Economic Impact Analysis Methods

Transcription

1 Economic Impact Analysis Methods The purpose of this study is to compare the economic impacts of two Tongass management trajectories: the Business-As-Usual Scenario (BAUS) and a Restoration Scenario (RS). Impacts are measured via economic impact analysis, with an additional qualitative presentation of management effects on non-market ecosystem services. Study Area Our study area is the Tongass National Forest (Tongass) in southeast Alaska (see Figure 2). Over 40% of the Tongass is rock, ice, muskeg, or water. Of the ten million forested acres, 4.2 million are legally withdrawn from timber production and 2.3 million acres are classified as non-productive. The remaining 3 million acres of timberland are available for harvest (TLMP 2008b) and about one million acres are mapped as suitable for harvest-including many acres previously cut (TLMP 2008a). It is these one million acres that represent some of the most productive forest on the Tongass, not only for timber, but for salmon producing rivers and streams, deer habitat, and biodiversity in general. Methodology For the Business-As-Usual Scenario, I assume that the current federal appropriations for the Tongass timber sale program are continued in order to produce commercial timber from Tongass old growth stands. The cost of Figure 2: Study Area timber production includes agency planning, road construction, old growth logging, timber processing, and exportation. For the Restoration Scenario, the same annual federal appropriations are allocated to three activities: riparian restoration, forest restoration, and second growth silvicultural management. These activities also require agency planning and contracting of in-the-woods employment. The scenarios were developed based on existing literature and numerous interviews with timber operators, U.S. Forest Service (USFS) and state forest managers, and other regional experts. Additionally, I used available second growth information and USFS assumptions Seeing the Tongass for the Trees: The Economics of Transitioning to Sustainable Forest Management 23

2 for costs, available biomass, and market assumptions to develop estimates of output expenditures for impacted industrial sectors under the Restoration Scenario. Engineered logjam construction for Tongass riparian restoration. Photo by Bob Christensen The development of the Business-as-Usual and the Restoration Scenarios were critical to the analysis. The BAUS represents the status quo over the last eight years (for which there is full data FY ), or the average Tongass expenditures for the timber sale program combined with the average final sales of Tongass timber products during this period. The RS represents a potential new management trajectory where timber budgets are reallocated to management focused on improving forest health, while initiating a transition to second growth utilization. Because the RS projects a new path, numerous modeling variants might be incorporated. To limit the range of the forecasted scenario, I constrained the RS to the following requirements: 1) maintain the existing level of federal subsidies for active management in the forest (i.e., improving forest health could also be achieved by eliminating funds for the old growth timber sale program); 2) provide an equal focus on terrestrial and riparian restoration activities as past harvests and road construction have significant impacts both on land and in-stream; and 3) provide a supply of second growth wood for industrial utilization opportunities. These broad constraints led to the development of a Restoration Scenario, where the existing timber sale budget is reallocated equally into three components: riparian restoration actions, forest restoration actions, and second growth management actions inside the timber base. The primary method of investigation was economic impact analysis. Economic impact analysis measures direct, indirect, and induced impacts on a regional economy due to changes in final demand in various business sectors. Final demand consists of inflows of money from outside the region in the form of sales, government transfers, and interest. The measured impacts are changes in employment, output, labor income, value-added, and taxes. I used Impact Analysis for Planning (IMPLAN) economic modeling software to conduct the impact analysis. IMPLAN uses national and regional economic data to build models that track monetary flows of some 450 industrial sectors. IMPLAN provides regional economic information at the county level, or in this case, at the borough/census level. The economic impacts were modeled for the boroughs/census areas that include the Tongass National Forest: Haines, Hoonah-Angoon, Juneau, Ketchikan Gateway, Petersburg-Wrangell, Prince of Wales-Hyder, Sitka, Skagway, and Yakutat. Seeing the Tongass for the Trees: The Economics of Transitioning to Sustainable Forest Management 24

