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Remi Paris, Head of Section, Environment and Sustainable Development, Development Cooperation Directorate at the OECD; and Ivan Ruzicka, applied economist, Vovray-en-Bornes, France. This paper was initiated in 1998 when the first author was a professor at the University of Liège and at CORE, Catholic University of Louvain, Belgium. The authors are thankful to P. Chander, J.H. Drèze, R. Gillingham, S. Gupta, J. Ligthart, L. de Mello, V. Reppelin, and S. Rietbergen for suggestions and comments.
In Honduras, state forestry revenue accounted for less than 1 percent of central government revenue in 1994, but stumpage prices increased by a factor of five in two years. In Cameroon, forestry taxes accounted for 3.5 percent of revenue in 1998/99, up from 2.5 percent three years before. In the Philippines, total taxes on logs increased from .06 percent of revenue in 1989 to .4 percent in 1991 (World Bank, 1999).
These “external benefits” range from the preservation of soil stability and regulation of hydrological cycles to the provision of habitats to a large number of species.
Where natural forests can be converted to superior uses (e.g., as agriculture or tree plantations) even when all their external benefits are taken into account, deforestation should be thought of as welfare-enhancing land improvement. Where this is the case, the arguments developed in this paper do not apply.
The Pigovian tax can be defined as a tax set as the difference between the marginal social and marginal private cost of an externality-generating agent that restores efficiency in resource allocation.
In addition, there is also a danger of corruption both on the part of the logger and the government. We do not systematically review this issue, but the interested reader is referred for example to Contreras-Hermosilla (1997), or to documents produced by the Environmental Intelligence Agency (1996).
We focus exclusively on the case of commercial loggers. Community-based forest management schemes require a completely different set of measures which are not covered in this paper.
We effectively argue that the “ceteris paribus” assumption, which would require all other variables in play to remain unchanged following the imposition of a levy, is simply untenable. Only strict regulation could force loggers to keep all other factors unchanged following the imposition of a tax. Thus, regulatory enforcement is actually a precondition for the tax to be levied as envisaged exante. Given the wide scope and incentives for violation, the levies themselves increase the need for strict monitoring and enforcement. The same conclusion powerfully emerges from virtually all recent assessments of industrial environmental taxation (e.g., Harvard Institute for International Development, 1999).
In its simplest form, the Faustmann solution states that the logger will cut trees up to the point where the forest will grow at the interest rate.
In reality, forests contain a wide variety of species corresponding to different classes and grades of timber. This has been given much attention in the early literature on the subject (see Page, Pearson, and Leland, 1976). Plotted against unit prices, the composition of each typical area can be organized in a descending order, the most valuable segment of the commercial stock first, followed by the second most valuable, etc. The resulting set of species-specific horizontal demand curves is often referred to, wrongly, as the demand schedule. This schedule is useful, however, for the examination of the impact of changes in the structure of species-specific timber taxes on the mix of species harvested. In this paper, we consider species heterogeneity as a distraction relative to the definition of policies fostering sustainable forest management as a whole.
These rules are normally translated into limits on the minimum diameter of trees cut. Increasingly, common requirements for forest managers to replant trees following felling effectively assume a violation of selective logging rules.
As noted above, the conversion of a heterogeneous tropical forest into a tropical plantation, say rubber, eucalyptus, or another similar plant can be sustainable if the additional revenue thereby generated compensates for the loss of the timber and nontimber values generated by the natural forest. We concentrate here on the sustainable management of natural forests, and the associated environmental benefits. This excludes the possibility that converting natural forests to even-aged plantations would yield socially, economically, and ecologically superior results.
This functional form has been used by economists in a number of different applications. See for example Clark, 1990.
Removing aging trees releases light and space for younger ones and actually increases forest productivity-Certain operations like timber stand improvement can also lower the threshold.
In most developing countries, forest land is owned by the government and leased out to private logging firms.
Rotation cycles will be defined here as the ideal length of time separating consecutive harvests of the same timber stand.
This important assumption is consistent with the situation prevailing in the world timber industry as well as most national markets, where producers are small relative to the market as a whole.
The term “technology” is a simplification. The cost of harvesting and the resulting damage to the residual stand will be determined not only by the choice of equipment used to reach, fell, and remove the trees (helicopters vs. bulldozers) but also by the way logging operations are planned and executed. Clearly, two different managers using the same technology may have a different impact on the forest stock according to their know-how and their approach. This means that the flexibilify of response each agent has is far greater than suggested by the mere changes of technology more narrowly conceived. It also means that the imposition of qualitative logging rules as part of selective logging systems cannot be reduced to the prescriptions of specific types of equipment to be used. Over a longer run, the choice of technology will affect also the magnitude of the environmental cost, notably in the form of soil erosion resulting from logging (see Weidelt and Banaag (1992); Bruenig (1996); Munoz-Braz and d’Oliveira (1997); or ITTO (1996)).
