Remunerating nature conservation in central European forests: scope and limits of the Faustmann–Hartman approach

Forest Policy and Economics 2 Ž2001. 117᎐131

Remunerating nature conservation in central European forests: scope and limits of the Faustmann᎐Hartman approach Ulrich HampickeU Ernst-Moritz-Arndt-Uni¨ ersitat, ¨ Botanisches Institut, Grimmer Strasse 88, D-17487 Greifswald, Germany Received 1 February 2000; received in revised form 16 August 2000; accepted 28 September 2000

Abstract The elementary method based on Faustmann’s analysis and extended by Hartman is used for the design of payment schemes inciting forest owners to manage their assets in a way more conducive to nature conservation. It is not aimed at extending the elementary theory but rather, to elicit its most important empirical implications. It is taken for granted that the conservation benefit of a forest increases linearly with time. Linearity is not only in sufficient agreement with ecological facts but also makes it easy to derive important conditions, in particular the minimal payment inducing owners never to harvest. The theory is applied to a German beech forest model Ž Fagus syl¨ atica.. It is found that inciting owners to delay cutting cannot be recommended. The instrument should be used for the objective of abandoning cutting altogether which, however, demands that the conservation objective, as expressed in its present value, is granted a very high value by society. In the sequel, various aspects as to the scheme’s practicability are discussed, including the need to capitalise annual payments into one single sum, the choice of a discount rate, the allowance for current costs in forestry and the likely approval of payments in the political arena. Although the discussion identifies several obstacles to the practical application of the scheme, there appears to exist no principal reason why a conservation policy based on the Faustmann᎐Hartman approach should not work in forestry. 䊚 2001 Elsevier Science B.V. All rights reserved. Keywords: Faustmann᎐Hartman approach; Optimal forest rotation; Nature conservation; Biodiversity; Central European beech forest; Rate of discount; Remuneration of ecological services

U

Tel.: q49-3834-864122; fax: q49-3834-864107. E-mail address: [email protected] ŽU. Hampicke.. 1389-9341r01r$ - see front matter 䊚 2001 Elsevier Science B.V. All rights reserved. PII: S 1 3 8 9 - 9 3 4 1 Ž 0 1 . 0 0 0 4 8 - X

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1. Introduction

In 1849, Martin Faustmann paved the way for the discovery of the optimal forest rotation from a capital᎐theoretical point of view ŽFaustmann, 1849.. His classic approach assumed that lumber production was the only benefit to society derived from forestry. Although this was a reasonable approximation in Faustmann’s epoch, it is no longer warranted today because other forest functions have gained importance ever since. They are described in a rich literature, ranging from protective functions with regard to soils, climate, and water resources to amenity values for recreation and the conservation of biodiversity Žsee, e.g. Ramakrishna and Woodwell, 1993; Adamowicz et al., 1996.. Some of the benefits have been monetised in the literature, notably those concerning recreation ŽWillis, 1991; Elsasser, 1996.. If these benefit streams depend on the forest’s age, their inclusion in the economic analysis must affect the optimal rotation ŽAronsson and Lofgren, 1999.. ¨ So does the allowance for carbon sequestration, as addressed by an increasing number of researchers Žvan Kooten et al., 1995; Solberg, 1997.. Not until the 1970s had these perspectives raised the interest of scholars, pioneering works include Samuelson Ž1976., Hartman Ž1976., Strang Ž1983., Bowes and Krutilla Ž1985, 1989. and others. Later, important contributions extended and refined the relevant concepts and added advanced analytical methods, for instance Snyder and Bhattacharyya Ž1990. and Montgomery and Adams Ž1995.. The deterministic nature of the Faustmann᎐Hartman approach with respect to wood prices and amenity values is now considered as one of its most serious drawbacks. Both parameters may of course change. Ignoring future prices and other parameters, contemporary models therefore use stochastic approaches ŽThomson, 1992; Reed, 1993; Provencher, 1995.. Without denying the progress achieved there, the shortcomings of determinism may be less severe than suggested, at least when focussing on central Europe. Experience shows that although

