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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)
Central Americaand Mexico (CAM)
Northern South America (SAN)
Brazil (BRA)
Southern South America (SAS)
Chile
Western Europe (EUW)
Sweden Finland
Eastern Europe (EUE)
JapanKoreaChina
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 Americaand 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)
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
GDP (1995 US Trillion $ PPP)
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
GDP (1995 US Trillion $ PPP)
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
GDP (1995 US Trillion $ PPP)
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
GDP (1995 US Trillion $ PPP)
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
5 10 15 20 25 30 35 40 45 50 55Age Class (5 year groupings)
Inventory (MMm3)
-
10.00
20.00
30.00
40.00
50.00
60.00
70.00
5 10 15 20 25 30 35 40 45 50 55Age Class (5 year groupings)
Inventory (MMm3)
-
20.00
40.00
60.00
80.00
100.00
120.00
5 10 15 20 25 30 35 40 45 50 55Age Class (5 year groupings)
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
5 10 15 20 25 30 35 40 45 50 55Age Class (5 year groupings)
Inventory (MMm3)
-
10.0
20.0
30.0
40.0
50.0
60.0
5 10 15 20 25 30 35 40 45 50 55Age Class (5 year groupings)
Inventory (MMm3)
-
10.0
20.0
30.0
40.0
50.0
60.0
5 10 15 20 25 30 35 40 45 50 55Age Class (5 year groupings)
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
Economics and The Environment
Firms
Households
OutputInput The Economy
The Environment
Economics and The Environment
Firms
Households
OutputInput The Economy
The Environment
Energy
Air
Water
Amenities
Raw Materials
Economics and The Environment
Firms
Households
OutputInput The Economy
The Environment
Energy
Air
Water
Amenities
Raw Materials
Pollution
Wastes
Economics and The Environment: Strategies
Firms
Households
OutputInput The Economy
The Environment
Energy
Air
Water
Amenities
Raw Materials
Pollution
Wastes
Conservation
RecycleSubstitutes
Economics and The Environment: Strategies
Firms
Households
OutputInput The Economy
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
Economics and The Environment
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
A sampled section with a single ownership and stream data.
Net Buffers
A sampled section with a single ownership and stream data.
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
NPV in dollars for the state
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
NPV in dollars for the state
Setup costs to delineate riparian management zones, unstable slopes, etc
NPV in dollars for the state
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
NPV in dollars for the state
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?