

1400

1600

1800

2000

5 15 25 35 45 55


Mill

ion

Cu

bic

Me

ters

Capacity

Contraction

1.4%

19821975

1995 2010

Capacity Expansion 0.5%

On the Road to Recovery

Recovery from a global recession

US domestic market strong

Weakening dollar puts pressure on importers to US

Projections for Demand Growth

Mid term projection: 300 to 800 MMm3 (60 BBbf to 160 BBbf)

0.5

1

1.5

2

2.5

3

3.5

4

5 25 45 65 85 105 125 145


Bil

lio

n C

ub

ic M

eter

s 1.4%

0.5%

Global Supply Analysis

Which regions will supply this increment Depends on available resources Location Infrastructure

Supply-side Players

Old Guard Pacific Northwest Alaska Russia

New Guard Chile/New Zealand Scandinavia (Sweden/Finland)

New Plantations

Latin America Uruguay, Argentina, Chile, Brazil

Asia Australia, New Zealand, Indonesia, China

Inventory (MMm3)

-

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

5 10 15 20 25 30 35 40 45 50 55Age Class (5 year groupings)

Inventory (MMm3)

-

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

50.0


Inventory (MMm3)

-

10.00

20.00

30.00

40.00

50.00

60.00

70.00


Inventory (MMm3)

-

20.00

40.00

60.00

80.00

100.00

120.00


Uruguay

Argentina

Chile

Brazil

Inventory Projections

Inventory (MMm3)

-

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0


Inventory (MMm3)

-

10.0

20.0

30.0

40.0

50.0

60.0


Inventory (MMm3)

-

10.0

20.0

30.0

40.0

50.0

60.0


Inventory (MMm3)

-

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

180.0

5 10 15 20 25 30 35 40 45 50 55

Age Class (5 year groupings)

New Zealand Australia

Indonesia China

Inventory Projections

Supply Demand Balance

Country Rotation Age Volume MMm3 China 35- 50 0

Indonesia 25 98 Australia 25 195

New Zealand 25 140 Argentina 25 137

Brazil 25 190 Uruguay 25 32

Chile 25 146 Total 25 938

Total Volume In Age Classes Greater Than Rotation Age

Supply Analysis with Global Trade Simulation Model

Adds economic parameters to physical resources

Allows trade flowsConsiders harvesting and delivery costsNot limited to newly established

plantationsAnalysis assumes no growth in demand

Who Will Supply the Next Increment of Softwood Sawlogs

0

5

10

15

20

25

30

35

fin nwz usn swe uss euw cea cin esv inv

0-50MMm3 51-100MMm3 101-150MMm3 151-200MMm3

Million Cubic MetersBased on cost competitiveness for 2010

Supply and Demand Balance

Brazil (BRA)

Chile

Sweden Finland Russia

New Zealand

1 - 5

0.5 - 1

4 - 5

0.3 - 1

4 - 5Japan

1 -3China

0.6 - 1Korea

0.4 - 0.6EU

Summary of Points

There’s plenty of supply just waiting for demand to kick in.

Plantations have expanded in regions outside of US.

Economics of getting the wood fiber to market will decide who gets to harvest their wood fiber.

US market will remain the strongest market globally.

Environmental Economics

Applying economic theory to environmental goods and services.

Includes the demand for environmental goods and services.

Includes the supply of environmental “bads” (Pollution and wastes).

Economics and The Environment

Firms

Households

OutputInput The Economy


Firms

Households


The Environment


Firms

Households


The Environment

Energy

Air

Water

Amenities

Raw Materials


Firms

Households


The Environment

Energy

Air

Water

Amenities

Raw Materials

Pollution

Wastes

Economics and The Environment: Strategies

Firms

Households


The Environment

Energy

Air

Water

Amenities

Raw Materials

Pollution

Wastes

Conservation

RecycleSubstitutes

Economics and The Environment: Strategies

Firms

Households


The Environment

Energy

Air

Water

Amenities

Raw Materials

Pollution

Wastes

Conservation

RecycleSubstitutes

RemediateRestoreRemove

Population

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

The Sustainability Paradigm

Reviving growth.Changing the quality of growth.Meeting essential needs (jobs, food,

energy, water and sanitation).Conserving and enhancing the resource

baseReorienting technology.Merging environment and economics in

decision making.

