ANALYSIS
The economic value of a forested catchment with timber, water and carbon sequestration benefits

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Abstract

This paper examines the optimal management strategy for a forested catchment that yields timber, water and carbon sequestration benefits. The Faustmann multiple rotation model is extended to allow for the maximisation of the net present value of these timber and non-timber benefits. The model is applied to the Thomson Catchment in Central Gippsland, Victoria. Carbon sequestration benefits are modelled via total stand biomass accumulation. The cost of carbon release back into the atmosphere upon logging is estimated as a function of rotation age using an adjusted pulpwood/sawlog ratio. The allowance for both non-timber benefits is found to lengthen the optimal rotation, in a large range of cases to infinity.

Introduction

This paper examines the optimal management strategy for a forested catchment that yields timber, water and carbon sequestration benefits. Carbon sequestration, as a result of photosynthesis, involves the uptake and conversion of atmospheric CO2 into cellulose and other organic compounds, such as wood. By sequestering atmospheric CO2, trees convert anthropogenic and natural greenhouse gases into carbon, which is stored in their biomass and released when the tree or its products decay: for a broad-ranging discussion of carbon sequestration, see Cannell (1999).

The model is applied to the Thomson Water Catchment in Central Gippsland, Victoria, which contains extensive native forests. The Thomson Catchment is a forested area of 48 000 ha draining into the Thomson Dam, one of the major water reservoirs for Melbourne (Vertessy et al., 1994). Roughly a third of the Thomson Catchment is covered by Ash species which are valued for their high-quality timber as well as playing a crucial part in the catchment's hydrology cycle.

The quality and quantity of water flowing from the catchment are maximised for old-growth forests. However, optimal exploitation of the timber resource requires harvesting at regular intervals. Therefore, the socially optimal rotation between planting and harvesting is likely to diverge from the rotation that would be privately optimal if only timber benefits were maximised. While other environmental benefits such as biodiversity conservation cease to exist after clear-felling, forest managers can influence the cost of carbon release back into the atmosphere by choosing the age of the tree cut and, as a result, the likely end-use of the timber.

There are other environmental benefits, e.g., biodiversity conservation, water purification and soil stabilisation, in addition to various recreational benefits; for a general discussion of costs and benefits in relation to forests, see Pearce (1994). These benefits are not considered here, largely because of the difficulty of obtaining suitable values. Furthermore, the effects of, e.g., nutrient depletion or soil compaction arising from harvesting, are not examined. However, it is expected that consideration of such factors would unambiguously increase the socially optimal rotation length since environmental and amenity values are likely to be positively related to tree age.

In 1998 the Kyoto Protocol to the United Nations Framework Convention on Climate Change opened the opportunity to trade greenhouse gas emissions for increased sequestration of CO2 by forests. While an established catchment like the Thomson would not qualify for carbon credits under the Kyoto protocol, the debate nevertheless stimulated independent studies of the traded value of a tonne of carbon.

Victoria's catchments are areas of public land that are managed by the state through Melbourne Water. The Thomson Catchment is part of the Central Gippsland Forest Management Area and is managed on a sustainable yield basis allowing for 80-yr rotations. The current management strategy does not take explicit account of non-timber values. However, in 1992 the Department of Conservation and Environment, together with Melbourne Water, commissioned an evaluation of the economic values of wood and water for the Thomson Catchment. The resulting report simulated the expected present values of timber and water yields for eight management options; see Read et al. (1992). Clarke (1994) used the data from the report and found that logging of the Thomson is not socially optimal. His findings were contradicted by Ferguson (1995), who argued that logging is optimal until 2022 on the grounds that the water values used by Clarke were too high and that appropriate policies could reduce water losses in future rotations. Ferguson (1995) based water values on marginal cost considerations rather than tap values; see also Ferguson (1996).

The effects of carbon subsidies and taxes on the optimal rotation age of a forest plantation were examined by van Kooten et al. (1995). They found that for the forest regions of northern Alberta and British Columbia, rotation ages are only marginally longer if the benefits from carbon uptake are taken into account.

The model developed here is based on the Faustmann multiple rotation model, extended to include water and carbon sequestration and allowing for the costs of regeneration and replanting. Unlike van Kooten et al. (1995), the instantaneous cost of carbon release back into the atmosphere upon logging is modelled as a function of rotation age since this affects the quality of the timber and therefore its use. For a transition matrix approach to carbon sequestration in the context of tropical forests, with regeneration uncertainty, see Reddy and Price (1999).

The formal model is developed in Section 2. The specification of various functional forms and parameter estimates for the Thomson Catchment are presented in Section 3. Section 4 examines the implications for optimal rotation length. The management of an existing stand, in contrast with an optimal rotation plan, is also discussed. Conclusions are in Section 5.

Section snippets

The formal model

This section presents the basic model of optimal rotation from the widely used Faustmann (1849) analysis, and extends it to include water and carbon sequestration benefits. For discussions of the Faustmann approach, see, e.g., Hartman (1976) and Hanley et al. (1997). The model is limited to a homogeneous forest, though in practice the species composition is heterogenous. The use of harvesting for fire protection is ignored here. Furthermore, silviculture practices are not modelled, but Hanley

Functional forms

This section presents the specifications and estimates of the functions introduced above for the Thomson Catchment. The analysis is limited to Alpine Ash, for which functional forms are available, rather than incorporating a wider cross-section of the vegetation in the Thomson. However, Alpine Ash is the most prominent and most valuable species in terms of water and timber yield and quality. In addition, its commercial value makes the Ash stand strategically important. Indeed, the most

The first-order conditions

An initial insight into the determination of optimal rotation length can be obtained by considering the three functions, F1, F2 and F3 derived above, using the specifications discussed in the previous section. In addition, the cost, S, of regenerating 1 ha is set at $607, which includes the cost of seed and site preparation. This cost was ignored by Clarke (1994).

For the ‘benchmark’ or base case, the following values are used: r=0.04, pf=$55, pw=$250, and pc=$110. The two functions relating to

Conclusions

This paper has examined the socially optimal management strategy for a forested catchment, the Thomson Catchment in Central Gippsland, Victoria. This yields timber, water and carbon sequestration benefits. The Faustmann multiple rotation model was extended to allow for maximisation of the net present value of timber and non-timber benefits. Carbon sequestration benefits were modelled via total stand biomass accumulation. The cost of carbon release back into the atmosphere upon logging was

Acknowledgements

The authors would like to thank Sheila Cameron and two referees for helpful comments on an earlier draft of this paper.

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