sudden price changes naturally affect short-time decisions of forest owners, long-run tendencies in this region never altered the rotations chosen in a systematic way. Econometric models tell us that substantial price changes in world wood markets are unlikely for decades ŽSedjo and Lyon, 1990.. Price changes in the more distant future will probably not affect current decisions substantially because of heavy discounting. Stochastic models often calculate longer optimal rotations, as compared with deterministic models. The latter may thus provide a lower boundary of the optimal rotation which may be regarded as useful information. Therefore, it appears promising for once to return to the early simple models and rediscover some of their capital᎐theoretical aspects which received insufficient interest during the last 20 years. This contribution does without any new theoretical refinement. Its explicit aim is, rather, to address some straightforward policy implications of the original Faustmann᎐Hartman approach which will prove particularly important once attempts are made to apply it in practice. If, for instance, financial incentives are offered to private forest owners for the provision of benefits other than lumber, it is important to be able to anticipate their probable reaction to such incentives. This question is also investigated in the context of climate change due to atmospheric CO 2 accumulation, thereby applying the same elementary theory as here Žsee authors quoted above.. The elementary theory provides, furthermore, that results are easily understood by decision-makers. The non-wood benefit considered in this contribution is nature conservation. As explained in some detail below, this is tantamount to the question as to which financial incentives make it profitable for owners to lengthen the rotation period, possibly to the point of not harvesting lumber altogether in certain types of forests. In Section 2, the theory is developed and applied to a model forest while in Section 3, the most relevant conclusions for forest policy are drawn.

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2. The Faustmann–Hartman approach as applied to conservation

Maximisation of Eq. Ž4. with respect to T gives the generalised Faustmann᎐Hartman solution

2.1. The basic theory

˙ ŽT . VLA i s VLAŽ T . 1 y eyi T

The basic model being so well known, its treatment can be very brief. Let VLŽT . be the value of lumber at age T and i the discount rate. Preliminarily neglecting costs, the present value of all lumber cutting operations PVL Ž T . s VL Ž T .Ž eyi T q ey2 iT q . . . . s VL Ž T .

ž

1 VL Ž T . y 1 s iT 1 y eyi T e y1

/

Ž1.

is maximised with respect to T which yields what is known as ‘Faustmann’s equation’ in the modern literature although his main discovery was Ž1. ŽJohansson and Lofgren, 1989.. ¨

˙ ŽT . VL i s VL Ž T . 1 y eyi T

Ž2.

Hartman Ž1976. was the first to straightforwardly extend the original approach such that non-timber benefits were allowed for. Let ␣ Ž t . be the instantaneous benefit of an amenity provided by the standing forest at age t. The present value PVA of the amenity stream then amounts to

q

T

yi t

H0 ␣ Ž t . e

dt

= Ž 1 q eyi T q ey2 iT q . . . . T

s

yi t

H0 ␣ Ž t . e

dt Ž3.

1 y eyi T

so that the total present value including timber production plus amenity benefits is T

PVLAŽ T . s

VL Ž T . q e iT y 1

H0

␣ Ž t . eyi t dt

1 y eyiT

Ž4.

yi t

dt y ␣ Ž T .Ž 1 y eyiT .

VL Ž T .Ž 1 y eyi T . Ž5.

As observed by Price Ž 1987 ., for all ˙ monotonously decreasing VLArVLA and all monotonously increasing ␣ Ž t . the optimal rotation is longer than in Eq. Ž2.. Write Eq. Ž5. as

˙ ŽT . VLA y sxq z Ž . VLA T

Ž6.

and consider y. If ␣ Ž t . was specified as A ) 0, constant, we would have i

T

yi t

H0 Ae

dt s AŽ 1 y eyiT .

Ž7.

in which case y would be zero and Eq. Ž2. would apply. Now consider ␣ Ž t . monotonously increasing with ␣ ŽT . s A. For all 0 - ␣ Ž t - T . - A it must be obviously true that T

yi t

H0 ␣ Ž t . e

i PVAŽ T . s

T

H0 ␣ Ž t . e

i

dt - i

T

yi t

H0 Ae

dt s AŽ 1 y eyiT .

Ž8.

so that y must be negative. z being positive ˙ throughout, for Eq. Ž5. to hold, VLArVLA must ˙ therefore be smaller than VLrVL which implies a longer optimal rotation period. For the special case ␣ Ž t . s At, A constant, Eq. Ž5. takes the form

˙ ŽT . VLA i AŽ 1 y Ti y eyi T . s q VLAŽ T . 1 y eyi T VL Ž T . i Ž 1 y eyiT .

Ž9.