3 Additionally, I conducted a qualitative analysis of non-market ecosystem service indicators focused on deer, salmon, and carbon. A lack of accounting for the non-market benefits of restoration can be a limiting factor for restoration accomplishments (Hjerpe et al. 2009). Because large-scale clearcutting of old growth has numerous extended effects on surrounding landscapes that are dispersed both spatially and temporally, quantification of these effects and their impacts on ecosystem services is difficult. Nevertheless, there is a pressing need to acknowledge the changes to ecosystem services resulting from forest management. Changes in Final Demand Before the economic impacts of a transition can be determined, the total expenditures-or final demand-of each scenario must be determined and allocated to the appropriate industrial sectors. The Tongass timber sale program results in direct expenditures in the regional economy of southeast Alaska by creating economic output in the form of forest management employment, logging, sawmilling, and other related activities. Total expenditures are initially spurred by annual Tongass National Forest congressional appropriations directed towards its timber sale program. This annual timber budget is funded by U.S. taxpayers and leads to two main categories of regional expenditures that comprise the final demand of the BAUS: A) USFS expenditures for timber sale planning, NEPA adherence, and correlating road and timber facility construction as allocated by yearly budget line items; and B) expenditures made by regional mill owners for the procurement of logs and the harvesting, processing, transporting, and selling of timber. Restoration and other stewardship activities on the forest would generate a similar set of expenditures under the RS. The total set of expenditures created by the timber sale program is the change in final demand that catalyzes regional economic impacts and is the driver of the economic impact analysis. The annual average expenditures appropriated for the Tongass timber sale program since 2001 are approximately $31.9 million, with another $12.7 million in cost pools associated with overhead (see Table 2). The direct timber budget ($31.9 million) was allocated between the individual IMPLAN sectors that are affected and is considered to be the initial final demand change on the regional economy. Additional final demand changes associated with subsequent wood product sales are spurred by the annual timber sale program appropriations. For the impact analysis, I compared the direct employment and output impacts resulting from the annual budget expenditures of $31.9 million for the BAUS with those impacts resulting from a reallocation of $31.9 million for restoration and stewardship in second growth stands--- the restoration scenario (RS). Under both the BAUS and the RS, the annual budget appropriations are the initial drivers of final demand changes; subsequent expenditures under both scenarios would be spurred in wood harvesting and production. The next section details the subsequent economic activity under both the BAUS and the RS. Seeing the Tongass for the Trees: The Economics of Transitioning to Sustainable Forest Management 25

4 Table 2: Tongass National Forest Timber Sale Program Budget for FY (Nominal Million $) 1 Budget Category Direct Timber Program Direct Road Program for Timber Average Total Source: Mehrkens 2009, USFS Region 10 Budget data. 1 Budget numbers exclude cost pools associated with timber program overhead, estimated at an additional $12.7 million per year. 2 Only regional totals were reported in FY The Tongass NF was proportioned at 98% of regional total. Business-As-Usual Scenario (BAUS) The federal appropriations for the Tongass Timber Sale Program lead to subsequent economic activity in logging and sawmilling. The final sales of Tongass wood products capture this subsequent economic activity and are comprised of intermediary expenditures made by regional mills to produce timber including stumpage fees, logging, transportation, and processing costs. These expenditures contribute to additional final demand changes, above and beyond the initial Forest Service expenditures. To determine the changes in final demand for Tongass timber sales, I used annual harvests since 2001 to estimate economic output associated with Tongass timber production. Fiscal year 2001 represents the first year after all remaining harvests associated with the 50-year pulp contracts ended. The harvest level of a particular year is not an exact reflection of that year s timber program budget or that year s final sales of timber (i.e., there is often a lag between a particular annual budget, harvest level, and final sales). However, in using annual averages since 2001, I have assumed the lags are captured. Table 3 details changes in final demand represented by species, destination, volume, and selling value. Using the last eight-year average for annual timber sale program appropriations ($31.9 million) and final sales of Tongass timber ($20.3 million) provides a total change in final demand of approximately $52.2 million in 2007 dollars for the BAUS. This change in final demand is entered into IMPLAN s impact analysis to determine regional economic impacts. Seeing the Tongass for the Trees: The Economics of Transitioning to Sustainable Forest Management 26

