Economic valuation of forest products and services & financing sustainable forest management, SFM Dr. Jukka Matero (UEF)

Transcription

1 Economic valuation of forest products and services & financing sustainable forest management, SFM Dr. Jukka Matero (UEF) Contents : 1. Multiple uses of forests 2. Innovative financing and incentives for sustainable forest management (SFM) 3. The Finnish case 4. Design of payments for environmental services (PES) Study aims: 1) to recognize the multitude of forest products and services as a part of total economic value of forests, 2) to understand the critical precondition of investments for economic sustainability, and 3) to get knowledge of main dimensions in the design of financial incentive programs in private lands to generate more investment for ensuring SFM. Oct, /JM 1

2 Multiple economic value concepts and categories Gross willingness to pay Market values (market prices) Nonmarket values Consumer surplus Total economic value Actual (direct & indirect) use values On-site values - Off-site values Option values - Quasi-option values Existence values - Passive use values Bequest values - Non-use values Oct, /JM 2

3 Multiple methods for economic valuation (Pearce & Seccombe-Hett 2000) Oct, /JM 3

4 Multiple-uses (services) from boreal forests a checklist Production functions timber, berries, game, lichen... Information functions scenic beauty, outdoor recreation, scientific experiments... Habitat functions maintenance of biodiversity... Regulation functions climate change abatement, housing comfort maintenance of soil productivity, filtering of dust particles water regulation and supply, control of pests... Oct, /JM 4

5 Production functions In 2008, value of commercial roundwood production in Finland was more than EUR 1.7 billion in stumpage price earnings. The value of household timber ca. EUR 50 million. The value of fuelwood (total amount 10 million m³) used on small-sized dwellings or on heating and power plants was more than EUR 200 million (as mill price!). The annual estimated yield of berries is million kg, of which 30 40% are acceptable for picking. In favourable years, the harvest of lingonberries and bilberries amounts to ca 50 million kg and the total of other wild berries accounts for 10 million kg. The majority of these are picked for private domestic use. Oct, /JM 5

6 Production functions Reindeer husbandry is a traditional and unique means of livelihood in northern Scandinavia. In Finland, the area of reindeer husbandry is more than one-third of the total area of Finland, and the number of reindeer owners is approximately During autumn and winter 2008, reindeer were culled. This produced 2.3 million kg of venison with a total value of EUR 15 million. The size of the winter herd after culling was about reindeer. Oct, /JM 6

7 Economic benefits and costs of moose (million euros per year)(national Audit Office 2005) Benefits Meat Recreational value of hunting Skins & horns 0.6 Hunting tourism? Social values & idirect impacts? Existence value? Costs: Traffic accidents Hunting costs Agricultural and silvicultural damages Accident prevention costs 1.6 Research 0.5 Regulation costs (administration) 2.5 (The National Audit Office audits the state's finances and asset management in order to ensure that public funds are spent wisely and in compliance with legislation) Oct, /JM 7

8 Recreational values Forests represent an extremely important environment for various outdoor recreation activities, as well as a landscape factor supporting both mental and socio-economic well-being. Adult Finns make approximately 600 million recreational visits per year to enjoy nature. The number of overnight visits to nature tourism destinations per year is about 14 million, and together these figures account for 40 million travel days. Almost 50% of these days are spent at summer cottages locating mainly along lakes. It is estimated that actual nature-based tourism accounts for a quarter of all value-added in Finnish tourism. Oct, /JM 8

9 Landscape preferences of renters of summer cottages (Korhonen 1999) Value of forest scenery is included in the asset prices of summer cottages YES! NO! Pictures: Ismo Nousiainen & Harri Silvennoinen Oct, /JM 9

10 Participation rate in various outdoor recreation activities by provinces (Finnish Forest Research Institute) Oct, /JM 10