Its graphical representation is shown in Fig. 1 for a given discount rate. A s 0 represents the Faustmann case as in Eq. Ž2.. Small values for A result in a slight extension of the optimal rota-

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U. Hampicke r Forest Policy and Economics 2 (2001) 117᎐131

Fig. 1. The generalised Faustmann᎐Hartman approach.

tion. Further increasing A produces two intersec˙ tions with VLArVLA while even higher values for A imply that there is no intersection any longer so that Eq. Ž9. cannot hold for any T Žexcept in the upper left which is economically irrelevant .. This seems to imply that upon passing a certain threshold it becomes optimal to refrain from harvesting lumber altogether. The amenity benefit of the standing forest, increasing with age, becomes so important that it dominates the management and requires us to forego the value of the wood harvest. However, as observed as early by Strang Ž1983., the expression Ž9. including its graphical representation, is flawed by a severe shortcoming which will be addressed below in Section 2.3. 2.2. Assessing the conser¨ ation ¨ alue of a forest Biodiversity is an extremely complex notion which is little conducive to exact measurement ŽWilson, 1988.. Paradoxically, at least under present conditions prevailing in central Europe it is none the less easy to define a forest’s value with respect to important conservation issues in broad

terms. Almost all ecologists will agree that in order to protect biodiversity in central European forest ecosystems the most effective measure is the redevelopment of old forests of indigenous tree species including decay stages ŽScherzinger, 1996; Peterken, 1996.. Despite their tiny area in most cases, remaining patches of very old forest stands which have escaped logging for several hundred years for historical reasons exhibit an amazing richness of plant, animal and fungus species many of which are very rare or absent in managed forests. Thus, the conservationist’s aim is to redevelop a certain percentage of nonmanaged forests in central Europe in the long run while the far greater share will, of course, be harvested in a sustainable way. In his most recent report, the German Council of Environmental Experts demands that at least 5% of the total forest area should be exempt from any management ŽRSU, 2000.. Economic valuation of biodiversity is even more difficult than understanding its physical features. In the forestry literature, the topic is addressed only occasionally, such as in Calish et al. Ž1978.

U. Hampicke r Forest Policy and Economics 2 (2001) 117᎐131

and Englin and Callaway Ž1995.. Only recently, biodiversity has become a major issue in resource economics, as documented in Perrings et al. Ž1995., Swanson Ž1995., Moran and Pearce Ž1997. and others. Biodiversity is a public good lacking market prices. Some linkage between wood prices and environmental benefits may be provided by the certification process. However, this highly controversial instrument is not suitable for the development of very old forests implying losses in timber quality and quantity. Therefore, two valuation approaches remain: Most straightforward in a liberal society is the elicitation of the consumers’ willingness to pay for conservation in contingent valuation studies. Numerous results confirm that the general population is prepared to contribute to conservation on altruistic grounds to a certain extent ŽJakobsson and Dragun, 1996.. However interesting these results are, they are not robust enough as yet to serve as a foundation for forest policy measures. Therefore, in this contribution, the other approach is used which is based on expert opinion. As stated above, from a conservation expert’s point of view, the value of a forest increases monotonically with age for a very long period. The time scale involves several centuries. Although a linearly increasing conservation value function ␣ Ž t . s At Ž A s constant. is, of course, an arbitrary assumption, there is at the outset no evidence for more complicated approaches being more adequate. Therefore, we are justified in choosing this function because of its mathematical simplicity which makes the results particularly transparent. We are free to resort to non-linear functions if necessary. It is the economist’s task to investigate the consequences of different choices for A.

Eq. Ž4. reduces to PVLAŽ T . s

T

yi t

H0 Ate

dt s A

½

1 y eyi T TeyiT y , 2 i i

5

Ž 10.

VL Ž T . i y AT A q 2 i i Ž e iT y 1 .

Ž 11.

Assuming lim VL Ž t . s VLU G 0,

Ž 12.

Tª⬁

l’Hopital’s rule yields ˆ lim Tª⬁

VL Ž T . i y AT VL⬘ Ž T . i y A s lim s0 iT Ž . i 2 e iT i e y1 Tª⬁ Ž 13.

so that lim PVLAŽ T . s

Tª⬁

A i2

Ž 14.

Depending on the relative magnitudes of VLŽT ., A and i, five cases can be distinguished as shown in Fig. 2: 1. 2. 3.

4.

2.3. A heuristic model We return to Eq. Ž4. and assume, as already in Eq. Ž9., that ␣ Ž t . s At, A ) 0, constant. Considering

121

5.

A s 0 yields the familiar Faustmann case as in Eq. Ž2. with optimal cutting age T1U . For small A the optimal cutting is delayed to T2U . Increasing A further shifts the optimal cutting to T3U and produces a minimum at T4U . The present value resumes growth beyond T4U but not to the level reached at T3U . This case was shown in Fig. 1 with Z crossing ˙ ŽT .rVLAŽT . twice. VLA The same applies here except that for large T the present value increases to the extent that it becomes worthwhile never to cut the forest. Cases 3 and 4 cannot be distinguished from one another in Fig. 1 because the curve intersections represent local rather than global maxima and minima of the present value ŽStrang, 1983.. Therefore, Fig. 1 as derived from Hartman’s Ž1976. extension of the Faustmann formula, is a misleading guide. Finally, A can be increased to the point that the local maxima and minima vanish so that the limit is approached monotonously. This is the case in Fig. 1 without intersection.

