Harry Nelson (604) FSC 4609 Office hours: by appointment.

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1 UNIVERSITY OF BRITISH COLUMBIA FACULTY OF FORESTRY FRST 318: FOREST AND CONSERVATION ECONOMICS WINTER SEMESTER 2013 FRST 318 Instructor: Harry Nelson (604) FSC 4609 Office hours: by appointment. FRST 318/357C R.A.s: Mahsa Mojahednia (318) FSC 4101 Office hours: Mon and Fri 9:30-10:30 Angie Mawdsley (537C) FSC 4101 Office hours: Wed 2-3 Lectures: Labs: Tuesday and Thursday 8:00 am-9:00 am, FSC 1221 until further notice There are three lab sections running Monday, Wednesday and Friday. We will initially meet in the classroom. Lab 01: Wednesdays 3-5 FSC 1003 (computer lab 1406) Lab 02: Fridays 2-4 FSC 1003 (computer lab 1406) Lab 03: Mondays 2:30-4:30 FSC 1406 COURSE OUTLINE AND SYLLABUS The focus of the course is to understand basic economic principles and how they can be applied to practical problem solving. A goal is to become familiar with the concept of economic analysis, and in particular applying it as part of a decision-making framework in the areas of business and policy-making. This course is a lecture course with weekly labs. The lecture is used to introduce concepts and ideas; these are then applied through solving problem sets in the labs and the group exercises. TEXT: Introduction to Forestry Economics. Peter Pearse. Available online through the UBC Library:

2 LAB: Weekly lab sessions involve working on either problem sets or the group project with the occasional quiz. The sessions are also a good time for students to ask the teaching assistant about the subject matter taught in the lectures. There will be five (5) problem sets, four (4) quizzes, and a group project. There are three short problem sets that will be due the following week in lab; two larger problem sets that will be due three weeks later in lab. The quizzes will also take place in lab. The two larger problem sets are each weighted 7% (and the other three 2% each). The Group Project consists of a class presentation given in lab and a brief report due the last day of class, April 8 (see the end of the syllabus for details). COURSE EVALUATION Quizzes 10% Problem Sets 20% Mid-Term Exam 25% Final Exam 35% Group Project 10% COURSE SCHEDULE Ideas and Concepts underlying Forest Economics 7 January Economics involves a set of concepts and ideas that are used to analyze problems and issues around how we, as a society, organize the production, distribution, and allocation of goods and resources. In particular it offers an analytic structure that allows us to examine the choices individuals, firms, policy-makers and other decision-makers face, why they may make certain decisions, and the consequences of those decisions. In the first class we discuss the key concepts and learning objectives for the course. We show how economics measures social well-being, what role markets play in the production, distribution, and allocation of resources, and why markets (under strict sets of assumptions) can yield socially efficient outcomes. We also discuss under what conditions markets can maximize social well-being. Several of these conditions are often violated in the real world, especially in the area of forestry, and we will identify those underlying causes and their consequences, which we will subsequently address throughout the remainder of the course.

3 In the lab we will review concepts of marginal analysis; how firms determine optimal production levels, how market equilibrium is reached, and how a change in demand or supply results in a new market equilibrium. Lecture and Lab Objectives: Understand the conditions required for markets to maximize social well-being Identify which conditions are likely to be violated in the case of forestry Solve for optimal production levels for a firm Solve for market equilibrium Assess changes in social welfare Reading: Chapters 1 and 2. Property Rights 9 January Property rights describe the rights around the ownership, usage, and responsibilities around natural resources. These rights affect how resources are managed and can have a powerful effect no outcomes and whether or not they are managed sustainably. In this section we will review the basic property rights framework and how it applies to private and public forestland in Canada and elsewhere. Identifying the main property right attributes Understanding the incentives different arrangements create Understanding how public forestlands are managed in Canada Reading: Chapter 9, Dietz, Ostrom and Stern, The Struggle to Govern the Commons Thomas Hardin Extensions of the Tragedy of the Commons The Economic Value of Wood in the Forest 14, 16, 21 January Forest product markets are an important part of the Canadian economy. These can consist of final markets for goods bought directly by consumers (tissue paper) or for intermediate products that are used as inputs (newsprint to be utilized for newspaper; log markets). In this section we will examine the linkages between these final and intermediate markets; those markets are important to the Canadian economy and forest sector; Understand derived demand

4 Identify which forest product markets are important in the Canadian forest sector and why Examine current condition and trends in those markets and implications Distinguish between short-run and long-run decision making and what factors influence firm decisions to maintain production Reading: Chapter 3, Guest Lecture: Jan. 16, 21, Mark Boyland, Chief, Acting Director, Industry and Trade Economics, Canadian Forest Service Timber Pricing, Resource Rent, and Market Power 23, 28 January The value of this timber is also influenced by the amount of resource rent available-and we will discuss how resource rent arises and why it matters, especially when we are dealing with publicly-owned resources. In an earlier section we reviewed how resource rent arises and why we would want to capture it when it is associated with publicly-owned resources. In this class we will review different methods to collect that resource rent and the implications for economic efficiency. We will also look at how market power arises and why it can lead to market failures. Understand how rent and value are influenced by changes in demand and costs Understand basic timber pricing concepts and their impact on timber values Understand market power and how it can lead to market failure Understand the concepts of monopoly, monopsony, oligopoly, and oligopsony Reading: Chapter 10, Luckert, Property rights, forest rents, and trade: The case of US countervailing duties on Canadian softwood lumber Guest Lecture: Bill Markvoort, January 23