11 Regional economic impacts of naturebased tourism (Metsähallitus) Annual maintenance costs ( ) Net income impact Employment impact (person years) No of visits Data source nature-based tourism plays a role in maintaining the population in peripheral, rural locations and in bringing precious additional jobs to regions suffering from heavy structural unemployment total employment impact of domestic outdoor recreation and nature-based tourism in Finland is some person years Oct, /JM 11

12 Habitat functions: maintenance of biodiversity Of the total forest area in Finland, 16% in northern Finland and 2% in southern Finland are strictly protected and unavailable as a source of wood supply. In Finland forest species, of which species are saproxylic (i.e. dependent on dead wood) Number of threatened forest species in 2000 was totally 564 (+ 64 forest species extinct) Existence demand generating economic value Oct, /JM 12

13 Regulation functions: Forests as carbon sinks In 2007, the annual increase in carbon stocks sequestrated by Finnish forests was 33 million tons. Payments for carbon sequestration would increase incomes to forest owners Difference between optimum regimes for timber revenue maximization and joint revenue maximization (start from bare land) (present values in /ha at 3 % interest rate and carbon price of 20 / ton CO2) Timber revenue Carbon revenue Joint revenue Max Timber SEV 3 % Max Joint rev 3 % Oct, /JM Source: Pohjola & Valsta

14 Example: Finnish Forest Account (Matero & Saastamoinen 2007) Forest use/service Current utility Future utility (million euros) TIMBER FOREST BASED TOURISM (350) DISPOSAL SERVICES 201 NONTIMBER SERVICES -Decorative lichen, reindeer meat, Christmas trees Picking berries & mushrooms 288 -Hunting & game management 167 -Other recreational activities 764 BIODIVERSITY LOSS -463 CLIMATE CHANGE ABATEMENT 1119 NUTRIENT STOCK CHANGES (SOIL&WATER) -129 Sub-total GRAND TOTAL 3392 Oct, /JM 14

15 Swedish Forest Account 1999 (Kriström & Skånberg 2001) Forest use/service Million euros GOODS Timber 2370 Berries 41 Mushrooms 17 Game meat 83 Lichen 84 SERVICES Recreational values in hunting 170 Recreational values in other forest visits 2200 Agricultural wind erosion prevention 5 Noise abatement 15 Carbon sequestration 810 STOCKS Timber 600 Lichen -45 Berries -13 Risk of biodiversity loss -160 Soil cations -95 Vincent (2009) Globally, the value of nonmarketed environmental benefits is higher than the value of timber 15 Oct, /JM

16 Multiple uses of forests - forest owners viewpoint Net cash incomes of NIPFs currently in Finland (million in 2005): Revenue from timber sales 1700 (>94%!) Compensation for moose damages 3 Environmental subsidies 4 Revenue for selling decorative lichen 0.5 Revenue for selling hunting rights 0.5 PES (Carbon, water, recreational value trading ) 0 Revenue from land use change Selling forest land for development purposes 70 Selling forest land for conservation purposes 28 (Renting forest land for wind power production +) Incentives for socially optimal joint production? Oct, /JM 16

17 Innovative financing and incentives for SFM Economic sustainability: emphasis on the maintenance of genuine wealth (i.e. overall net investment level for the benefit of future generations) Because of the long rotations in the Nordic countries, silvicultural activities are inherently transfers of assets to future generations Motives (incentives) for silvicultural long-term investments: Forest legislation (rules for regeneration) Direct subsidies (improvements in the profitability, mitigating risks) Land markets (in perfect land markets the asset value is increased immediately after the profitable investment) Bequest motive equally important in the Nordic family forestry (Hultkrantz 1992) Oct, /JM 17

18 Innovative financing and incentives for sustainable forest management (SFM) Traditional investment financing (cost sharing) encourage the willingness to invest in forestry ( input side instruments, eg. subsidies, incentives, tax measures,..) * Innovative financing through markets for goods and services aim to encourage the willingness to pay for forest goods and services by creating or developing new markets for environmental services (instruments target the output side ) Innovation Cases in Forestry Innoforce Database of Innovation Cases in Forestry ( Economic justification for public subsidies: Efficiency (market failures) Equity (regional development, employment) Stability Oct, /JM 18