U. Hampicke r Forest Policy and Economics 2 (2001) 117᎐131

122

Fig. 2. Five cases of Eq. Ž11..

The important point is to distinguish cases 2 and 3 from cases 4 and 5 which is impossible in Fig. 1. In the given linear model, the distinction is possible by a very simple procedure. In cases 4 and 5 it is true that PVLAŽ T .

VL Ž T . i y AT A A q 2- 2 iT Ž . i i i e y1

᭙T ,

Ž 15.

which reduces to A)

VL Ž T . i s Ž MAI. i T

Ž 16.

If A exceeds the product of the mean annual increment ŽMAI. in monetary terms times the interest rate, measured at T Žthe rotation length optimal if lumber alone were relevant. it is economically optimal never to cut the forest. For 0 - A - ŽMAI. i the forest is cut at a delayed date, as compared with the classical Faustmann solution. For MAIs Ari the owner is indifferent between cutting at some optimal date or not cutting at all. Even allowing for the linearity of ␣ Ž t . the condition derived is unexpectedly simple. No specific assumptions about VLŽ t . except Ž12. are required.

2.4. Numerical simulation For lack of reliable data there is little point in estimating a growth function of broad-leaved forests in a rigorous statistical way. Too few stands are factually harvested, say, at age 70. Therefore, a model forest is chosen for the simulation experiment. Table 1 shows data of a beech forest Ž Fagus syl¨ atica. typical for central Germany Že.g. ., according to a pertinent Hessen or Thuringen ¨ Ž growth table Schober, 1987. and assuming wood prices in the late 1990s. All numbers are derived from SYLVAL 3.0, a computer programme developed by the Federal Ministry of Finance and applied to indemnification cases due to premature felling. 10-year-intervals from age 50 to 150 are considered. The usual cutting age is between 130 and 150 years. This type of deciduous forest is chosen for the simulation experiment because it is best suited for conservation purposes in the area due to its relative naturalness, in contrast to spruce or pine plantations. Columns 2᎐7 show harvest, average wood price, gross revenue, harvest costs, revenue net of harvest costs and finally, revenue minus harvest cost minus costs for establishing the subsequent tree generation. Revenues and costs of

U. Hampicke r Forest Policy and Economics 2 (2001) 117᎐131

123

Table 1 Growth simulation of a German beech forest Ž Fagus syl¨ atica. using Eq. Ž17. a 1 Age Žyears.

2 Harvest Žm3 .

3 Average wood price Žs C rm3 .

4 Gross revenue Žs C.

5 Harvest costs Žs C.

6 Net revenue Žs C.

7 Net rev. yKs VLŽT . Žs C.

8 VLŽT . simulated Žs C.

50 60 70 80 90 100 110 120 130 140 150

126 175 220 255 285 312 335 355 373 390 404

29.01 32.17 36.64 42.58 54.28 62.21 69.52 79.09 84.72 92.90 100.05

3655 5638 8061 10 857 15 469 19 363 23 288 28 075 31 599 36 231 40 420

1843 2233 2647 2951 3159 3379 3529 3616 3729 3823 3849

1812 3405 5414 7906 12 310 15 984 19 759 24 459 27 870 32 408 36 571

y688 905 2914 5406 9810 13 484 17 259 21 959 25 370 29 908 34 071

3311 4458 5967 7923 10 411 13 493 17 181 21 386 25 880 30 274 34 034

a Unless specified otherwise, all figures per hectare. K, costs of replanting, assumed at s C 2500. Original prices in DM, rounded Ž1s C f 2 DM.. 1s C f 1 US$. Data in columns 1᎐3 kindly provided by W.-D. Radike.

thinning are ignored because of their low importance in forestry of broad-leaved trees in the region. Column 8 shows net revenues calculated by a growth function. In the literature, functions of the type V Ž t . s kt a eyb t ; k, a, b constant are preferred Žvan Kooten et al., 1995.. However, for ages ) 90 Žshaded area in Table 1, earlier age classes are little relevant. the fit to the empirical data are considerably better using a bell-shaped first time derivative of a logistic function, assuming a maximal monetary yield V U of s C37 500 Žnet of replanting costs. at age tU s 170 and a coefficient bs 208. The derivative of the original logistic function N s MrŽ1 y beyr t . is transformed into VŽt. s

4V U b Ž1yt r t

U

U

.