5 Table 3: Total Average Sales of Wood Products from Tongass Timber Sale Program, Species and Destination Average Annual Sawlog Volume Cut FY (MMBF) End Selling Value ($ per MBF, FOB) 1 Change in Final Demand (2007 Million$) Western Hemlock Western Hemlock (export) Sitka Spruce Sitka Spruce (export) Western Red Cedar 1.6 1, Western Red Cedar (interstate) 1.2 1, Alaska Yellow Cedar (export) Totals Source: All data, except where otherwise noted, taken from USDA Forest Service, Region 10, Timber Cut and Sold Reports FY , Log Exports and Interstate Shipment Table, and Selling Values, Manufacturing Costs, Logging Costs, and Profit and Risk R10 Bulletin. Available at Last accessed on 7/24/09. 1 Selling values for sawn and whole logs include utility and chip expenses and sales, which account for an additional 6.2mmbf of annual harvest. 2 Hemlock and Spruce export selling values taken from Timber Trends Restoration Scenario (RS) Final demand changes for the restoration scenario include expenditures associated with a Tongass budget focused on restoration and second growth management. I assumed annual appropriations for the timber sale program ($31.9 million) are reallocated to new management activities and divided evenly into three components: 1) riparian restoration activities including red pipe culvert replacements, road decommissioning and maintenance, log placement in streams, and soil/channel restoration; 2) forest restoration of second growth stands in beach fringe, previously harvested old-growth reserves (OGRs), and riparian buffers now outside of the scheduled timber base; and 3) other second growth management including pre-commercial thinning, commercial thinning, and non-commercial thinning from the second growth timber base. The allocation of these funds was based on project expenses from previous Tongass restoration projects. Seeing the Tongass for the Trees: The Economics of Transitioning to Sustainable Forest Management 27

6 Riparian restoration activities include placement of large woody debris in streams to increase habitat complexity and improve fish habitat. Photo by Bob Christensen Additional economic activity associated with subsequent harvesting, processing, and wood product sales would be spurred by this scenario as well and are estimated based on interviews with timber operators, Forest Service managers, and existing literature. Utilization expenditures were derived from expected final sales of second growth wood products. Under the RS, second growth trees would be available from restorative thinning prescriptions (variable density thinning for understory and structural responses) and silvicultural treatments within the second growth timber base (e.g., commercial thinning or noncommercial thinning). Reallocating the timber sale budget towards the RS would result in an average of $10.63 million (onethird of $31.9 million) annually for each of the three analyzed components:riparian restoration, forest restoration, and silvicultural second growth treatments. As opposed to the BAUS, thinning activities in the RS would initially be paid for by the Forest Service appropriation. Using spending patterns associated with previous restoration and silvicultural treatments on the Tongass, I was able to estimate annual restoration and silvicultural treatments in second growth (see Appendix B for detailed allocation of expenditures). The proposed reallocation of agency budgets for the RS would allow for the annual restoration of up to 1,600 acres of second growth outside the timber base (variable density thinning), 345 acres of commercial thinning(ct) of second growth inside the timber base, and 5,000 acres of pre-commercial thinning (PCT) of second growth inside the timber base. This thinning program would provide an immediate supply of second growth that can help bridge the transition from old growth to second growth utilization. For pre-commercial thinning treatments, slash is assumed to be left in the forest. For restorative Seeing the Tongass for the Trees: The Economics of Transitioning to Sustainable Forest Management 28