19 Constraints to investment in small-scale and community forestry (Boscolo et al 2008) Forest management (e.g. tree planting) is capital intensive and a long-term investment. Incentives for tree planting are available in some countries, but access to finance from the private-sector is often constrained as: forests are often not acceptable collateral for a loan; land cannot be used as collateral without clear land tenure; lending policies favor short-term loans with low risks, but a lack of information contributes to an inflated perception of risk in forestry; and interest rates are often higher than growth in the value of forests when timber is the only marketed output. Oct, /JM 19

20 Constraints to investment in small-scale and community forestry (Boscolo et al 2008) Forest management (e.g. tree planting) is capital intensive and a long-term investment. Incentives for tree planting are available in some countries, but access to finance from the private-sector is often constrained as: Attraction of forest investment: - Diversification potential forests are often not acceptable - Potential collateral to hedge for a unexpected loan; inflation land cannot be used as collateral Campanale without & Rhein clear (2008): land tenure; Most private financing has not been able to provide real incentives for SFM. lending policies favor short-term It has instead loans with worked low risks, against but sustainability. a lack of information contributes to an inflated perception of risk in forestry; and interest rates are often higher than growth in the value of forests when timber is the only marketed output. Oct, /JM 20

21 The Finnish case Financing of silvicultural and forest improvement work in NIPF forests, Oct, /JM 21

22 The Finnish case The share of total costs of silvicultural and forest improvement work by work type, Oct, /JM 22

23 The share of public subsidies of silvicultural and forest improvement work by work type in NIPF forests, Forest roads Fertilisation Drainage of peatlands Management of young stands Regeneration, Lapland Regeneration (Aarnio et al. 2004) Oct, /JM 23

24 Finnish specialty: Investments in peatlands Drainage usually collective investment project (forest owners seldomly initiators) The share of public subsidies in total investments in NIPF drainage was 88 % during In total, the area of drained mires is 4.9 million hectares (54 % of mires) (resulting increased forest cover and growth, roughly 10 mill. m3 annually) Currently, over 50% of peatland stands are young thinning stands Area of delayed drainage maintenance: about 1.6 mill. ha (NFI9). 1.3 million kilometers of ditch (33 times around the globe)! Profitability thresholds for (i) timber production; (ii) drainage maintenance and (iii) reforestation (?!) NFP: A comprehensive national programme for peatlands will be drawn up. Oct, /JM 24

25 Financing of silvicultural and forest improvement work in non-industrial private forests, 2008 (million ) [Act on the Financing of Sustainable Forestry] (compulsory!) [Cf. Sweden] Oct, /JM Compensation for the costs of biodiversity maintenance

26 Effect of public cost sharing on private investments Cost-sharing may cause substitution between public subsidies (external funding) and private funding ( crowding out effect) In the case of complementarity public subsidies increase private investments A positive forest investment (and timber supply) effects of public cost-sharing were dominant among NIPF owners in Finland during E.g. Linden & Leppänen (2006): 10% increase in public subsidy will increase the private investments by 2.5%. Ovaskainen et al (2004): Personal (information) assistance encouraged the use of public subsidy, which had positive impact on young stand improvements. NFP(2010) projection: 10 million -increase in public subsidies increases private investments by 55 million. Oct, /JM 26

27 Economic impact assessments (Aarnio 2004) Increased volume of the growing stock has increased the supply of pulpwood by 60% and supply of logs by 40% (over 10 Mm3) (lowering stumpage prices?) Future: - importance of budget constraint increasing - pressures for significant reallocations - share of self-financing increasing - role of PES? Distributional impacts Eg: If forest-owners were paid for carbon fixation, significant net transfers from urban areas to rural, forest-rich regions (Kriström 2003). Oct, /JM 27

