Integrating risks into management and policy: economic insights

Transcription

1 Integrating risks into management and policy: economic insights Bo Jellesmark Thorsen University of Copenhagen KNOWLEDGE BASE MANAGEMENT OF MEDITERRANEAN FORESTS UNDER CLIMATE DRIVEN RISKS: THE WAYS AHEAD April 2010 Antalya, Turkey Slide 1

2 Things to cover What are the risks and uncertainties to worry an economist? What are the values at stake for whom? How may different risks and uncertainties be handled in forest management? How may society address the risks and uncertainties and the way forest managers may react to these? Slide 2

3 What are the risks and uncertainties to worry an economist The same as any forest owner Increased risk of forest pest, of forest fires Increased risk of droughts, of windthrows Reduced overall forest health and productivity Uncertainty about the absolute and relative profitability of various forest management options and tree species But also: That while we are convinced that changes are forthcoming, we are uncertain about: how fast the changes come their actual magnitude and composition if we the world society will be able to reduce and slow changes or if the get really bad??? Slide 3

4 What are the values at stake for whom? For the forest owner The value of the wood production The value of marketed recreational goods and services, like hunting, trekking, mushroom picking etc The loss of capital and assets (other than the roundwood) due to forest fires, windthrows etc The potential costs of damages to externals, if the forest owner can be held liable Slide 4

5 What are the values at stake for whom? for society at large: the values at risk of concern to the forest owner also matters to society but forest ecosystems provide a number of ecosystem services, which may also be at stake: carbon stocks may change significantly down regulation of watershed services, groundwater recharge forest dependent biodiversity may be at risk recreational quality of forested landscapes may change as forests change in addition, increased risk of negative externalities arising from wild fires and large scale windthrows Slide 5

6 Risk in forest management - damages -The handling of risk of damages has been handled in everything from stands to forests and forest landscapes - Typical early results on optimal policy included the reduction of rotation ages (e.g. Reed 1984), stocking levels etc: M /(M+J) Add risk: δ + λ Discount rate δ Slide 6 T* with risk T* without risk

7 Endogenous risk in forest management - Many studies extended this to handle the fact that forest management can it self affect risk, e.g. in research on windthrow and fire: Managing risks and value at risk A typical A typical stand stand level level result result - effects - endogenous of exogenous risk risk 600 Value or volume Age No risk No risk Exog. risk Exog. risk Endog. risk Ex.: Thorsen, April 2010 B.J. Anatalya, and F. Turkey Helles, 1998: Optimal stand management with endogenous risk of sudden destruction, Slide 7 Forest Ecology and Management, 108,

8 Risk of damages possible divergence in view from forest owner to society - Society share the concerns of the forest owner re. damages - and the potentially increased risk under climate change - Society may be more concerned than the forest owner: - Windthrow and fire storms are seldom local events - Wild fires is a risk to values outside the forest - Large scale damages cause loss of positive externalities and enhance negative externalities, of little concern to the owner Policy reactions - Ex.: Policies exist to induce owners to minimize risk of fires - Ex.: Reforestation with species less susceptible to windthrow is subsidized in Denmark - Ex.: and also requires the forest owner to buy insurance against the material losses Slide 8

9 Risk diversification in forest management What is risk diversification? - Risk diversification is about not putting all eggs in one basket - Assume the outcomes of two non-exclusive decision alternatives are uncertain, but not perfectly correlated - By mixing decision alternatives, we may arrive at an Expected Outcome and Uncertainty mix more appealing than either Climate Change Species A: Species B Success Failure Success Failure Climate change goes one direction Chance: 80% Return: 100 Chance: 20% Return: 70 Chance: 15% Return: 70 Chance: 85% Return: 50 Climate change goes another direction Chance: 10% Return: 70 Chance: 90% Return: 30 Chance: 80% Return: 80 Chance: 20% Return: 50 Slide 9

10 By diversifying his choice of tree species, provenances etc., the forest owner can reduce some of the risk climate change implies for him If climate change favours either the red or the green type but with some likelihood not both, some mixture has value for the forest owner Implementing diversification: In terms of risk diversification, each of the two model forests here are perhaps the same to the forest owner. But for society the models may not be equally good: Failure of one species on large tracts of land may cause a loss of externalities - social values which are not so much the concern of the forest owner. Slide 10