7 and commercial thinning treatments, stems are assumed to be removed and utilized as either sawlogs or bioenergy. The amount and type of biomass available for byproduct utilization from thinning treatments depend heavily on the age, size, accessibility, previous treatments, and location of second growth stands. For this analysis, I used broad estimates to approximate available woody biomass from thinning treatments. Thinning treatments, both restorative and silvicultural, would be implemented in the older, higher volume (and further into the stem exclusion phase) second growth stands that have volumes ranging from 20 to 40mbf per acre. An average of one-third basal area removal for restorative thinning and one-half basal area for silvicultural thinning are assumed-taking this from an average stand with 30mbf per acre would yield 10mbf and 15mbf respectively per acre. Applying 10mbf per acre to the 1,600 acres assumed to be restored in the RS would yield approximately 16 million board feet of thinned second growth annually (1,600 acres * 10mbf/acre). Under the RS, an additional 345 acres are presumed to be silviculturally treated, yielding another 5.2 mmbf (345 acres * 15mbf/acre). In total, approximately 21 mmbf of annual woody byproduct would be available for utilization and could subsequently help fund further restoration and thinning efforts. To determine the end selling values of woody biomass under the RS, I applied prices of existing sales and second growth feasibility studies. For the RS markets, I assumed that capacity upgrades and retooling towards smaller-diameter processing has taken place. While this type of scenario could unfold in a variety of ways, I assumed the addition of a wood products cluster on Prince of Wales Island that includes a mill capable of processing small diameter material, a correlating dry kiln, and a community wood lot 2. A wood products cluster would encourage a wide range of processing options potentially including the production of framing lumber, cabin logs, post and poles, wood pellets, briquettes, chips, and cordwood. For this analysis, I allocated 75% of second growth stems to the production of framing lumber, for which there is adequate demand in the Pacific Northwest and is matched well with the current physical characteristics of Tongass second growth (Beck Group 2009). The remaining 25% of second growth byproduct under this scenario is allocated towards the production of wood chips or pellets for municipal and agency heating needs and/or cordwood for residential woodstoves. 2 Upgrades in similar equipment and facilities for processing Tongass second growth have been estimated to cost $12 million for Viking Lumber on Prince of Wales Island by the Beck Group (2009). Federal grants and low-interest loans may be appropriate for these upgrades and would result in further regional economic impacts. Seeing the Tongass for the Trees: The Economics of Transitioning to Sustainable Forest Management 29

8 The Beck Group (2009) determined an end selling value for framing lumber from Tongass second growth of approximately $700 per thousand board feet of logs 3. Under the RS, framing lumber markets would generate final sales of approximately $11.03 million (15,750 mbf * $700/mbf). CTA Architects Engineers (2009) found that the conversion of heating Coast Guard facilities would yield substantial savings when purchasing local wood chips for $100/green ton. Chip and/or cordwood sales 4 would generate an additional $2.9 million (5,250mbf * 5.5 tons/mbf * $100/green ton). In total, the RS would result in $13.93 million of final sales. Changes in final demand for the RS include $31.9 million in federal appropriations and $13.9 million in subsequent second growth sales for a total change in final demand of $45.8 million. The economic backward linkages associated with biomass utilization are primarily the same ones associated with timber production-logging, transportation to the mill/plant, processing, and barging of final product (see Figure A1). Table 4: Market Scenario for Tongass Second Growth Byproducts Average Annual Products End Selling Volume 1 Values 2 Change in Final Demand (2007 Million$) 15.75mmbf Framing Lumber/ Cabin Logs $700/mbf mmbf(29,000tons) Wood chips/ Cordwood $100/green ton mmbf Volume yielded from the Restoration Scenario restoration and silvicultural treatments. 2 Sources for end selling values come from CTA Architects Engineers 2009, Beck Group The Beck Group determined a lumber recovery factor of 2.42 mbm of lumber for each mbf of Tongass second growth sawlogs and applied this to an end selling value for framing lumber of $286 per mbm of lumber, indicating that the end selling value of Tongass second growth would be approximately $700 per mbf of raw logs. 4 Traditional cordwood for residential woodstoves sells for approximately $250/cord in southeast Alaska (CTA Architects Engineers 2009). With 2.2 cords per mbf of sawlogs, the market value of cordwood is $550 per mbf of sawlogs-the same amount as wood chips valued at $100 per green ton given 5.5 green tons per mbf of sawlogs. Seeing the Tongass for the Trees: The Economics of Transitioning to Sustainable Forest Management 30