Ž 1 q b Ž1yt r t . .

2

Ž 17.

substituting r by b and tU . At ages ) 170 years the stumpage value diminishes symmetrically to the increase prior to tU s 170 which may be somewhat too fast but hardly influences the results. Although costs of replanting are considered, the costs of the first plantation are ignored. This is justified by the assumption that any decision

whether to harvest a forest or to delay the harvest due to payments for conservation is taken after its foundation so that costs involved are sunk costs which cannot affect further decisions. Current costs are ignored in the simulation, their significance is discussed, however, later in section Section 3.4. Correctly, the condition Ž16. must be evaluated at the specific optimal Faustmannian age T. This may be tedious if a more complicated growth function is used, providing a good fit to empirical data. There will be, furthermore, little point in being overly precise once the remuneration scheme is applied in practice. Therefore, a proxy for the size of A required to outcompete cutting is called for. This is obtained in calculating the maximal MAI of the growth function. For Eq. Ž17., MAI max amounts to s C229 at age T s 157. On the assumption of i s 0.02 p.a., a value of A s 229 = 0.02s 4.58 must surely suffice to make it profitable for the owner never to harvest since the MAI value corresponding to the Faustmannian optimal felling date for i s 0.02 cannot be larger than MAI max . In practice, one may even add some further amount in order to enhance the incentive for the forest owner to cooperate. In the case regarded, one may chose A s 5 which implies that the owner yearly receives s C50 for a

124

U. Hampicke r Forest Policy and Economics 2 (2001) 117᎐131

Fig. 3. Present value, lumber production and conservation of the model forest in Table 1, after Eq. Ž11., discount rate of 0.02.

10-year-old stand per hectare, s C500 for a 100year-old, etc. Figs. 3 and 4 contain the results of two simulations, significant values are shown in Table 2. The section 0 - t - z is of no economic significance.

An interest rate i s 0.02 p.a. is combined with values for A of 0, 2.5, 5 and 7.5, whereas i s 0.01 p.a. is combined with A s 0, 1.25, 2.5 and 3.75. In both cases A s 0 reduces to the classical Faustmann case. With i s 0.02, A s 2.5 results in

Fig. 4. Present value, lumber production and conservation of the model forest in Table 1, after Eq. Ž11., discount rate of 0.01.

U. Hampicke r Forest Policy and Economics 2 (2001) 117᎐131

125

Table 2 Local maxima of present values when lumber and conservation services are remunerated a I

0.02

0.01

lim PVLAŽT .

A Žs C ryear.

T Žyears.

loc.max PVLA ŽT . Žs C.

Žs C.

0 2.5 5 7.5 0 1.25 2.5 3.75

114 140 159 ᎐ 140 150 157 167

2143 7078 12 355 ᎐ 9911 16 890 24 142 31 655

0 6250 12 500 18 750 0 12 500 25 000 37 500

tª⬁

a

i, discount rate per annum; A, annual payment factor for conservation services, to be multiplied with age. T, local maximum of present value of receipts from lumber sales and conservation Ž PVLA..

a delay of the optimal harvest from 114 to 140 years Žcase 2 in Fig. 2., A s 5 produces a local PV maximum at age 159, although the optimal decision is never to harvest Žcase 4., and A s 7.5 obviously demands the same Žcase 5.. With i s 0.01, the cases are analogous except that even for A s 3.75 case 4 pertains, there remaining a local maximum at T s 163. 2.5. Discussion Despite the simplicity of the analysis the following findings appear to be robust, that is their qualitative reproduction by studies using more advanced methods is highly probable: 1. Payments capable of persuading the owners never to harvest produce present values which are extremely high in relation to present values attainable by conventional forestry in the region. 2. Intuition suggests that in order to stop cutting once and for ever it should suffice to pay the owner a sum which just perceptibly exceeded the highest possible PV achievable in conventional forestry and to let him choose between both options. For instance, at i s 0.02 a payment of s C2500 should be preferred to the Faustmannian PV of s C2143 ŽTable 2.. This conclusion is erroneous because it presumes that a forest cut at age 114 has no conservation benefit at all. In reality, conventional

beech forests managed with cutting ages of 100᎐150 years are already valuable from a conservationist’s point of view although less so than very old forests. In order to economically justify the option of never cutting, its value must exceed that of the sum of timber value and conservation value at any finite age T. This is the reason why only high conservation PV’s can outcompete cutting. 3. The latter effect can of course be reduced by altering the specifications chosen. There exist innumerable functions ␣ Ž t . shifting the conservation benefit further into the future. For instance, ␣ Ž t . s At may be truncated for low values of t; the first payment may be due at, say, t s 100. Or a function ␣ Ž t . s At k Ž k ) 1. may be used. In any case, the choice of ␣ Ž t . must be based on ecological facts rather than on mathematical convenience or the desire to achieve results considered favourable from a financial point of view. 4. The prospects for postponing the harvest are unattractive. Even high payments merely result in heavy income effects with rather insignificant reallocation. Interpreting ␣ Ž t . as a policy tool rather than as an exact yardstick for the value of biodiversity, one would suggest to apply payments only for the explicit objective to abandon harvesting altogether rather than for achieving longer rotation periods. If this is agreed, meaningful payments must attain the minimum level for precluding

