Handbook of Forest Resource Economics

Shashi Kant, Janaki Alavalapati, Shashi Kant, Janaki Alavalapati

• Publisher: Routledge
• Year: 2014
• ISBN:
  9781136253287
• Edition: 1
• Topic: Technology & Engineering
• Subtopic: Forestry
• Index: Technology & Engineering

It is increasingly recognized that the economic value of forests is not merely the production of timber. Forests provide other key ecosystem services, such as being sinks for greenhouse gases, hotspots of biodiversity, tourism and recreation. They are also vitally important in preventing soil erosion and controlling water supplies, as well as providing non-timber forest products and supporting the livelihoods of many local people.

This handbook provides a detailed, comprehensive and broad coverage of forest economics, including traditional forest economics of timber production, economics of environmental role of forests, and recent developments in forest economics. The chapters are grouped into six parts: fundamental topics in forest resource economics; economics of forest ecosystems; economics of forests, climate change, and bioenergy; economics of risk, uncertainty, and natural disturbances; economics of forest property rights and certification; and emerging issues and developments. Written by leading environmental, forest, and natural resource economists, the book represents a definitive reference volume for students of economics, environment, forestry and natural resource economics and management.

1
Evolving Forest Resource Economic Thought

Shashi Kant¹ and Janaki R. R. Alavalapati²

¹PROFESSOR, FOREST RESOURCE ECONOMICS AND MANAGEMENT, FACULTY OF FORESTRY, UNIVERSITY OF TORONTO, 33 WILLCOCKS STREET, TORONTO, ONTARIO, M5S 3B3, CANADA. [email protected]

²PROFESSOR AND HEAD, DEPARTMENT OF FOREST RESOURCES AND ENVIRONMENTAL CONSERVATION, COLLEGE OF NATURAL RESOURCES AND ENVIRONMENT, VIRGINIA TECH, BLACKSBURG, VA 24061, USA. [email protected]

Abstract

This introductory chapter provides an overview of the contents of this handbook. First, a historical perspective of dominant forest economic thought is provided, and six themes of forest resource economics are identified. These themes are discussed in the form of six interrelated parts of the handbook. For each part, an overview is provided, followed by short reviews of its chapters.

Keywords

Bioenergy, climate change, ecosystems, forest economics, forest certification, natural disturbances, property rights, risk and uncertainty

Introduction

The links between forests and human beings are as old as the existence of human life on this planet. The origin of forest economic thought can be traced back to the early phases of Homo sapiens because forests have always been a resource for human welfare. As humans evolved from being hunters and gatherers through the agrarian and industrial eras to the information and technology era, formal concepts, principles and theories relating to forest economics have also evolved. As such, economic thought that was relevant and rational in one era may be irrelevant and irrational in another. There are situations in which some concepts, theories and technologies become dominant due to path dependence and positive feedback effects, whereas others remain dormant (Arthur, 1994). In addition, many path-breaking ideas and concepts are never transmitted from one place to another or from one culture to another due to communication and cultural barriers. Hence, it is impossible to trace the origin and evolution of forest economic thought.

Evidence suggests that Kautilya (or Chanakya) discussed some economic aspects of forest resources in his famous book Arthashastra (economics) written during the fourth century bc in India (Basu, 2011). It is also believed that the first discussion of economic harvesting in Germany was held in the monasteries of Mauermunster during the 1100s (Amacher, Ollikainen and Koskela, 2009). During the 1700s, Denmark and England played a dominant role in developing basic concepts of forest economic thought (Amacher et al., 2009). Danish Count C.D.F. Reventflow proposed an economic theory of optimal forest rotation as early as 1801 (Helles and Linddal, 1997). Englishman William Marshall, in his writings in 1790 and 1809, suggested the need to include the opportunity cost of growing trees and the cost of occupying the land in the calculation of optimal forest rotation (Scorgie and Kennedy, 2000). Irrespective of these early writings, the origin of current dominant forest economic thought is largely attributed to Martin Faustmann’s paper published in 1849.

