C I N T R A F O R
Special Paper Abstract
Economic Analysis of Forest Landscape Management Alternatives
Bruce Lippke, John Sessions, Andrew Carey. 1996. (157 pp) SP21 $25.00
Analysis of forest structures that support wildlife--particularly species that may be endangered because of a shortage of certain structures--provided the basis for The Washington Forest Landscape Management project's evaluation of management alternatives to maintain and restore biodiversity and habitat. Biological and economic measures were developed for commercial management alternatives, preservation or set-asides, and biodiversity management pathways which were specifically. developed to produce the forest structures now in greatest shortage. This report provides an economic assessment of the listed alternatives, especially the biodiversity pathways. The economic effects that landowners would experience if they changed management strategy to produce for both non-timber and timber goals are analyzed in some detail. Incentive methods that could offset losses and motivate change in management are developed. An assessment of additional benefits that accrue to the economic region and the nation are provided, as they may offer further justification supporting incentives for biodiversity management alternatives.
Landscape management alternatives can serve both commodity production and non-timber goals. For commodity production of timber, short rotations of about 50 years produce the optimal financial return to timberland owners west of the Cascades, but such short rotations reduce the number of acres in late seral and old-growth (LSOG) forest structures believed to be important to certain fish and wildlife. Simulations show that landscape management alternatives can increase the number of acres in LSOG forest structures and thus serve both commodity production needs and non-timber goals. These alternatives result in lower implementation cost (1ess revenue loss) and lower-risk disturbances than no-management (reserves or set-asides) alternatives.
The biodiversity management pathways developed for the Washington Forest Landscape Management Project can be used to convert some of the excess in overly-dense young stands that result from commercial rotations to stands with characteristics of late seral forests more rapidly than would occur by setting acres aside as reserves. The principal differences between these management pathways and current commercial practices include: 1) site preparation retaining more debris, 2) heavier thinnings for lower densities, 3) more attention to retaining snags and debris with patches of variable densities for diversity, and 4) periodic thinnings over longer rotations.
Biodiversity management pathways that increase late semi-like structures significantly reduce financial returns. while the first three treatments for these biodiversity management pathways can make a substantial improvement in biodiversity at relatively low cost, increasing the amount of forest structure equivalent to late seral stands through periodic thinnings and ion get rotations has been viewed as most important biologically, but it would substantially reduce the return (net present value) to timber owners. Given a commitment to manage. over longer rotations, a focus on growing higher-quality wood, thus generating increased revenue to offset at least a portion of the losses from the longer holding period, naturally follows. The thinning treatments to produce higher-quality wood are complementary to the production of forest structures and habitats in short supply. Net cost or revenue loss for these management alternatives under various market and operating cost assumptions and across various land productivity classes are key elements in determining what motivation would be required to induce land managers to change their practices to improve biodiversity and habitat
Offsetting the cost of these management alternatives by financial incentives should make managers neutral in choosing alternatives which can serve non-timber as well as commodity values. Financial incentives can be provided in several different ways including competitive contracts, tax reduction or stewardship cash payments. The joint production of commodity values and non-timber goals is substantially cheaper than preservation or set-asides because the production of high-quality wood offsets much of the lost revenue from longer holding periods.
For public lands chartered to be managed for multiple amenities, biodiversity pathways can reach late seral forest structure goals more quickly, with less risk of inadequate natural disturbances, while also producing a greater long-term sustainable flow of wood products and revenues as well as support for a more diversified rural infrastructure.
While regulatory standards are often considered the most direct method to achieve an environmental goal, the primary emphasis in this report was to identify more effective alternatives Adopting uniform standards as regulatory requirements would be very costly and inefficient and would substantially reduce competitiveness. Regulatory constraint on harvest was already known to be very costly, have inequitable impacts across owners, be likely to drive capital investment to other regions producing substitute supplies with similar environmental impacts, and also increase the consumption of non-wood substitutes. The manufacture of substitutes like steel, aluminum, concrete, and brick is fossil-fuel-intensive, causing substantial increases in atmospheric carbon emissions.