126

U. Hampicke r Forest Policy and Economics 2 (2001) 117᎐131

harvesting. In the model presented here, this level is approximately A s 5 at a discount rate of i s 0.02 and A s 2.5 at i s 0.01. 5. Several curves in Figs. 3 and 4 show very smooth curvatures and go almost horizontally over long periods. For instance, in the case of i s 0.02rAs 5 the owner receives an almost identical present value whether he cuts at T s 150 or at T s 250 or not at all. As already known from conventional forestry, the choice of a rotation may have small consequences in the long run: Someone who misses the optimal felling date by many years may in fact lose very little. Under these circumstances, economic incentives may easily prove ineffectual. It follows that they are unlikely to yield satisfactory results if applied alone. Rather, they have to be combined with other planning and policy instruments.

3. Problems and policy Only the most important points as to the adequacy of the instrument analysed can be addressed briefly. 3.1. Liquidity, risk and confidence Cutting and selling trees yields immediate liquidity free of risk. In contrast, the wealth of an owner who keeps his forest uncut rests on the promise of an authority to pay him regularly certain sums till the distant future. Experience suggests that there will remain strong tendencies to continue conventional forestry implying cutting even if calculated PV’s of the conservation option are attractive on paper. This problem is solved by capitalising future rents. The owner who considers cutting is offered a once-and-for-all payment for abstaining from doing so together with the information that this decision is irrevocable. This measure provides the conservation option with an equal chance. As stated above, payments for the purpose of merely delaying the date of cutting can hardly be recommended from an economic point of view.

In the linear case, as analysed here, the capitalised conservation payment necessary to incite the owner never to cut at some arbitrary age T amounts to PVAŽ T . s Ae iT

⬁

yit

HT te

dt s

A AT q , i i2

Ž 18.

evaluated at T. For instance, values for i s 0.02 and A s 5, a forest stand of 1 ha of age T s 100 dedicated to conservation will receive a once-andfor-all-payment of s C37 500. 3.2. Rates of discount The rates of discount chosen in the model calculations appear surprisingly low by international standards. However, if forest owners in central Europe behave in a Faustmannian way at all, the high rotation lengths observed ŽKuusela, 1994. can be explained only assuming a very low discount rate. There is a clear justification for such a low rate. The rate chosen reflects the forest owner’s alternatives for investing his capital, allowing for transaction costs, risk, taxation and other institutional constraints. Due to heavy imperfections of the capital markets, these alternatives differ from those open to other economic agents including the state and, very probably, to forest companies in other countries. In general, German forest owners appear to be sceptical as to their profit chances outside the forestry sector, otherwise they would chose shorter rotations. Their scepticism may be well founded. However, market imperfections entail an interesting problem. Low discount rates imply low annual payments for conservation, but high capitalised once-and-for-all payments Žsee Table 2.. Therefore, forest owners will presume relatively high rates when claiming annual payments and low rates in a bargain implying capitalisation as above. In order to avoid strategic bargaining in each individual case which would imply high transaction costs, a commitment is called for. Upon establishing the remuneration scheme the parties must agree on a discount rate from which once-and-for-all payments are derived. If this is achieved, the conservation agency

U. Hampicke r Forest Policy and Economics 2 (2001) 117᎐131

faces an odd situation if its own investment opportunities are superior to those of the forest owners. In the example shown in Section 3.1 above, the payment of s C37 500 implies an infinite rent for the forest owner of s C750 annually Žassuming i s 0.02. while the agency might be able to net s C1500 in an investment yielding i s 0.04. From the state agency’s point of view, conservation is twice as expensive as from the forest owner’s. An analogous phenomenon is observed in conservation in the open countryside when areas have to be purchased from farmers. If rents achievable outside the agricultural sector were used as a yardstick, these areas should be much cheaper than they actually are. One might comment that it is the state itself who, via taxation and subsidy schemes, contributes strongly to the imperfection of capital markets. 3.3. Current costs Current costs are ignored in the model calculations above. Including administration, they amount to nearly exactly s C150 per hectare per year on the average in Germany’s private forests ŽAgrarbericht, 1998, p. 209.. This is transformed into present values of s C7500 respectively s C15 000, assuming discount rates of 0.02 or 0.01. The respective first rows in Table 2 show that conventional forestry in broad-leaved stands achieves present values net of harvest and replanting costs of s C2143 Žassuming i s 0.02. respectively s C9911 Ž i s 0.01.. Subtracting current costs, the true present values are, therefore, s C y 5357 or s C y 5089. If