11 Uncertainty and adaptive forest management - Timing is everything also in forestry - If we can describe the possible future states of nature, their distribution and their link to our current and future actions, then we can design an optimal decision programme - Bellman s principle of dynamic programming tells us how: V t (x t d t *)= E{max{π t (x t d t ) + (1+r) -1 V t+1 (x t+1 d t )} In many cases, the decision is a question of timing a switch, e.g. an investment or a change in a system, from A to B. V t (x t A)= E{max{V t (x t d t = B); (1+r) -1 V t+1 (x t+1 d = A)} -The optimal programme d use the option to wait and to adapt to new information as it becomes known Thorsen, B.J., 1999a: Progressive Income Taxes and Option Values: The case of a Farmer who Owns a Forest, Journal of Forest April Economics, 2010 Anatalya, 5, 217 Turkey Thorsen, B.J., Slide b: Afforestation as a real option: Some policy implications, Forest Science, 45,

12 Illustrating the value of waiting When to make a commitment in the mating game A decision rule: Commit when benefits exceed costs or.. Max Suppose your current best partner option has an { Value of being in a relationsh ip; Value of NOT being in a relationsh ip } expected B/C-ratio of 1.2 but that at you least are when everyday things learning are certain. new things should you commit? Slide 12

13 A basic point: The value of postponing commitments: Probability = 0.5 Dad s a billionaire: B/C = 1.8 Current B/C = 1.2 Probability = 0.5 Slide 13 Mom has anger issues: B/C = 0.6

14 A basic point: The value of postponing commitments: Your decision problem: Max {Commit now; Postpone Commitment} Max {E(B - C) = 0.2; E(Max {B C; 0} = 0.4} If you wait, you have the chance to run (for your life) or commit with a smile (all the way to the bank). Postpone until benefits you miss outweigh gains to waiting Slide 14

15 Getting back to the forest We are used to variation in productivity over time, but under a stable climate on any given site, we often have a clear ranking: Imaginary illustration: Productivity of species under stable climate Productivity Time Slide 15?

16 What can the forest owner do? Over the life span of a forest stand we may learn more about the forthcoming changes in productivity.if we make flexible decisions, we may build valuable option into our forests. Ex.: Mixing species/genotypes may allow for selective and adaptive adjustments along the life of the forest stand. Jacobsen, J.B. April and 2010 B.J. Anatalya, Thorsen, Turkey 2003: A Danish example of optimal thinning strategies in mixed-species forests under changing Slide 16 growth conditions caused by climate change, Forest Ecology and Management, 180,

17 When to adapt and switch management When is climate change evidence on future productivity sufficient for a switch to be optimal compared to continuing? Changing productivity of of species with CC CC Productivity So what is it? Now? In 20, 40, 60 or more years? Time Slide 17

18 Adaption strategies depends on expectations Current models of adaptive forest management assume that even if we don t know where we are going, we can at least describe the future using some statistical distribution A +6 world? A +4 world? CC index A +2 world? And when can we tell? Expected distributions of the future are non-stationary!! Slide 18 Time

19 Uncertainty about CC society, the forest owner and challenges for research - For society and the forest owner both, timely adaptation measures are crucial again preferred response may differ - Do forest owners form expectations about the future that are systematically different from those of society? - If yes, forest owners may adapt too quickly or too slow from the view point of society Relevant policy measures: - Enhance the dissemination of research to forest owners to align expectations - Politicians should signal clearly their policy goals and act accordingly even if it is to aim for the 4 -scenario. - Research, research, research basic and applied Slide 19

20 CC, uncertainty and social sciences - What are expectations of forest owners re. CC impacts? - From where do they draw the information on which they base their expectation and adaptation decisions if at all? - How can we translate this into decision making models, allowing us to include management actions when assessing impact of CC? - How far can we link models of CC and forest eco-systems into stochastic optimization models to find good adaptive strategies? -How can we handle the issue of non-stationarity in or simply lack of - probability distributions, and still provide good consistent models for adaptive forest management? Slide 20

21 Thank You! Slide 21