ECON 310 Chapter 12 Notes
Temperate Forests
the bears don't write
letters and the owls don't vote.
Lou Gold, forest advocate
CHAPTER SUMMARY
The historical emphasis of forest economics has been on how to maximize wealth to be derived from the harvesting of the forest's wood. A contrasting viewpoint expressed by later conservationists, such as John Muir (1838-1914), was that the forest was a synergistic system and that the benefits derived from a forest were derived primarily through the preservation of the forest, although timbering of some forest land was certainly appropriate. This chapter looks at the traditional problem of how to maximize income derived from timbering, as well as the more general problem of maximizing the total social benefits arising from the forest.
Temperate forests, the type found in North America are found north of the Tropic of Capricorn and south of the Tropic of Cancer. The forest is a collection of plant, animal, bacterial, and fungal organisms that interact with the physical environment and with one another. A forest is an example of a climax community.
A climax community is an ecosystem that has arisen out of competition with other communities of organisms. An area of land may be first populated by grassland, then small woody plants, then fast growing trees, and finally slower growing trees, such as oak and maple. The process of soil formation and nutrient cycling is a good example of how organisms interact with the physical environment.
Nutrient cycling refers to the process by which the basic life nutrients (phosphorus, potassium, and nitrogen) are absorbed from the physical environment by various organisms in the ecosystem, transferred from organism to organism, and eventually returned to the soil. As Figure 12.1 illustrates, nutrients in soils are absorbed by roots of trees and other plants. These nutrients return when plants die and decay, when animals eat plants and their waste is returned to soil and when other animals eat these animals and waste is returned to the soil.
Forests play an essential role in carbon cycling. Forests remove carbon dioxide from the atmosphere and sequester it in their woody tissue. This basic building block is then available to other organisms who consume the tree.
Forests play an important part in the hydrological cycle. Leaves of the forest slow the velocity of the rain, allowing a slow trickle to organic matter below. The result is more water absorbed by soil, reaching underground aquifers and less soil erosion due to run-off.
Forest ecosystems are important providers of ecological services. In addition to the forests contribution discussed above, forests are important to flood protection, biodiversity, soil formation, and erosion control. Forests also provide important aesthetic and recreational benefits and production activities. Productive activities include harvesting animals, mushrooms, berries, mining and grazing of livestock.
Forest ownership can be divided into three primary categories: forests owned by households, forests owned by firms in the forest industry, and publicly owned forests. It is difficult to identify a single management strategy for household owned forests. Strategy varies by owner and can take the form of profit maximization, utility maximization, or a combination of both. Firms seek to maximize the present value of earnings derived from the forest. These firms include Boise-Cascade, Weyerhaeuser, and Georgia-Pacific. These firms lease both private and public lands. Publicly owned forests include national parks, national forests, and state and local parks and forests, as well as publicly owned tracts of forests, wildlife refuges, game management areas, and nature preserves. Generally these publicly owned forests are managed for multiple uses.
There are two basic methods for maximizing the physical quantity of wood derived from the forest. One involves letting the forest grow to peak volume, then harvest, replant and repeat the process. This process requires that the manager choose a length of harvest-replant-harvest cycle that maximizes harvest over time. This is referred to as the rotation of forest. The length of the rotation cycle is chosen to maximize the flow of wood.
Growth conditions of trees depend on density of trees, the soil condition, weather and rainfall, and incidence of disease and pests. It is important to consider growth of stand of trees, not individual trees. After replanting, the trees initially grow at a rapid rate, but mass of wood is relatively small. Eventually growth slows, as trees mature. Growth can become negative as disease and death associated with aging has a greater impact. As illustrated in Table 12.1, Figure 12.2a, and Figure 12.2b, growth of a hypothetical stand of trees can be expressed as a function of the age of the trees in the stand. A forest grows to peak size when growth (annual increment) is zero.
It is more difficult to identify when harvest over time is maximized. The optimal time to harvest is at the age that maximizes the average growth of the tree over its lifetime. The average growth rate is mean annual increment in Table 12.1 and illustrated in Figure 12.2b. It is maximized when it is equal to marginal growth rate (annual increment). This occurs at 80 years.
Table 12.2 illustrates that the penalty (in terms of decreased volume) of having too short a harvest cycle is greater than that of too long. Maximizing the physical quantity of wood is an inefficient management strategy because it does not consider the costs and benefits associated with making the rotation longer or shorter.
The optimal rotation can be determined by comparing benefits of making the rotation a year longer with the costs associated with the increase in rotation. It is difficult to identify benefits and costs and evaluate them over an extremely long time horizon. Figure 12.3 illustrates the time paths of benefits and costs from timbering. Revenue is generated at harvest and is referred to as stumpage value. The costs include planting, maintenance such as disease control, fire prevention, thinning, pruning and removal of deadwood and pest control. The forest manager's job is to maximize the present value of this stream of costs and benefits by deciding the optimal rotation length.