28 External financing to forests in developing countries (Simula 2008) Forest management (e.g. tree planting) is capital intensive and a long-term investment. Incentives for tree planting are available in some countries, but access to finance from the private-sector is often constrained for the following reasons: forests are often not acceptable collateral for a loan; land cannot be used as collateral without clear land tenure; lending policies favor short-term loans with low risks, but a lack of information contributes to an inflated perception of risk in forestry; and interest rates are often higher than growth in the value of forests when timber is the only marketed output. In addition, administration costs are similar for large and small loans and this discourages lending to small enterprises. Oct, /JM 28

29 Official Development Assistance to Forestry and Biodiversity (Simula 2008) Oct, /JM 29

30 Innovative financing and incentives for sustainable forest management (SFM) over 600 funds. Boscolo (2008) Oct, /JM 30

31 Payments for environmental services (PES) A mechanism to translate external, non-market values of the environment into real financial incentives for local actors (landowners) to provide environmental services. PES definition and scope Dimensions and design characteristics of PES programs Comparison to alternative policy programs PES programs: effectiveness and distributional implications Based on: Engel, S., S. Pagiola, and S. Wunder Designing payments for environmental services in theory and practice: An overview of the issues. Ecological Economics 65: Oct, /JM 31

32 PES definition a) Avoluntary transaction where b) A well-defined environmental service (or a land use likely to secure the service) c) Is being bought by a (minimum one) service buyer d) From a (minimum one) service provider e) If and only if the service provider secures service provision (conditionality) Main characteristics of PES programs Type and scale of ES demand Payment source Type of activity paid for Performance measure used Payment mode and amount Oct, /JM 32

33 PES scope Applicable in problems in which ecosystems are mismanaged because many of their benefits are externalities from the perspective of ecosystem managers (e.g. private landowners) Examples: carbon sequestration, biodiversity maintenance, landscape Most growth in PES is expected in three main areas (Boscolo et al 2008): 1. payments to mitigate and adapt to climate change 2. payments to improve water quality through better forest management and conservation & 3. payments for recreational amenities Oct, /JM 33

34 The logic of PES Adapted from Pagiola and Platais (2007) Oct, /JM 34

35 Characteristics of PES programs Who are the buyers: User-financed PES: buyers are the actual users of the PES Likely to be efficient as the buyers: o have a clear incentive to ensure that the mechanism is functioning well o Can observe directly whether the service is being delivered o Have the ability to re-negotiate (or terminate) the agreement if needed Government-financed PES: buyers are others (government, NGO or an international agency) acting on the behalf of ES users. Less likely to be efficient as the buyers: o Are not the direct user of the ES o Generally cannot observe directly whether ES is being provided o Are often likely to be subject to a variety of political pressures. Oct, /JM 35

36 Characteristics of PES programs User-financed PES: buyers are the actual users of the PES Likely to emerge when: o PES benefits a small number of actors o Individual users have sufficiently large ES benefits (incentives to free ride relatively low) Government-financed PES: buyers are others (government, NGO or an international agency) acting on the behalf of ES users. In many cases may be the only option: o As the number of ES buyers increases, transaction costs and incentives for free riding increase as well Oct, /JM 36

37 PES vs. environmental taxes PES-subsidies suffer from several sources of potential inefficiency: Lack of additionality (i.e. paying for activities that would have been conducted anyway) Leakage (i.e. shifting environmentally-damaging activities elsewhere) May be misused for protectionist purposes PES-subsidies raise the profitability of the subsidized activity relative to other activities (-> potential expansion of the subsidized activity) Oct, /JM 37

38 PES is not an alternative to state and community governance (Vatn 2010) PES are foremost a reconfiguration of the roles of public bodies and communities becoming core intermediaries or buyers. 1. to establish PES, rights to the land that delivers the environmental service must be clarified. This demands public action. 2. transacting over environmental amenities is very costly. Creating markets for environmental services depends therefore crucially on state and community facilitation. Oct, /JM 38

