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We are grateful to Paola Agostini, Arthur Blundell, Jean-Christophe Carret, Russell Krelove, participants in a seminar held in Accra in February 2005, and colleagues from the Liberian Forestry Initiative for helpful comments.
See UN Security Council resolutions and reports S/RES/1343 (2001), S/2001/1015, S/2002/470, S/RES/1408 (2002), S/2002/1183, S/2002/1115, S/2003/466, S/2003/498, S/RES/1478 (2003).
Taxes to enforce the commercial use of concessions and land titles are also used in other sectors, such as taxes on unused land or area fees to encourage exploration of oil fields.
If the discount factor is defined by β = 1/(1+Φ), and Φ is the annual interest rate, then the discount factor β is close to one for low Φ and becomes smaller as this interest rate increases.
It is assumed that the first derivatives of the function f (a, n) are positive and that fnn.> 0 and faa< 0. The last derivative assumption implies that increases in a will also increase the deforestation rate d, this happens at a decelerating rate as the difficulty of finding large trees increases. The function f links d to the firm’s two choice variables and serves to reflect environmental concerns. For example, if all trees are harvested, then no “standing” cubic meters remain, thus implying that the forest disappears, and d equals one.
The risk of selective logging or high grading can be reduced by using differential “tree taxes,” though this obviously has administrative implications. Similarly, assuming a certain number of cubic meters of timber may be obtained from several small trees or, alternatively, fewer but larger trees, then d will be larger in the first of these two cases. The reason is simple. For the same ratio a, the ratio n is larger when young trees are harvested. In turn, this also suggests that there are benefits to be derived from harvesting large trees-- a practice that allows smaller ones to develop further.
The revenue and cost functions, as well as the export tax term, are expressed in currency terms. They may be rewritten by normalizing for the price of a cubic meter of timber.
In an infinite-horizon model, production takes place only if the discounted stream of profits is greater than, or equal to that of, alternative investment opportunities, thus implying that government revenues exist only if the concession is under exploitation.
Following the two-stage maximization methodology proposed by Lucas and Stokey (1983) on optimal tax policies; the first stage must solve for the firm’s optimal behavior, and the second stage must incorporate the resulting optimal firm choices as constraints in the government’s model. An equilibrium is defined as a set of pure environmental taxes and pure revenue-generating taxes which solves both the firm as well as the government model.
Export taxes generate revenues for the state, but their main feature is that they have implications for intensity and, thus, for forest sustainability in each hectare. Similarly, area and profit taxes may also drive firms out of production and, thus, have an impact on sustainability. This impact depends, in turn, on the environmental constraint being faced. Their main role, however, is to generate revenues for the State. The classification of revenue instruments into pure environmental taxes or pure revenue-generating taxes attempts to highlight the key features of each revenue instrument.
Since the firm’s FOCs are not a function of the area and profit tax, changes in these taxes have an impact only to the extent that hectares are driven out of production (i.e., excess profits disappear).