9 Allocating Final Demand Changes to Industrial Sectors Changes in final demand needed to be properly allocated to impacted industrial sectors for the impact analysis for both the BAUS and the RS. The allocation of final demand changes were based on existing Forest Service operations. Table 5 provides a list of expenditure allocations to each affected IMPLAN industrial sector for the BAUS, based on the previous list of changes in final demand (Tables 3 and 4). Greater detail in methods used to determine wood product values and to appropriately allocate them to their specific sectors is contained in Appendix A. Tongass budget expenditure ratios and patterns of affected sectors from previous restoration and second growth thinning treatments were used to properly allocate changes in final demand associated with the Restoration Scenario. Table 6 provides a detailed listing of expenditure allocation under the RS. Detailed methods and sources for estimating spending patterns and potential wood product values resulting from a transition to restoration and second growth management activities are provided in Appendix B. Table 5: Changes in Final Demand Associated with the Business-As-Usual Scenario Activity IMPLAN Sector No. IMPLAN Sector Description Change in Final Demand (2007$) Logging 16 Commercial Logging 7,118,000 Road Construction 36 Construction of other new nonresidential structures 7,600,000 Road Maintenance 39 Maintenance and repair construction of nonresidential structures 7,600,000 Sawmilling 95 Sawmills and wood preservation 8,680,000 Barging 334 Transport by water 2,388,000 Trucking 335 Transport by truck 1,194,000 USFS Administration 439 Employment and payroll of federal govt., non-military 17,623,000 Total 52,203,000 Seeing the Tongass for the Trees: The Economics of Transitioning to Sustainable Forest Management 31

10 Table 6. Changes in Final Demand Associated with the Restoration Scenario Activity IMPLAN Sector No. IMPLAN Sector Description Change in Final Demand (2007 $) Logging 16 Commercial Logging 6,378,000 Road Decommissioning 36 Road Maintenance 39 Construction of other new nonresidential structures Maintenance and repair construction of nonresidential structures 1,063,000 3,189,000 Sawmilling 95 Sawmills and wood preservation 9,751,000 Barging 334 Transport by water 1,393,000 Trucking 335 Transport by truck 2,786,000 Heavy Equipment Leasing 365 Engineering 369 Commercial and industrial machinery and equipment rental and leasing Architectural and Engineering-related services 531, ,500 Environmental Consulting Services 375 Environmental and other technical consulting services 2,126,000 USFS Administration 439 Both the BAUS and the RS start with a similar injection of $31.9 million of federal appropriations, but these appropriations are spent differently and spur different, subsequent changes in final demand based on the sales of wood products. The riparian restoration, restorative thinning, and traditional thinning that form the basis of the RS involve more activities than just timber production. As reflected in the tables, the RS impacts a greater number of sectors than the BAUS, helping to diversify the regional economy. Employment and payroll of federal govt., non-military 18,071,000 Total 45,820,000 However, the RS generates less wood production, 21 mmbf versus the 39 mmbf of the BAUS, of an economically inferior resource-small diameter second growth versus large diameter old growth. Focusing forest management on restoration and stewardship as opposed to timber production results in approximately $6 million less in final demand ($52 million minus $46 million), though not all of this represents direct, regional output due to the percentage of leakage under both scenarios. Furthermore, it is impor- Seeing the Tongass for the Trees: The Economics of Transitioning to Sustainable Forest Management 32

11 tant to note and understand the declining trends of the Tongass timber program. For example, the last three fiscal years (2007 to 2009), the Tongass has averaged only 25 mmbf of timber harvest (USDA Forest Service, Region 10, Timber Cut and Sold Reports at for_mgmt/), while requiring a similar federal budget to support this harvest. Taking only the last three years shows a harvest reduction of 36% from the eight-year average used in this analysis. Applying that to final sales of Tongass wood products reduces the change in final demand for the BAUS by approximately $7 million, down to $45 million and less than the calculated change in final demand for the RS of $46 million. Non-Market Ecosystem Services Recent studies (e.g., Phillips et al. 2008) have illustrated the ecosystem services provided by Tongass old growth forests that are unaccounted for in economic efficiency analysis in Tongass Land Management Plan (TLMP) (2008b). Ecosystem services are the collective benefits provided by nature to humankind; they range in function from provisioning, regulating, and supporting, to cultural benefits. Collectively, these ecosystem service values are different from economic impacts and are more analogous to the values represented in cost-benefit studies where efficiency and distributional implications of the Ecosystem services are the costs and benefits are considered. On the Tongass, some of the most important ecosystem services include a vast carbon sink, habitat for abundant wildlife including deer and salmon, collective benefits provided by nature to humankind; they range in function from provisioning, regulating, and supporting, to cultural benefits. water purification, nutrient cycling, and numerous other services. The biggest gains associated with a transition away from old growth harvests towards restoration and second growth management would be in the form of ecosystem service benefits. Previous research on the Tongass has illustrated the negative ecological impacts associated with old growth clearcutting. The idea of passive restoration, or the removal of the stressor causing degradation, captures one set of economic values that would be gained by transitioning out of old growth. That is, for every stand of old growth that is clearcut, the Tongass reduces the stock of natural capital that is so important to southeast Alaska and to the national public. Trees will return to previous clearcuts, but centuries will pass before these stands will be on the successional trajectory towards old growth if they are not harvested again. Furthermore, whether or not the current ecological structure, function, and processes present in old growth temperate rainforests will ever return is unknown. While it is difficult to quantify the lost economic values associated with the negative ecological impacts of depleting old growth stands, the Tongass old growth timber sale program is mortgaging the stock of natural capital on which southeast Alaska s future is dependent. Broadly, the curtailment of the old growth timber sale program would also curtail the ever-expanding adverse ecological impacts to the Tongass, preserving economic opportunities and economic value in the future. Removing the stressor of old growth harvests can be considered as avoided costs. Transitioning Seeing the Tongass for the Trees: The Economics of Transitioning to Sustainable Forest Management 33