The costs of letting trees grow for another year include both out-of-pocket costs and opportunity costs. Out-of-pocket costs include disease prevention, thinning, fire prevention and control of pests. Opportunity costs are based on foregone income plus two other categories. Interest' income is earned if trees had been harvested, sold, and the money invested and potential rent if trees had been harvested and land rented.
In modeling the optimal rotation, out-of-pocket expenses are assumed to be zero. Additional assumptions include that the real price of a cubic foot of wood does not change over time. Assumption that out-of-pocket expenses are zero implies that periodic cutting of the forest stand is sufficient. If out-of-pocket expenses were sufficiently high, then it is possible that the forest should never be cut. The benefits of allowing the trees to grow come from the fact that if you wait, you will have more to sell. The benefits are critically dependent on the shape of the marginal growth (annual increment) function.
Figure 12.5 illustrates the determination of the length of the optimal rotation. Additional revenue associated with increasing length of rotation is represented by DV /Dt. This is the time derivative of the stumpage value [V(t)]. The stumpage value function reaches its maximum when DV /Dt = 0, that is when lengthening the rotation has no impact upon stumpage value. Opportunity cost of land is represented by the function OCL. This opportunity cost is the interest that could be earned from the sale of land that is also equal to the annual rent that could be earned. Maximum value for OCL will occur when rotation is at its optimal length. Here the forest will be most valuable. When rV + OCL (the sum of the two opportunity costs) are equal to the marginal benefits of changing rotation length (DV /Dt), the present value of the whole future stream of harvests is maximized. Students desiring a more sophisticated derivation of optimal rotation are referred to Pearse (1967) or Howe (1979).
Any external changes that shift DV /Dt upward will, ceterus paribus, lengthen the optimal rotation. Likewise, any external changes that shift either rV or OCL upwards will, ceterus paribus, shorten optimal rotation. An example would be an increase in the price of timber that would increase the stumpage value (V), which would increase DV /Dt, and increase rV and. OCL. An increase in DV /Dt lengthens the rotation. An increase in rV and OCL shortens the rotation. Which effect dominates depends upon the interest rate. Low rates of interest imply that the opportunity cost is small relative to the increase in revenue, this results in lengthened rotation. A shortcoming of the optimal rotation model is the failure to include benefits associated with standing forests. These include watershed protection, wildlife habitat, and recreation and so on.
Bowes and Krutilla point out in their study that relationships between the length of the harvest rotation and nonharvest benefits are likely to be irregular. This leads to a multi-peaked function as illustrated in Figure 12.4. Figure 12.6 illustrates the optimal rotation when nonharvested benefits are considered. The maximum of the total benefits function is to the right of the maximum of the timber harvested function, implying that considering non- harvested benefits will lengthen optimal rotation. This conclusion is dependent upon the shape of the nonharvest benefits. If nonharvest benefits are large enough, the optimal harvest rotation may be to never harvest.
Both harvested and nonharvested benefits from a particular stand of forest are dependent on the quantity and quality of other forest stands. The price of timber is determined by the quantity and quality of other forest stands. Elimination of nonharvest benefits by harvesting may have an impact upon nonharvest benefits of other forest stands. Clear cutting scars the landscape and reduces the recreational value of remaining landscape. The degree of forest fragmentation caused by harvesting is extremely important to species habitat and biological diversity.
Although the Multiple Use Sustained Yield Act (MUSYA) of 1960 specifically charges the U.S. Forest Service with managing to promote benefits from both timber and nonharvest benefits, this is not an easy task. One set of uses of forest specified by the MUSYA includes those that generate revenue for forest service such as timber, grazing, mineral and energy mining, and fee recreation.
Grazing is possible because a forest is generally defined as an area in which at least 10 percent of land area is covered by a canopy of trees. This leaves 90 percent for forage. Approximately 100 million acres of national forest land is currently available for ranchers, of which 50 percent is suitable of grazing. Bowes and Krutilla charge that the payment made for use of this land is below market price.
An alternative set of uses for the forest resource does not generate revenues and is often called nonmarket use. These include open-access (unpriced) recreation, watershed maintenance, wilderness, and fish and wildlife value. Not only do market and nonmarket uses conflict but also many nonmarket uses conflict with one another. Too many recreationists can lead to environmental degradation which leads to a decline in wildlife numbers and diminished watershed attributes. Hikers conflict with trail bikers or skiers with snowmobiles.
Although the MUSY Act of 1960 states that multiple uses should be promoted, many critics of U.S. Forest Service policy felt that management was slanted towards timber production. In the late 1970s, the National Resources Defense Council focused on the existence of below cost timber sales and the inefficiencies that they create, including depressing the profitability of privately owned forests. Below market timber sales are those sales of timbering rights on public land, where revenues do not cover the timber related forest management expenses.