39 The efficiency of PES Source: Pagiola (2005), Engel et al (2008) Oct, /JM 39

40 Problems in effectiveness and efficiency of PES Social inefficiency Failure to adopt practices whose social benefits exceed their costs (payments too low, B) Adoption of practices whose benefits are smaller than their costs (payments too high, C) Lack of additionality ( money for nothing, just a transfer without land-use change, D) Payments to land uses that would have been adopted anyway reduce funds available to induce socially-efficient land-use changes elsewhere Likely problem in PES programs with low, undifferentiated and untargeted payments Leakage If leakage occurs, the environmental ( net ) benefits obtained from PES are overestimated. Lack of permanence Permanence of benefits depends on the continued flow of financing (more likely problem in government-financed PES programs) The role of targeting Selection among applicant sites to maximize the program s financial efficiency Targeting based on variation in benefits, costs or benefit/cost among sites Oct, /JM 40

41 Problems in effectiveness and efficiency of PES Lack of additionality demonstrated recently also in the case of Costa Rica. Pfaff et al (2008) estimated that (at minimum) 99% of PSA area would have remained under forest cover even without payments (PSA: 5-yr contract period, first-come first-served, oversubscribed) If baseline are not known with certainty by those implementing a policy, selfselection into the policy could lower the efficiency Emphasis on targeting based (also) on the risk of development/threat. For example, slope, a proxy for agricultural suitability, turns out to really matter. Protected areas on flatter land were estimated to block 14% deforestation between 1986 and 1997 while the impact of protection on the steeper lands was very close to zero (i.e. money for nothing ) (Pfaff et al 2009). Oct, /JM 41

42 Distributional implications of PES Potential linkage between PES and poverty three key questions: 1. Who are the actual and potential participants in PES programs, and how many of them are poor? 2. Are poorer households able to participate in PES programs? 3. Are poor households affected indirectly by PES programs? The available evidence to date on participation of the poor in PES programs is mixed. The extent to which poorer households actually benefit from participation has also been little documented to date. Some government-financed PES programs (e.g. Costa Rica s PSA program) use poverty as a targeting criterion Oct, /JM 42

43 International PES One prominent example is the Clean Development Mechanism (CDM) that operates under the Kyoto Protocol. The Bali CoP13 agreed to consider REDD (Reduced Emissions from Deforestation and Forest Degradation in Developing Countries) projects as part of the post-2012 regime. Details still unclear, but it will probably operate at national level (unlike project based CDM) (Moutinho & Schwartzman 2005) Generating avoided deforestation credits will require that protected areas actually lower deforestation as inferred through the establishment of well-defined baselines (Pfaff et al 2009) and accurate monitoring Oct, /JM 43

44 International PES One prominent example is the Clean Development Mechanism (CDM) that operates under the Kyoto Protocol. CDM potential not realized because of: The Bali CoP13 1) agreed a lengthy to process consider of REDD 1-2 years (Reduced in getting Emissions CDM projects from Deforestation fully formulated, and Forest validated Degradation and in approved, Developing Countries) projects 2) Soas high part transaction of the post-2012 costs that regime. smaller projects are not viable, and 3) particular characteristics of forestry projects related to Details still unclear, but it will probably operate at national level additionality, leakage and permanence which are not (unlike project based CDM) (Moutinho & Schwartzman 2005) required in the well functioning energy sector part of the CDM markets. Generating avoided deforestation credits will require that protected areas -> actually many feasible lower deforestation projects CDM as inferred have in through fact been the establishment introduced of well-defined to the voluntary baselines markets. (Pfaff al 2009) and accurate monitoring See Gong et al (2010) for the reasons why much of the project land in the world s first CDM forest project in Oct, /JM China remains still unforested. 44