This cost variable is a simplification. It amalgamates pre-harvest, harvest, and post-harvest costs without distinguishing between their variable and fixed components. This point is addressed in a later section.
Assuming that a waste tax can effectively be levied. Adding a tax on income would not affect the results in any way.
Recall that we have considerably simplified matters by assuming a single species. More realistic assumptions would make it even more difficult to assign a market value to Qsold and K.
Note that the Euler equation obtained here is a special case of the more general solution where the effort made to harvest the stock has an impact on costs (e.g., where c increases with the quantity cut). The interested reader should refer to Clark, 1990, p. 40.
Actually, faster harvesting could extend for several periods if the technology does not allow undertaking harvesting operations throughout the lease area. We rule out this possibility in the formal model, but will occasionally discuss it.
The duration of forest leases must also be consistent with the exceptionally long rotation periods involved. Many timber species mature only after 20–25 years or more.
Clark (1990) presents a detailed discussion of what happens when the length of the lease is such that the equilibrium harvest is never reached.
That is, if, as mentioned earlier, the technology makes this possible. If not, the logger will deplete as fast as possible toward the end of the lease so that Kt vanishes at time t = T.
We refer here to the Bellman equations that are at the root of the Faustmann solution. Indeed, at every period t in]0, T[, the logger follows the same path (e.g., weighs the returns from his logging activities) at time t and the returns from all remaining periods. For a detailed account, see Bellman (1957) or Clark (1990).
We apologize for using discrete and continuous notations. However, this is done only for tractability and clarity and does not affect the results in any way.
Generally, immature trees are salable at a discount, reflecting their smaller diameter.
In practice, rising logging and transport costs owing to topographical factors and increased distance from the forest gate would eventually result in increasing the marginal cost of logging. The more remote parts of the lease area may thus not be worth logging and some marketable timber stock would still remain unharvested. These complexities do not affect our basic results.
As already emphasized, preventing such behavior is possible only with rigorous and, therefore, costly monitoring.
The result follows from the assumption that the logger is a price-taker.
Export taxes or bans, and any other measure reducing the market price of logs, have the same negative impact. Conversely, eco-labelling or export certification schemes that allow certified loggers to obtain higher prices for sustainably harvested timber encourage good logging practices.
Typically, timber taxes are assessed not at the logging site, which would be very expensive, but at mill-gate. This further weakens the argument that these taxes encourage the enforcement of quantitative logging rules.
The problem is further compounded by the complex nature of logging damage. Some of it is inflicted on trees that would be suppressed by competing trees (would die in any case). The measured volume of wood lost in the course of logging will therefore tend to overestimate the loss of future salable volume. Other complexities of tropical growth dynamics are beyond the scope of this paper. This also suggests that reliable measurement of environmental damage in tropical forestry is more complex than in industrial applications where end-of-pipe measurements often suffice as a basis for a Pigovian pollution tax.
The actual economic cost of watershed degradation and soil erosion is dependent on the nature and value of downstream infrastructure, notably road, power-generation, and irrigation facilities. It could be negligible in an uninhabited area and very severe in a densely populated urban zone. The damage to biodiversity will similarly depend on the species affected. Note that none of these arguments bears any relation to the market value of the timber extracted.
The timber lax works only to the extent that it makes certain forests no longer worth logging. This will have positive environmental impacts if and only if the other factors behind forest degradation (notably conversion to subsistence agriculture or pastures by landless poor) are absent. If the areas put out of production because of the tax are large enough, it may lead to a rise in the price of timber. In this sense, its impact is different from an export ban, which would lead to a reduction in domestic timber prices.
The disturbance to forest biodiversity resulting from logging operations is a notable exception, because biodiversity is a public good which does not enter the loggers’ private profit maximization. Special measures are therefore required. This is discussed further in Section VI.
Reid and Rice (1997) suggest that natural forest management is not financially attractive in most countries of tropical Latin America. In view of the environmental benefits, they advocate susbsidies for natural forest management. They also suggest that such subsidies would have to be very large to close the gap in profits between uncontrolled logging and sustainable management, although others offer statistical evidence that careful logging can be profitable. The point is that environmentally sustainable logging cannot be measured by reference to the market price of logs. Paris and Ruzicka (1991) provide “guesstimates” of the difference between the financial and economic gains of logging in the Philippines.
A closely related misconception is that the policymaker faces a choice between a pristine forest and an overlogged forest. This belief underlies arguments in favor of outright logging bans. In many parts of the world, notably in densely populated areas, the real alternative is between a managed forest or a forest degraded through encroachment and conversion to unsustainable slash-and-burn agriculture. This is not to suggest that the world’s few remaining virgin forests do not deserve special treatment. In many cases, such forests should not be available for any kind of commercial logging activities, or only at a very high price, in view of their exceptional environmental, cultural, and social value.