12 to restoration and second growth management will yield additional benefits by increasing our stock of natural capital. This is both an investment in our natural capital and insurance for protecting and enhancing the ecosystem services provided by the Tongass. Tongass Non-Market Ecosystem Service Indicators: Deer, Salmon, and Carbon To augment the impact analysis, I qualitatively illustrate the effects of each management scenario on non-market ecosystem service values, using important Tongass indicators of deer, salmon, and carbon. Part of the uniqueness of southeast Alaska regional economies, as illustrated by Robertson (2003), is Non-Market Ecosystem Services Adversely Affected by Tongass Logging Ecosystem Service Example Reference Nutrient Cycling Gas and Climate Regulation Wildlife Habitat/ Refugia Disturbance Regulation Water Regulation Soil Retention/Erosion Control Biological Regulation Disturbed stream sedimentation and nutrient exchange with the ocean Loss of carbon to the atmosphere Loss of habitat for deer, salmon, wolves, goshawks, and murrelets Loss of windfirmness in clearcut edges Altered hydrological processes Harvest and road construction caused erosion Compromised wolf/deer trophic-dynamic Tiegs et al Leighty et al Wallmo and Schoen 1980, Heifetz et al. 1986, Person et al. 1996, Flatten et al. 2001, Cotter and Kirchoff 2007 Harris 1999 Gomi et al Kahklen and Hartsog 1998 Person et al that their economic structure includes greater non-market components than the typical economies examined by most economic impact studies. Activities of subsistence fishing and hunting, for example, provide a large portion of human nutritional need in southeast Alaska. Furthermore, the main market drivers in southeast Alaska such as commercial fishing, sport fishing, tourism, and recreation are dependent on clean water and healthy forests and soils. The wood products that are the focus of the impact analysis represent one type of marketized ecosystem service. However, there are numerous ecosystem services affected by Tongass logging that are not captured by impact analysis or market indicators. While timber production is one example of a provisioning service, it is not representative of the full suite of ecosystem service values. In fact, clearcutting of old growth generally creates a negative impact on virtually all nonmarket ecosystem services (see Box below). While changes to these nonmarket ecosystem services have regional economic consequences over time, they are difficult to quantify. Seeing the Tongass for the Trees: The Economics of Transitioning to Sustainable Forest Management 34

13 For the Tongass, deer, salmon, and carbon play an important role in numerous provisioning, regulating, supporting and cultural services and are three of the most significant indicators of overall ecosystem service values. Combining the avoided costs associated with transitioning out of old growth and the increased benefits of habitat restoration illustrates the positive influence a management transition would have on Tongass ecosystem service values. Reductions in the quantity and quality of deer, salmon, and carbon storage also have marketized impacts as well, including reduced income opportunities for sport hunting and fishing, commercial fishing, wildlife viewing, and carbon management. These increased opportunity costs result from old growth clearcutting and manifest as negative externalities impacting other regional industries. Without a comprehensive accounting of the full impacts of the Tongass Timber Sale Program, southeast Alaska is unable to ensure both its community and ecosystem sustainability into the future. Seeing the Tongass for the Trees: The Economics of Transitioning to Sustainable Forest Management 35