Environmental and Natural Resource Economics 2nd ed. Jonathan M. Harris Updates for 2012 Chapter 15: Forest and Water Systems Copyright © 2012 Jonathan M. Harris

Figure 15.1: Forest Growth over Time This biologically-derived graph shows the cumulative biomass of a forest stand, and demonstrates the same logistic curve pattern as stock growth in a fishery. The difference is that the forest harvest is not continual, but rather takes places after a certain period of time. In this graph, the year 30 shows the point of maximum Mean Annual Increment or highest average growth over time. If the only criterion for harvest was maximum volume of wood, the optimum harvesting period would be 30 years. But other economic factors must be taken into account, as shown in the following graphs.

Figure 15.2: Timber Revenues and Costs over Time The harvest value can be translated into economic terms by multiplying wood volume by wood price to get a Total Revenue (TR) curve that shows the revenue that can be obtained from harvesting in any given year. Total Costs (TC) of harvesting are also shown, roughly based on the total volume of wood harvested. The difference between the two (TR –TC) is net profit in the year of harvest. Since the planned harvest will take place years after planting, calculation of the economic optimum requires the use of a discount rate for a Present Value calculation (shown in the next graph).

Figure 15.3: Optimum Harvest Period with Discounting Applying a discount rate has the effect of “shrinking” the profit (TR –TC) back towards the origin. The higher the discount rate, the more the “shrinkage”. The economic optimum is shown by the maximum discounted profit, at the top point of the curve. Without discounting, total profit is largest at point A, but with discounting the economic optimum is at point B. Thus a higher discount rate implies a shorter optimum harvest period. Slower-growing trees will tend to be less profitable, because the wait to maturity involves ahigher dicount factor.

Figure 15.4: Deforestation and Tree Cover The economic logic of harvesting implies a transition between old-growth forest (which is already mature and can be harvested immediately) and second-growth or plantation forestry employing faster-growing species. Even if total forested area is increasing as second-growth expands, the ecological value of the original forest may have been significantly diminished due to industrial forestry.

Figure 15.5: Threatened and Endangered Species Percent of species evaluated The decline of old-growth forests and other habitats has led to an increasing number of threatened and endangered species. The value of species is not included in economic calculations of commercial forest value. Together with the inherent bias in commercial forestry towards shorter harvesting periods, this leads to a disregard for the ecological values of mature multi-species forest ecosystems. If these values are to be internalized into decision-making, specific policies for species and ecosystem conservation are required. Source: IUCN, 2011, The Red List of Threatened Species at http://www.iucnredlist.org/documents/summarystatistics/2011_1_RL_Stats_Table_2.pdf

Figure 15.6: Long-Term Deforestation and Population Growth As global populations have grown, there has been a long-term decline of forest cover. This has been most notable for tropical forests. Temperate forests declined during the Industrial Revolution and through the early twentieth century, but are now approximately stable in total area.

Figure 15-6 Update: Global Deforestation and Population Growth, 1990 - 2008 Forest area (billion ha) Population (billion) World forested area has continue to decline in recent decades. This is partly a result of population growth during the same period, as forested areas are used for agriculture and urban and rural settlement. But it is not necessarily a cause-and-effect relationship, since policies towards forest use as well as international trade have a major impact on whether growing populations result in forest decline. Some countries, such as Costa Rica, have implemented specific policies to expand forested area even as population increases. Source: FAOSTAT, 2011 at http://faostat.fao.org/site/291/default.aspx

Figure 15.6 Update: Forest Area by Major Regions, 1990 –2010 (thousand hectares) Regional trends in forest area differ significantly. South America, Africa, and South and South East Asia have all seen forest decline, while forest cover has increased in East Asia and remained stable in the temperate forests of Europe and North America (figures for Europe include Russia’s boreal forest). Even a seemingly small percentage loss of forest can lead to major ecological and species loss, especially if forest fragmentation and degradation of forest ecological quality are considered. Source: FAOSTAT, 2011 at http://www.fao.org/forestry/fra/fra2010/en/

Figure 15.6 Update: Regional Forest Area Trends Regional forest trends can be compared as a percent of the base year 1990. The increase in forest cover in East Asia is a result of large-scale reforestation policy in China, following disastrous floods resulting from watershed forest loss. Temperate forest areas in Europe and North America show little change, while tropical forests in South America, West and Central Africa, South and South East Asia, and Eastern and Southern Africa have all declined significantly. The fastest rates of decline are in Central America, though the largest total area loss is in South America, as shown on the previous graph. (Note that the numbers for Western and Central Africa are very close to numbers for South America, so that the lines are inseparable in the graph.) Source: FAOSTAT, 2011 at http://www.fao.org/forestry/fra/fra2010/en/

Figure 15.7: World Paper and Wood Production, 1961-2009 Increasing demand for wood products puts continued pressure on forests. While roundwood demand has not increased significantly since 1990, paper demand continues to rise. The recession of 2008-9 caused a downward shift in demand, but growth is likely to resume with development pressures in China, India, and elsewhere in the developing world. Source: FAO, 2011 at http://faostat.fao.org/site/626/DesktopDefault.aspx?PageID=626#ancor

Figure 15.8: The Water Cycle Water is both a renewable and a depletable resource. The water cycle leads to a continual, but limited, flow of fresh water, while lakes and aquifers, along with human-made dams, provide stored water. Many aquifers require centuries to fill, so that drawing water from aquifers is essentially exploitation of a non-renewable resource. Overdraft of groundwater is a problem in all water-short areas of the world including the U.S. West, Central and South Asia, and North China.

Figure 15.9: Global Water Demand, Historical and Projected to 2025 Global water demand has steadily increased. Between 1900 and 200, freshwater consumption rose over sixfold, more than double the rate of population growth. Demand is projected to continue increasing in future decades. Especially in developing Asia, growing water demand places strains on existing supplies and causes groundwater overdraft, with widespread water pollution an additional problem.

Figure 15.10: Effects of Subsidized Water Pricing Widespread government policies of subsidizing water supply, especially for agriculture, worsen the problem of excessive demand. At low prices, the quantity demanded tends to exceed available supply, placing pressure on governments to fund large-scale water supply projects such as dams and water transfer projects. These supply projects have significant economic and environmental costs (areas B and C on graph). In theory, a market price solution could reduce quantity demanded, avoid excessive costs, and gain net social benefits (area A). But major issue of equity arise with water privatization and higher water prices. This has led some authorities (for example, in South Africa)to promote two-tier schemes with a limited amount of subsidized water and higher prices for large users. Unfortunately, many areas have the opposite situation, with subsidies for inefficient use but high prices for low-income consumers (including many regions in India).