The Key Issues

What is the correct level of environmental protection?

How should this be decided?How should this level be achieved?Who should bear the cost?

Requires an interdisciplinary approach Economics, Ecology and Ethics


Market failures and externalities Cost of production are external to the

price of the product Lack of well-defined property rights Internalizing environmental values

Decision Making

Cost benefit analysis Project definition Classification of impacts Conversion into monetary terms Discounting Project assessment Sensitivity 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


Net Buffers


Potential Costs Measures of potential costs Lost revenues due to timber asset retirement NPV in dollars for the state Net costs associated with road planning and maintenance

NPV in dollars for the state

Setup costs to delineate riparian management zones, unstable slopes, etc


Net income losses due to employment losses. NPV in dollars for the state Set asides for unstable slopes Not estimated, will add to costs Costs associated with the forested wetlands rules Not estimated, will add to costs Costs associated with pesticide restrictions Not estimated, will add to costs Equipment zone limitation costs Not estimated, will add to costs Social and economic dislocation Not estimated, will add to net

income loss figure above Loss recreational and fire control access Not estimated, will add to costs

Potential Costs: CBA

Potential Costs Measures of potential costs Lost revenues due to timber asset retirement NPV in dollars for the state Net costs associated with road planning and maintenance


Setup costs to delineate riparian management zones, unstable slopes, etc


Net income losses due to employment losses. NPV in dollars for the state Set asides for unstable slopes Not estimated, will add to costs Costs associated with the forested wetlands rules Not estimated, will add to costs Costs associated with pesticide restrictions Not estimated, will add to costs Equipment zone limitation costs Not estimated, will add to costs Social and economic dislocation Not estimated, will add to net

income loss figure above Loss recreational and fire control access Not estimated, will add to costs

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

Table 1. Potential costs and benefits associated with new proposed rule changes. Potential Benefits Measure and Effect Improved fishery resource NPV in dollars for the state Improved habitat for upland wildlife Not estimated, will increase benefits Improved carbon sequestration Not estimated, will increase benefits Improved water quality Not estimated, will increase benefits Reduced threats to public safety from unstable landforms

Not estimated, will increase benefits

Promote viability of industry in view of other alternatives

Not estimated, will increase benefits

Employment benefits from implementing road maintenance plans


Tax credit benefits to landowners/harvesters NPV in dollars for the state

Potential Benefits: CBA

Fish Values As A Function of Incremental Project Success

$-

$2

$4

$6

$8

1 2 3 4 5 6 7 8 9 10

5% Increments in Fish Population

Bil

lio

ns

Columbia Freshwater Columbia Migratory

Pacific Freshwater Pacific Migratory

High Status Quo

Fish Values As A Function of Incremental Project Success

$-

$2

$4

$6

$8

$10

$12

1 2 3 4 5 6 7 8 9 10

5% Increment in Fish Population

Bill

ion

s

Columbia Freshwater Columbia Migratory

Pacific Freshwater Pacific Migratory

Low Status Quo

Net costs over Current Situation

Net benefits over Current Situation

Low High Low High Foregone timber asset value 2.678 2.678 Road maintenance & stream crossings 2.13 2.13 Lost wages 2.387 3.420 Set up costs 0.154 0.154 0.154 0.154 Hypothetical FIRST 5% increase in fish population after 20 years

7.0

10.3

Increased road construction activity 1.789 2.684 Reduced excise tax 0.154 0.154 0.154 0.154 TOTALS 7.503 8.536 9.097 13.292

Summary Table for Benefit Cost Analysis (Billion dollars)

Summary Points

Break even point suggests that probable benefits exceed probably costs for the 1st 5% increment in fish population

If the project produces an increase of less than 5% than the costs outweigh the benefits

The proposed rules are assumed to produce the first 5% increment over all other projects

Questions?

Documents

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