Incentives offered through competitive contracts can offset the cost and risk of producing non-timber goals. Since the range of costs over different land productivity classes and different owners is large, non-timber goals can be reached at the lowest cost by offering competitive incentive contracts under which successful private sector bidders would modify their management to reach the non-timber goals for a set of acres to be treated. The key elements in incentive contracts would be a cash incentive to offset the lost net present value for the alternative treatments, consideration of any cash flow needs if the operations are less than break-even (including the impact of estate taxes on small owners), and guarantees that the increased habitat that they produce will not prevent harvesting or, alternatively, compensating the landowner for the fair market value of any final harvest constraint Funding of cash incentives would require new institutional mechanisms even if justified by non-timber and other economic benefits.
Under current forest practice regulations, treatments that increase habitat also greatly increase the risk of an "asset taking" through regulatory requirements to save existing habitat This requirement acts like a tax on any habitat created, motivating the elimination of habitat through accelerated harvest of potential habitat and the shortening of rotations to avoid creating future habitat. Once current habitat is eliminated through natural disturbances, it could be gone forever since potential replacement stands are being harvested at a younger age. In contrast, the guarantee of no taking without compensation and the incentive offset of revenue loss would motivate the future creation of habitat, with the potential of greatly increasing the amount of habitat over time.
Under competitive contracts to produce non-timber goals, the lowest-cost bidder would produce the goals. Estimated costs range from $1500 to $2500 per acre to reach 110-year rotations for medium-site hemlock lands when the contract is effected at the time of the first thinning, about age 30 years. Negotiating the same contract at the time of stocking, age 0, would result in a much smaller incentive, roughly $500 per acre, given the value increase in the growing timber that occurs from the time of stocking to age 30; but the non-timber goals would then be reached 30 years later than can be achieved by staring with existing 30-year-old stands. Most important, the estimated cost of the incentives to reach the biologically equivalent structure is significantly lower on higher-site lands since the structure can be reached sooner, with a much smaller revenue loss. The estimated costs for non-timber contracts may be as much 30% of the land's revenue potential on medium-site land, even more on low-site land but substantially less on high-site land. The working group noted that the growth and yield assumptions appear to be ultra-conservative, which suggests that the estimated cost to switch to long rotations may be significantly lower than estimated.
The alternative to set a stand aside (with no management) with the expectation that natural aging and disturbances will eventually produce diverse structure with increased biodiversity sacrifices all economic value, or about $4000 per acre if the stand is ready for a first thinning, or in excess of $12,000 per acre if the stand has reached age 50 and is ready to harvest. Late seral-like structures from these young set-asides would not likely be reached until much later than under managed alternatives--perhaps more than 100 years later. Long rotation wildlife treatments or selective harvest treatments within riparian buffers can greatly reduce the cost of no management buffers while more rapidly producing the diverse forest structures desired for habitat
Biodiversity and habitat suitability indices can be restored to historic levels. Through management of a portion of the acres under biodiversity pathway treatments, late seral forest structures and habitat indices can be restored to levels estimated for pre-European settlement times. Using a mix of treatments and targeting for restoration of late seral structures approaching conditions for pre-European settlement times may limit annual incentive costs to less than $60 million per year for 10 million acres comparable to the West side of Washington state. if 25% of these acres are public and set aside, rather than managed, the lost (public) revenue could exceed $300 million per year without achieving the diversity produced by the incentives.
Transitional costs can be significant simulations for the Clallam River landscape demonstrated both the cost of the treatments as well as the cost of deferring harvests to a later time to avoid substantial reductions from the sustainable harvest rate. Extending rotations by deferring the harvest of marketable inventory causes a reduction in the present. value of the harvest because of the longer holding period. Given an excess of marketable inventory, harvest may be postponed in order to reach habitat targets more quickly and to avoid future declines in the harvest schedule, but the present value will be discounted still farther if there is no mature inventory to defer there will be a shortfall in acres available for harvest in just 20 years when the stands thinned at age 30 become age 50 (the commercial harvest age), as they would be designated for a second thinning along a biodiversity pathway instead of for final harvest if the thinnings are phased in more slowly, both the harvest decline and the economic losses are reduced but the biological targets are reached several decades later. Since Washington state has more acres in the age class appropriate to a first thinning (30+ years), a significant percentage (approaching 25%) may be diverted to longer rotations without causing a substantial future decline from current harvest levels. The estimated present value cost of producing an increase of 10% in late seral structures could be less than $120 per landscape acre ($60 million per year for 10 million acres) but the transitional costs to phase these treatments in quickly may be as large or even greater.