In the first half of the 1800s, many foresters of Germany, such as Friedrich Pfeil, Gottlieb König and Johan Hundeshagen, published economic aspects of forest management in the first journal of forest science, die Allgemeine Forst- und Jagt Zeitung, which was started in 1824 (Amacher et al., 2009). However, it was the article by Edmund von Gehren on the determination of land value published in the same journal in 1849 that attracted the attention of Martin Faustmann, who published his critique and offered a different approach to calculate land value in the same year. In 1850, Pressler supported Faustmann’s approach with a mathematical formulation (Pressler, 1860). In 1921, Bertin Ohlin, a Swedish economist, also presented a mathematical formulation of optimal forest rotation (Ohlin, 1921). Hence, Faustmann, Pressler and Ohlin are considered the founders of forest economic thought, which remained unnoticed by the English-speaking world for almost a century. The earliest reference to Faustmann’s formulation in English was Gaffney (1957), followed by Bentley and Teeguarden (1965) and Pearse (1967). Faustmann’s paper was translated into English in 1968. Samuelson (1976) gave the credit for current economic thought to Faustmann’s formulation, and since then, Faustmann’s formulation has become the cornerstone of forest economics (Newman, 2002).

Irrespective of the origin of current forest economic thought, two aspects – optimal forest rotation and the choice of discount rate – have dominated discussions in forest economics for the past 50 years. The ownership of forests and the trade of forest products are two other aspects that have been discussed heavily. The issue of ownership has multiple aspects. About 75% of global forests are publicly owned, whereas about 14% are privately owned (White and Martin, 2002). In the case of public forests, determining optimal timber prices is a challenging economic issue because of a large single ownership that does not satisfy the conditions of a competitive market. In the case of private forests, the challenge is to design economically optimal tax policies to advance societal goals. Another complexity arises when different forest owners have different forest management objectives. Similarly, forest products have been locally and internationally traded for centuries, and an understanding of trade issues is just as critical as understanding the local economic issues associated with ownership.

Although the foundations of forest economic thought laid by German foresters mainly focused on timber resources, the importance of nontimber resources in decision making started to emerge in the 1970s. In 1976, Hartman incorporated nontimber resources in determining optimal forest economics rotation (Hartman, 1976). Since then, efforts to advance nonmarket evaluation techniques to quantify the value of ecosystem services such as outdoor recreation, biodiversity, clean air and clean water have been intensified.

Climate change seems to be the greatest environmental challenge of the twenty-first century. Forest carbon sequestration and storage has been shown to play a critical role in mitigating climate change. For example, Bonan (2008) found that carbon sequestration in forest ecosystems was close to one-third of carbon emissions from the use of fossil fuels and land-use change. Approximately 75% of total terrestrial biomass carbon and more than 40% of soil organic carbon are stored in forest ecosystems (Jandl et al., 2007). Hence, the economics of climate change must be an integral part of forest management and conservation strategies.

The risks and uncertainties associated with markets and natural processes such as climate change, forest fires and biological invasion of species have stimulated many forest economists to incorporate them into the analysis.

The Faustmann formulation assumes that a forest owner operates under the conditions of a ‘private property’ that includes exclusive, perpetual, transferable and unfettered property rights. Forest ecosystems provide a web of goods and services that include private goods, public goods, common-pool goods and club goods; therefore, a simple concept of resource ownership may not be good enough for economic analysis of forest ecosystems (Kant, 2000). In fact, government’s role in regulating and managing forests arises due to the existence of multiple types of goods and associated market failures (Kant, 2003a). Forest ecosystems are specifically susceptible to market failures because they are expected to contribute not only to the private goals of the forest owner, but also to social objectives, including the state of the environment. Most governments play an active role in designing forest property rights arrangements to achieve private as well as social goals. Hence, the economics of forest property rights has become a very important component of current forest economic thought.

Finally, there are many economic aspects of forests that cannot be dealt with in the boundaries of the Faustmann framework, and that leads to gaps between theoretical economic models and forestry practices. Kant (2003b, 2013) observed that the economics profession, as a whole, has been re-examining and challenging almost every basis of neoclassical economic thought, in order to reduce the gap between theoretical models and practices. Hence, it is imperative for forest economists to extend the boundaries of forest economics beyond Faustmann’s economic thought. The forest economics profession seems to have taken up this challenge by drawing concepts from other streams of economics, such as new institutional economics and political economy.