127

higher discount rates were applied, as in the forestry sectors of other countries, the picture would be even more gloomy. From a capital᎐theoretical point of view the question arises why private forestry is not abandoned altogether in these cases given the disproportion between costs and proceeds. The best explanation for the persistence of private forestry in Germany is that most of the costs are sunk costs at any given point in time. Owning a 120-year-old stand is attractive. Additional aspects include high costs and risks of relocating the capital to other sectors, the hope for more favourable circumstances in the future and non-monetary amenity benefits appreciated by numerous forest owners. The economic situation of the sector ᎏ the excellent performance of which in physical terms is never disputed ᎏ is nonetheless increasingly precarious. There are two extreme prospects. If the decision that a stand will never be harvested does not reduce current costs, the results in Table 2 are obtained. If, on the other hand, this decision implies that current costs reduce to zero, corrections as shown in Table 3 will have to be made. In order to avoid transfer payments lacking allocative effects, the present values of current costs saved will have to be subtracted from the payments as calculated from Eq. Ž18.. The extent to which current costs become obsolete after dedicating a stand to conservation depends on the individual case. It is true that the necessity for continued work in the forest may decrease substantially upon establishing ‘wild’

Table 3 Reduced payments for conservation upon allowance for reduced current costs a i

T Žyears.

PVA Žs C.

PVC Žs C.

PVAy PVC Žs C.

Ž PVAy PVC .rPVA

0.02

100 150 200 100 150 200

37 500 50 000 62 500 50 000 62 500 75 000

7500 7500 7500 15 000 15 000 15 000

30 000 42 500 55 000 35 000 47 500 60 000

0.8 0.85 0.88 0.7 0.76 0.8

0.01

a

i, discount rate; T, arbitrary age of stand considered for conservation; PVA, once-and-for-all payment necessary to forgo cutting in model forest in Table 1, according to Eq. Ž18.. A s 5 for i s 0.02rAs 2.5 for i s 0.01. PVC, Present value of future costs in conventional forestry. PVAy PVC, payment necessary if future current costs reduce to zero.

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stands. On the other hand, a large proportion of current costs in forest firms are fixed costs resulting from administration. These will not reduce if a small proportion of an owner’s area is set aside for conservation but may become obsolete if this is done for the entire area. Although there is scope for bargaining in each individual case adding to the transaction costs of the scheme, Table 3 suggests that the difficulties to be expected might not assume proportions so as to imperil its success. 3.4. Acceptability of conser¨ ation costs The figures calculated here for payments necessary to induce forest owners to cooperate in nature conservation seem exorbitantly high, as measured in present values. On closer scrutiny, they become much less discouraging, however. It is of course not the economist’s task to decide which costs should be incurred in nature conservation. This is done in a political process, based on value judgements. As noticed by Pearce Ž1993., the economist’s task is to elicit the valuations of the public, especially in contexts of collective goods where no market prices are available. Furthermore, the economist observes whether or not the valuations of decision makers, as expressed in remuneration schemes for conservation, are internally consistent. It would seem odd, for instance, if biotopes of low conservation value received higher payments than others containing a much larger number of endangered species. Remuneration of conservation services has been practised for many years by the European Union in the agrarian countryside, that is, outside forests. Numerous programmes launched by the Common Agricultural Policy ŽCAP. have been analysed in the literature, for instance in Deblitz and Plankl Ž1998.. The overall financial input is considerable; typical examples for payments granted to farmers in order to incite them to abstain from applying pesticides, high amounts of fertilisers and other input in grassland ecosystems lie in the range of s C125᎐250 per hectare per year. The maintenance of valuable biotopes comprising rare species is sometimes funded with substantially higher amounts up to s C500 per hectare per