The cost of a substantial improvement in non-timber goal production is offset by regional economic gains. if the target for increased acres in late seral-like structures on state and private lands is not high, it can most likely be reached with incentive costs below $1000 per acre on a small portion of the total acreage, generally on higher-production sites. Given the number of acres Sin federal set-asides and under riparian protection, an additional 25% of the non-federal acres managed for longer rotations will produce a much better balance in forest structures than under current short term commercial rotations, with the total number of acres in late seral structures probably larger than the lowest levels experienced a number of times over the past several centuries based on research on the history of natural disturbances. The incentive cost of such a program for Western Washington could be as low as $28 million per year (not including the lost opportunity on federal set-asides).
A significant regional benefit of the managed alternative would be the increased employment and income produced by the increased management operations. The thinning treatments needed for biodiversity management result in increased labor and infrastructure, contributing increased economic activity especially in rural areas flow suffering high unemployment. The short-term job gains from the increased thinning activities would approach 7,000 annual jobs, with half of these in rural areas. The estimated increase in state and local tax receipts from the first thinning treatment to increase biodiversity is roughly comparable to the estimated cost of the incentive required to motivate landowners to undertake biodiversity management pathways. In addition, the potential reduction in unemployment compensation cost is almost twice as large as the cost of incentives, producing a net regional economic savings. Further; the increase in federal tax receipts is larger than the increase in state receipts. At the regional level, the benefits of increasing biodiversity can be reached while improving the fiscal balance even in the short-term.
Over the longer term, as the harvest of longer-rotation, higher-valued timber supports increases in the processing of higher-quality timber, the regional economic benefits increase further with the tax receipts becoming many times larger than the cost of incentives. Since the beneficiaries of non-timber goals are the general public and the cost of incentives is more than offset by both increased tax receipts and other budget savings, there is adequate justification to pay for incentives out of general fund sources.
During the mid-term years when there ate fewer acres available for short rotation harvest and long rotations have not yet matured, there could be an overall reduction in both harvest volume and economic value. One approach to reduce this loss would be to offset the decline by reducing the number of acres now devoted to set-asides in recognition of the increasing number of acres of habitat being created.
Carbon sequestration benefits-provide additional justification to we incentives. Longer rotations for biodiversity management result in roughly twice as much standing timber inventory and an increase in carbon storage of roughly 45 tons per acre. In addition, high-quality wood tends to substitute for fossil-fuel-intense products such as steel and aluminum, a potential reduction in carbon emissions several times greater than the forest storage. While paying the incentive cost to purchase carbon storage may involve some of the lowest-cost carbon storage that can be purchased, these are long-term gains and are not useful in meeting short-term targets such as a short-term utility carbon budget or the President's year 2000 targets. While there is uncertainty on the importance of reducing carbon emissions, to achieve such a reduction will require long-term solutions in which biodiversity management and production of high-quality wood could play a part.
Incentive methods can be extended to non-competitive situations. While competitive incentive contracts are most efficient, there may be watersheds where there is inadequate competition for effective bidding. The knowledge of incentive costs gained in areas where competitive bidding is effective can serve as a guide for offering contracts in areas where there is inadequate competition. Cooperatives and other arrangements may be useful where competition is limited but several owners are involved, such as for streamside management. For non-timber goals that are focused on improving biodiversity over shorter rotations, which can improve habitat indices but will fall short of late seral functionality, the cost may be low enough that non-competitive subscription incentives, much like tree farmer stewardship programs, can be used. But the elements of a contractually binding guarantee assuring no asset takings without compensation would still be required or the regulatory risk to the landowner would likely be prohibitive.
In summary, incentives can provide the market mechanism to motivate land managers to produce stand structures that provide non-market goals. The land managers' risk of asset takings must be reduced as a part of this incentive since that risk will otherwise rise with good management Since the economic loss to landowners would be significant, voluntary participation to meet desirable goals should not be expected. Targets to restore habitat indices at least partially may be low enough in cost that they could be reached with small incentives if the risk of asset takings for successful production of habitat were eliminated. Institutional changes are necessary to implement incentive systems, but strong arguments can be made in justification.