45 Carbon Markets One prominent example is the Clean Development Mechanism (CDM) that operates under the Kyoto Protocol. The Bali CoP13 agreed to consider REDD (Reduced Emissions from Deforestation and Forest Degradation in Developing Countries) projects as part of the post-2012 regime. Details still unclear, but it will probably operate at national level (unlike project based CDM) (Moutinho & Schwartzman 2005) The Generating voluntary over-the-counter avoided (OTC) deforestation markets are credits will require that currently the only source of carbon finance for avoided protected areas actually lower deforestation as inferred through deforestation. Forestry-based credits account for 36% of the total establishment voluntary market (USD of well-defined 331 million 2007) baselines (Pfaff et al 2009) and and have accurate been able to also monitoring incorporate small-sized projects (Hamilton et al. 2008). Oct, /JM 45

46 External financing to forests in developing countries (Simula 2008) (Source: Simula Markku 2008) Oct, /JM 46

47 PES in practice Oct, /JM 47

48 Innovative practices in practice Conservation banking wetland mitigation banking (USA 1989-) 'no net loss' of wetlands; limit the total amount of property that can be developed (or that has to remain undeveloped) in a given area -> where wetlands are impaired or destroyed, wetland mitigation is required; those responsible for the mitigation activities can bank the credits (usually defined as habitat units ) for subsequent sale or use. Environmental Stewardship agri-environment scheme (UK 2005-) - scoring for a list of management actions, NIPF has to exceed a threshold scoring (per hectare) to get payment In Denmark (with open access!!!), annual income for NIPF from the sales of recreational permits about 100 /ha (indicating the actual demand for extra services in addition to open access). Oct, /JM 48

49 PES in Finland The Forest Biodiversity Programme for Southern Finland (METSO) RTV potential not yet realized in Finland: - Key factor is the existence of a group of users who are actually willing to pay for recreational services under the everyman s right (i.e. demand for special forest characteristics (e.g. avoidance of clear cuttings) not provided by normal NIPF forest management). -Summer cottage owners, tourism companies (or customers)? NFP- target level for 2015: Contracts between landowners and buyers of recreational values are an established practice Necessary measures: Forest-owner oriented modes of operation will be adopted for the production of recreational values, such as trade in recreational values and contractual practices between landowners and buyers of recreational values Oct, /JM 49

50 NFP-target: The annual increment is at least 100 million m 3 Justification: The diversifying use of forests further refinement of wood and energy production, conservation of biodiversity and the recreational use of forests, as well as forests as carbon sinks all these demand an increase in growing stock. Oct, /JM 50

51 Further readings: Holopainen, J. & Wit, M. (eds.) Financing Sustainable Forest Management. Tropenbos International, Wageningen, The Netherlands. European Tropical Forest Research Network. ETFRN News. Issue No. 49, September Pp. vi-xvi. Available at: Innoforce Database of Innovation Cases in Forestry. Available at: Engel, S., Pagiola, S. & Wunder, S Designing payments for environmental services in theory and practice: An overview of the issues. Ecological Economics 65: Pfaff, A., Robalino, J. A. & Sachez-Azofeica, G. A Payments for Environmental Services: Empirical analysis for Costa Rica. Terry Sanford Institute of Public Policy. Duke University. Working Paper Series SAN p. Vatn, A An institutional analysis of payments for environmental services, Ecological Economics 69: Gong, Y., et al Participation in the world's first clean development mechanism forest project: The role of property rights, social capital and contractual rules, Ecological Economics 69: Hultkrantz, L Forestry and the Bequest Motive. Journal of Environmental Economics and Management 22: Juutinen, A. & Ollikainen, M Conservation contracts for forest biodiversity:theory and experience from Finland. Forest Science. 56(2): Simula, M Financing Flows and Needs for Achieving Sustainable Forest Management and Forest- Based Mitigation of Climate Change. Available at: Pfaff, A., J. Robalino, A. Sanchez, K. Andam, and P. Ferraro Location affects protection & generation of REDD: observable characteristics drive park impacts in Costa Rica. IOP Conf. Series: Earth and Environmental Science 6. Oct, /JM 51