The principle of comparative advantage has interesting implications for management of public forests. When applied to forests, the theory of comparative advantage argues that even though some of the best wood in the world can be produced from old growth red wood, spruce, fir and sequoia forests in the Pacific Northwest, the comparative advantage of these forests is in the production of ecological services, aesthetic benefits and recreational opportunities. This may be true not only for old growth forests but also for second-growth forests, such as the mixed hardwood forests that cover most of the Appalachian Mountains.
A general guideline for proper use of public forest land is that a forest should be used for timbering if the present value of the net benefits (net of all management costs) of all multiple uses is greater than it would be without timbering. The cost of road building is often not included in this analysis because it is viewed as a benefit to multiple uses. The problem is that the quantity of roads necessary for harvest of timber may be greater than that optimal for recreational use, and as a result may cause environmental degradation. In addition, building these roads precludes the designation of the forest as a wilderness area. The cost of the roads is viewed as sunk by the Forest Service and is not linked to the acceptance of bids for use of the forest land.
Figure 12.7 illustrates the excess harvesting which will result when the full costs associated with use of the timber resource are not reflected in the decision to harvest. M1 represents the square miles harvested when the timbering firm does not recognize the cost of road building or the other opportunity costs. As additional costs are added to the MPC, the optimal quantity of timber harvested falls. Marginal revenue is presented as a horizontal line because this is a small portion of the market for timber. Harvest from this forest will not impact the price of timber in the market place.
Figure 12.8 illustrates a special case where failure to recognize the full costs of harvesting timber can lead to inefficient harvests. By comparing MR to MPC plus additional external costs it is possible to see that the optimal level of harvest is zero. Failure to incorporate the other costs would result in a positive level of harvest.
Old growth or ancient forests are forests that have never been logged and therefore, are in their original state. Ecosystems are very different. Trees tend to be very large and there is a diversity of age among the trees in the forests. In the United States, the only remaining old growth forests are in the Pacific Northwest and Alaska. Huge trees shape the ecosystem within which they live. Standing trees serve as homes for many species. Falling trees clear a swatch through the forest, open up the floor of forest to sunlight, and promote growth of plants. Deadwood provides nutrients for new generations of trees.
Fallen trees provide homes for voles, a mouse-like species of mammal. The vole spreads a fungus throughout the forest, which is responsible for making soil nutrients available to coniferous trees and facilitates their tremendous growth. From an ecological perspective, replanted forests are a poor substitute for an old growth forest.
Since the forest is the only source of economic activity in many remote rural areas, it is often felt that the forest must be harvested to provide jobs to support the region's population. There are costs associated with "saving" jobs in the timber industry. These include the inefficiency associated with road building, the potential loss of species, for instance the decline in salmon fishing due to destruction of streams. As fewer and fewer old growth forests remain, the cost associated with clear cutting these forests rise. The value of the last of any species is very great.
KEY CONCEPTS AND
DEFINITIONS
Temperate Forests forests found north of the Tropic of Capricorn and south of the Tropic of Cancer, the type of forest found in North America.
Climax Community an ecosystem that has arisen out of competition with other communities or organisms. A forest is an example. An area of land may be first populated by grassland, then small woody plants overtake grassland, then faster growing trees overtake woody plants and finally, slower growing trees arise from the system.
Nutrient Cycling refers to the process by which the basic life nutrients (phosphorus, potassium, and nitrogen) are absorbed from the physical environment by various organisms in the ecosystem, transferred from organism to organism and eventually returned to the soil.
Carbon Cycling process by which carbon is cycled through the ecosystem. Trees remove carbon dioxide from the air and sequester carbon in their woody tissues. This basic building block is available to other species as one species consumes plants and then in turn is consumed.
Harvested Wood harvested wood is used for a variety of purposes which includes construction material, furniture, paper, fiber, and chemicals. Harvested wood is also used for fuel.
Public Forests include national parks, national forests, and state and local parks and forests. Also includes wildlife refuges, games management areas, and nature preserves.
Rotation of the Forest choice of the appropriate length of time for cycle which includes harvest of forest, re-planting, and harvest of replanted trees. Optimal rotation can be determined by comparing benefits of making the rotation a year longer with the costs associated with the increase in rotation. Shortcoming of the optimal rotation model is the failure to consider the nonmarket benefits associated with standing forests.
Stumpage Value revenue earned when tree is harvested and sold.
Nonharvest Benefits these are benefits associated with a standing forest. These include watershed protection, wildlife habitat, and recreation.
Multiple Use Sustained Yield Act of 1960 specifically charges the U.S. Forest Service with managing the forests to promote the benefits from both timber and nonharvest benefits. Divides uses into those that generate revenue for the Forest Service and nonmarket use.
