New frontiers in forest economics

Investing in growing trees as a profitable venture is a challenging endeavour.  Perhaps today, more than ever before, there are a number of factors that are coinciding, with the potential to revolutionise forestry finances: after all, a forest reliant on Government handouts is not a sustainable forest.  Here a review of the main actors.

Forest Economics – an overview

Forestry has long been viewed as unprofitable and only justifiable through the environmental and social benefits it provides, for example as suggested in the UK Treasury inter-departmental cost-benefit study of forestry in 1972 [1], and the National Audit Office assessment of the Forestry Commission in 1986 [2]. Incentives to encourage good silvicultural practice are rarely provided, and there has been a powerful argument that forests should be left largely unmanaged as a public service resource for recreation, wildlife and landscape enhancement. Yields from forestry are seen as too long-term and the application of any realistic interest rate makes Net Present Value (NPV) and Internal Rate of Return (IRR) calculations unappealing to investors.

Towards a green economy

Earlier this year the United Nations Environment Programme published the Green Economy Report:

“A Green Economy is one that results in improved human well-being and social equity, while significantly reducing environmental and ecological scarcities.” UNEP 2011

Nineteen years after the Rio Earth Summit of 1992 this ground-breaking report seeks to bring real understanding and value to the importance of the environment to economists and decision makers.  Then we were only just beginning to think about climate change but now, with the world population due to increase to nine billion by 2050 we need, as the UNEP explain starkly:

to be able to thrive … let alone survive.

The report makes an economic and social case for investing 2% of global Gross Domestic Product (GDP) in greening ten main elements of the economy. It seeks to dismiss a widespread myth is that there is a trade-off between environmental sustainability and economic progress:

“There is now substantial evidence that the “greening” of economies neither inhibits wealth creation nor employment opportunities, and that there are many green sectors which show significant opportunities for investment and related growth in wealth and jobs.”

Measuring the green economy: US Report April 2010

Interest in the green economy is not limited to Europe of course.  In April 2010 the US Government published their first report on the green economy.  The report summarised that there were 1.8 to 2.4 million jobs, or 1-2% of total private business in the US, relating to the green economy in 2007.  The green economy was seen to be in a position to grow quickly but its relatively small size suggests that most growth will occur outside it. The report was produced as a first step and as a baseline for future measures of the green economy in the US.

The natural choice: securing the value of nature

In the UK promotion of the green economy has seen a number of important Government reports in recent years. Professor Read’s report of 2009 proposed challenging woodland creation rates of 23,000 hectares per year across the UK with the main aim of managing carbon. In England this could mean increasing woodland creation rates from 2,300 hectares per year to 10,000 hectares per year over time, with woodland cover increasing from 10% to over 13% by 2060. With Government funding reducing severely, meeting this target is a significant challenge, requiring new approaches such as private sector and NGO investment.  Read Report

In June 2011 the UK Government published a Natural White Paper “The natural choice: securing the value of nature”.  This states very strongly that economic growth and the natural environment are mutually compatible. Sustainable economic growth relies on services provided by the natural environment, often referred to as ‘ecosystem services’ (although I vehemently dislike this phrase).

Forests

How do these opportunities relate to forests and to forestry?  Clearly strong political good will and interest in the environment and the green economy are very important. These need to be translated into action that will support sustainable forest management across the world.

Thirteen million hectares of land (1990-2005 data) are still being deforested each and every year at huge environmental and economic cost:

“It is estimated that deforestation and forest degradation are likely costing the global economy between US$2.5 and US$4.5 trillion a year, more than the losses of the recent and ongoing financial crisis. Urgent action is needed to protect the values of forests as an ecosystem sustaining local livelihoods in the face of climate change.” Statement by Achim Steiner, UN Under-Secretary General and UNEP Executive Director

It is now recognised that forests can provide many ecosystem services including:

1. provisioning services e.g. timber and water supply;
2. biodiversity;
3. cultural services e.g. recreation, landscape and cultural heritage;
4. regulating services e.g. carbon storage, flood management, noise reduction, improving water, soil and air quality.

The challenge will be enabling some form of payment transaction to forest owners for the provision of these services.  Who will pay: Government via different support mechanisms, and/or perhaps big business especially those with the greatest environmental footprints?

I am supportive of the following statement in the UK’s Natural White paper:

“Our ambition is for a major increase in the area of woodland in England, better management of existing woodlands and a renewed commitment to conserving and restoring ancient woodlands.

The second of the three elements, that I’ve highlighted in bold, pleases me most. I’ve written before about massive area of woodlands that are unmanaged in England, and how we should be concentrating first on managing these before (or while) planting more.  If we plant more, which is laudable, let’s make sure they are designed and managed to be truly sustainable plantations, so that we don’t waste precious land resources.

Gabriel Hemery

---

References

[1]  HM Treasury, Forestry in Great Britain: an inter-departmental cost benefit study. 1972, HMSO: London. p. 107.

[2] National Audit Office, Review of Forestry Commission Objectives and Achievements. 1986, HC75 (1985-86), HMSO, London.

Further Reading

• UK Government Natural White Paper: “The natural choice: securing the value of nature”.
• UNEP Green Economy
• Lawson G. and Hemery G. (2007) World timber trade and implementing sustainable forest management in the UK. Report to the Land Use Policy Group
• Measuring the green economy (US Report)