Keeping these six themes of forest economics in perspective, we have divided this book into six parts. Each part contains chapters focusing on specific issues related to its theme. There is some continuity, including linkages, among the chapters of each part; however, each chapter stands alone. Given the importance of the fundamental topics that have been the main attraction of forest resource economics for 60 years or more, we start this book with Part 1, focusing on fundamental topics, and close it with Part 6, which focuses on emerging issues and developments.

Part 1: Fundamental topics in forest resource economics

The focus of Part 1 is on four topics – Faustmann’s formulation, rate of discount, ownership and international trade of forest products. In Chapter 2, Deegen and Hostettler note that although the Faustmann model is a useful tool for making an economic decision, the underlying process of market mechanisms, known as catallactics, is also very critical. The authors discuss theoretical concepts and provide an overview of selected contributions of forestry to the inner processes of market functioning. In Chapter 3, Chang discusses the generalized Faustmann formula that allows stumpage prices, stand volumes, annual incomes, regeneration costs and interest rates to vary from timber crop to timber crop. As a result, optimal management and/or optimal rotation would also vary from timber crop to timber crop. Chang notes that this formulation represents a more realistic world relative to Faustmann’s world, in which everything remains static forever. Price, in Chapter 4, highlights various economic and ethical perspectives associated with different economic justifications for discounting, such as opportunity cost, time preference, diminishing marginal utility, declining discount rate and internal rate of return.

Next, three chapters are focused on economic issues associated with ownership. In Chapter 5, Wear presents US forest policy history and forest economics research related to timber supply by ownership groups. He raises many important issues in light of new models of private ownership, such as Timber Investment Management Organizations (TIMO) and Real Estate Investment Trusts (REIT). Leefers and Ghani, in Chapter 6, focus on various timber-pricing mechanisms such as administered charges, negotiated values and market-derived prices – the residual value method and transactions evidence method – used by governments. Ollikainen, in Chapter 7, reviews the results of forest taxation in the Faustmann and Hartman framework, discusses best and second-best forest tax policies, and relates the discussion to modern forest policies promoting ecosystem services such as biodiversity benefits, climate mitigation and nutrient loading. Finally, in Chapter 8, Perez-Garcia and Robbins provide an overview of global forest products trade, discuss economic theory and empirical models of trade and present economic assessments of selected forest products trade policies.

Part 2: Economics of forest ecosystems

Part 2 covers three topics – valuation methods for ecosystem services, economics of specific ecosystems and payment mechanisms for ecosystem services. In Chapter 9, Boyle and Holmes provide an overview of valuation methods and expand on choice experiments. The authors present the latest information on choice experiment methodologies and then discuss their applications to forest ecosystems. The next four chapters are focused on the economics of different forest ecosystems. In Chapter 10, Montgomery and Crandall place old-growth forests within the context of the Faustmann and Hotelling models and discuss old-growth forest values and methods of their measurement. Poudyal and Hodges, in Chapter 11, focus on the economics of open spaces (or green spaces) in urban environments. In particular, they review measures of open spaces, valuation methods (with an emphasis on hedonic price method) and recent studies in open space valuation. Chapter 12 focuses on forest ecosystems that are used to manage game and recreational hunting. Here, Munn and Hussain present the institutional context of these ecosystems in the United States, insights about hunting lease markets of the south-eastern United States and economy-wide implications of wildlife-associated recreation activities. Mercer, Frey and Cubbage, in Chapter 13, focus on the economics of agroforestry systems and review economic principles and approaches to assess agroforestry systems and demonstrate their application through a case study. The focus of the last chapter in Part 2, Chapter 14, is on the status of payment for ecosystem services schemes in developing countries. In particular, Gong, Hegde and Bull discuss schemes for watershed services, biodiversity conservation and forest carbon and present lessons learned and future challenges.

Part 3: Economics of forests, climate change and bioenergy

There are three very important aspects associated with climate change and forests. First, climate change will impact the productivity of forests and thus the forestry sector. Second, forests can be managed to sequester carbon, thereby moderating climate change. Third, carbon em...