Old Growth Forests also referred to as ancient forests. These forests have never been logged. The trees tend to be very large and there is a diversity of age among the trees. These huge trees shape the ecosystem within which they live.
Chapter 12 Short-answer questions
1. What is the significance of the quote from Lou Gold which is given at the beginning of the chapter?
· Most of the organisms which benefit from the existence of temperate forests are not human. Humans make policy about resource use and this policy may or may not reflect the benefits associated with owls and bears.
2. Define a climax community and explain why a forest is an example of this type of community.
· A climax community is an ecosystem that has arisen out of successful competition with other communities of organisms. Grasses give way to small woody plants, which give way to fast growing trees, which give way to dominant slower growing trees.
3. Explain the process of nutrient cycling, carbon cycling, and hydrological cycling within a temperate forest.
· Nutrient cycling nutrients in the soils are absorbed by the roots of the trees and other plants. When these trees and plants drop their leaves or die and decay, their nutrients are returned to the soil. In addition, these nutrients are cycled through the system when animals eat plants. When they die, a host of organisms eat them and return these nutrients to the soil.
· Carbon cycling the process of photosynthesis converts carbon from carbon dioxide in the atmosphere to carbon in sugar in the trees leaves. This basic building block is then transferred through the food chain.
· Hydrological cycling rain falls on the leaves which slow the velocity of rain. As the rain trickles off the leaves, organic matter in the soil absorbs the water and the water slowly makes its way to aquifers and surface water. Trees prevent run-off and erosion.
4. Forest ownership can be divided into three categories. Compare and contrast these three categories and explain how management decisions differ across these three categories of ownership.
· Ownership by Households management is determined by seeking to maximize utility and can vary across each household. The household can seek to maximize income, maximize non-pecuniary benefits, or protect the resource for their children.
· Ownership by Forest Products Industry these are profit-maximizers who seek to maximize the present value of earnings in the industry.
· Publicly Owned Forests generally managed for multiple users and not just the generation of a stream of income.
5. What factors will influence the optimal length of rotation in the harvest-replant-harvest sequence?
· The optimal length of rotation will be a function of the growth rate of the tree and the costs and benefits associated with making the rotation a year longer. The costs of letting the tree grow another year include out-of-pocket costs and opportunity costs, in the form of foregone income. The benefit associated with letting the tree grow another year will be in the form of a greater quantity of wood to sell in the future. It is also necessary to consider the opportunity cost of the land.
6. Identify and discuss the costs associated with letting the trees grow for another year. Be sure to include opportunity costs associated with this decision.
· The costs associated with letting the trees grow another year include out-of-pocket costs such as expenses for disease prevention, thinning, pruning, and removal of deadwood, fire prevention, and control of pests. Opportunity costs are based on foregone income from two sources: interest that could have been earned on revenue generated from the sale of timber and foregone income in the form of rent on land.
7. When these marginal opportunity costs are equal to the marginal benefits of changing rotation length (DV/Dt), the present value of the whole future stream of harvests is maximized, and the rotation can be said to be optimal." Discuss the various components of this relationship and explain why the above relationship identifies and optimal rotation length.
· Opportunity costs refer to the potential income that is given up when the forest is allowed to grow another year. This income could be in the form of interest earned on revenue from sales or income from renting the land. Benefits associated with extending the rotation length are linked to the increased volume of wood at harvest. By comparing the additional cost of extending the rotation to the addition to benefits (i.e., revenue) it is possible to identify an optimal length of rotation.
8. Identify the benefits associated with a decision not to harvest a stand of trees. How can these be measured?
· Benefits include the increased volume of wood in the future (a harvest measurement of benefit) and nonharvest benefits such as watershed protection, biodiversity, wildlife habitat, and recreation. The total benefits of the forest are the sum of the harvested benefits and the nonharvested benefits. When nonharvest benefits are considered, the rotation length is greater. Measurement of these nonharvest benefits requires use of valuation techniques discussed earlier.
9. Your text makes a statement that "although the Multiple-Use Sustained Yield Act of 1960 specifically charges the U.S. Forest Service with Managing to promote benefits form both timber and non-harvested benefits, this is not an easy task." Explain this statement.
· The pursuit of market benefits often conflicts with the pursuit of nonmarket benefits. Also nonmarket uses often conflict with each other. For example, too many recreational users can reduce the quality of the ecosystem.
10. What are the unique aspects of old growth forests that make decisions regarding harvest of these forests a different from the harvest decisions examined earlier in the chapter?
· Old growth forests, which have never been logged, have ecosystems which reflect the continuity of the ancient forests, the sheer size of ancient trees and the diversity of the age of trees (previously logged forests tend to be of uniform age). Policy makers and managers should also consider the quality of environmental services provided by old growth and even some second growth forests.