year and even more. As compiled in Hampicke Ž1999., conservation-prone managed ecosystems in the open countryside typically require payments of s C300᎐500 per hectare per year in order to cover their full costs. Depending on the discount rate, the model forest analysed in this contribution requires annual payments ATss C250᎐500 per hectare per year at age T s 100 in order to avert harvest Ž A s 2.5r5 for i s 0.01r0.02.. At age 200, the payments double, etc. A comparison with remuneration schemes already existing outside the forest enjoying much approval in the public shows that the measures discussed in this contribution cannot be considered out of place. Given the extraordinary conservation value of old forests and given their relatively small percentage of the total forest area Žecological experts demand some 10%., a society committed to a consistent conservation policy would seriously consider the financial input required. 3.5. Further policy aspects More fundamental policy commitments are implicit in any remuneration scheme. If owners are paid for contributions to conservation, they are vested with property rights for biodiversity Žsee Bromley, 1997 for the importance of property right regimes in environmental economics.. They could not sell what they did not possess. In Germany, laws often implicitly deny such property rights in that they demand forest owners to contribute to conservation without payments. This must result in contra-productive incentives and poor performance in conservation. The situation is quite different in the agrarian countryside where farmers are paid for practices enhancing biodiversity, according to schemes operated by the European Community. Unavoidably, distributive aspects are involved. Although this contribution focuses on allocation, many will welcome the measures analysed for their distributive consequences. The poor economic performance of Germany’s forestry is often attributed to the fact that proceeds from wood sales are nearly the only source of income

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while all environmental services, no less important than wood, are delivered free. It is often held that the topic analysed in this contribution is of little practical relevance because, it is argued, conservation objectives should be pursued primarily in state-owned forests. The state may convert forests to nature reserves by simple decree, making financial transfers superfluous. There are several objections to this view. Firstly, although in this case no financing is necessary, economic valuations are implicit in any such decision. Economically, forgoing timber in favour of conservation implies identical social costs regardless of the type of ownership. Secondly, there is no compelling reason why private forests should be exempt from contributing to an important societal objective such as nature conservation. Thirdly, the very institution of the state forest, seen by some as a historical relict, is increasingly challenged. If in the long run wholesale privatisation cannot be ruled out, the measures analysed here will be indispensable for any conservation policy. Observers question the readiness of forest owners to cooperate in conservation on subjective grounds. It is true that after 200 years of forestry focussing on production, it may now seem unusual to dedicate some forests to other objectives. But forest owners will soon realise the economic advantages. The model forest shown in Table 1 yields proceeds net of harvest costs of roughly s C30 000 if cut at age 140. Thereafter, a long period involving costs and risks starts. According to Eq. Ž18., the decision at the same age never to harvest is rewarded with s C40 000᎐47 500 or s C45 000᎐60 000, assuming A s 5ris 0.02 or A s 2.5ris 0.01, depending on the share of current costs set off as explained in Section 3.4 and Table 3. The reward is free of risks. Due to the restricted area of forests dedicated to conservation in the way suggested here and allowing for an efficient transport system it is unlikely that any realistic scheme will have a significant impact on wood prices even on a regional scale. The most often-heard objection to the scheme is that the public cannot afford it. This is dismissed straightforwardly in pointing to the pay-

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ments for agroenvironmental measures as mentioned in Section 3.5. These exceed s C400 = 10 6 per annum in Germany alone. Not unfrequently, their performance is far from satisfactory. Only institutional barriers preclude the diversion of a certain share of these funds to forestry which would substantially increase the overall success.

4. Conclusion The straightforward application of the original Faustmann᎐Hartman approach to a model forest realistically portraying central European stands yields results which warrant scrutiny. Practical forest policy is nowhere based on theoretically ideal approaches, rather, concepts gradually improving a given empirical status quo which is highly deficient are called for. A serious deficiency is expressed by the fact that lumber is still the only service of forests remunerated by the market while other functions equally important including nature conservation are not. These amenities being external effects till now, the overall allocation of forest resources cannot be welfare maximising. The approach applied here calculates payments necessary to incite forest owners never to harvest and, thus, maximise the conservation value of these stands which will always remain a fraction of the total forest area only. The results depend, of course, on the special assumptions chosen. Some of these are very robust. It is unlikely, for instance, that knowledgeable ecologists will change their view that the conservation value of a forest increases monotonically with its age for a very long period. If less robust assumptions, for instance concerning future wood prices, have to be varied, this will change numbers calculated but hardly the general conclusions. Of course, the next steps of the analysis will have to include careful sensitivity analyses. As expected, various obstacles to practical applications have been identified in Section 3. However, a closer look at each of them showed that none appears to be serious enough as to jeopardise the scheme’s success at the outset. In recent years, society has gained experience with schemes

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remunerating the conservation of biodiversity in the open countryside. It comes as no surprise that doing the same in forests involves more complicated questions due to the fascinating capital᎐ theoretical implications of forestry. Given the extraordinary conservation value of forests, society should take up the challenge.

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