5 Making Investment Decisions 30 January, 4 February It is important to take time into account when evaluating choices and decisions as we typically place a higher value on the present than the future. We discuss the economic rationale as to why this exists, and the implications. This is especially important in terms of forestry where it can take a long time for a tree to grow, and we have to take into account the effects of time not only in valuing the forest but also in how we manage that forest. This section also investigates different methods of evaluating investments, including ranking different kinds of projects and capital budgeting. To calculate the present and future values of a wide variety of investment streams To calculate net present value and use it to measure an investor s willingness to pay for an asset To understand how inflation affects interest rates used for investment decisions To understand the impact of risk To calculate commonly used capital budgeting measures for a capital project: net present value (NPV), internal rate of return (IRR), payback period and cost benefit ratio. Reading: Chapter 6 Market Failures in Forestry: Externalities and Incomplete Property Rights 6 February Many of the outputs from forestry are non-priced. These include recreation, existence value, biodiversity, scenic beauty, and many others. This leads to market failure. In this section we will discuss two of the most common sources of market failure-externalities and incomplete property rights-and discuss ways in which these problems can be addressed. We will also introduce methods for valuing non-timber forest products and benefits. Difficulties in determining the value of non-priced forest outputs To understand what is an externality and why it leads to market failure To understand why incomplete property rights can lead to a market failures Approaches to addressing market failures Methods of valuing non-priced forest outputs Reading: Chapter 4

6 Determining the Optimal Rotation Age and Harvest Level 11, 13 February Forests can act both as an economic asset (the wealth embodied in the standing timber) as well as in the income they can provide (the revenues realized from harvesting and other forest-based activities). This section applies economic theory to stand level decisions. The section starts with even-aged management, and we will learn to calculate the net present value of bare land based on a stream of expected costs and benefits. Next we learn to determine the optimal stand rotation age using marginal analysis as the point where the holding costs just equal the liquidation costs. We then examine different harvest rules and their economic implications. Reading: Chapters 7 and 8. To calculate the net present value of an even aged stand of timber at different rotation ages. To determine the optimal rotation age using marginal analysis. To be able to explain the effect of different discount rates on rotation ages and to discuss the selection of those rates for public and private forestry. Midterm Break February Midterm Examination February 25 First Nations and Forestry 27 February Aboriginals have a long-standing and complex relationship with forests that are at the root of their identities in many communities. Forest policy in Canada has historically marginalized those Aboriginal communities, and in this section, we will explore how this is changing both through judicial rulings and new policies that offer these communities a greater role in the management of those forest resources, sometimes directly through ownership of land or securing tenure agreements, and other times through collaborative arrangements. Describe the unique and evolving role of Aboriginals in Canada Describe recent legislation and policy developments

7 Examine different types of collaborative arrangements and FN approaches to forest management Reading: To be provided Guest Lecturer: tbd Valuing Forest Carbon 4 March An important service that timber provides which is in the process of being recognized is their role in regulating the climate. Carbon sequestration has emerged as a potential nontimber use that also has economic value, and in this section we will investigate how to incorporate the economics of forest carbon into our economic analysis. We will also explore the importance of institutional arrangements (markets and standards) in influencing that value. Reading: To be provided Guest Lecturer: tbd Examine the economic consequences of including carbon as a forest output Explore the use of carbon markets and what is an offset Understand how different rules and standards influence the value of forest carbon Cost-Benefit Analysis 6 March Where markets do not provide optimal outcomes we may need to develop policies that can improve the allocation of resources and correct externalities. However we need to consider the benefits and costs of the different choices we face among the different policies and instruments we can adopt. Cost benefit analysis using economic analysis techniques is often used to provide quantitative information to decision-makers to help select appropriate policies. In this lecture we will explore the application of this technique and how it can be used to provide guidance. An understanding of how cost-benefit analysis works An examination of cost-benefit techniques are used in policy analysis and the evaluation of projects Informational requirements and limitations Reading: Pearce, Cost Benefit Analysis and Environmental Policy, Canadian Cost Benefit Guide

8 Assessing Economic Impacts 11 March In addition to assessing individual policy options and projects, there is also interest in assessing the broader economic impacts that might follow either from those options or shocks to the system. In this section we will review how economic models can be used to explore how these changes or shocks can ripple through different markets. We will also examine the use of the input-output model as one way to provide information on those impacts. Describe how the linkages between markets work to transmit economic impacts Understand what is an input-output (I/O) model Understand how the I/O model can be used to generate information about economic impacts Reading: van Kooten, Land Resource Economics and Sustainable Development, Ch. 6; Horne, 2004 British Columbia Provincial Economic Multipliers And How To Use Them Forest Product Markets and International Trade 13 March Canada s rich forest endowment combined with increasing global demand for forest products for much of the past century had enabled it to become the world s largest exporter. However, there have been structural shifts both in global demand, as well as timber supply within Canada and from other countries, and Canada is now no longer the world s leading exporter although it is still the largest exporter for many important products. In addition to these shifts, trade restrictions also influence the flow of forest products. In this section, we will explore the theory underlying free trade, the impact of different trade restrictions, and Canada s changing competitive condition. Understand the idea of comparative advantage Understand the importance of export markets for the Canadian forest industry Understand how changes in those markets impact demand for Canadian forest products and current trends Explore the effect of log export restrictions Explore the Softwood Lumber Dispute Reading: Chapter 2, Frank/Bernanke, Principles of Microeconomics

9 Land Use 18 March One of the most important policy questions is how we allocate land among different uses. This is especially important in forestry as the intensity of forest management depends in part upon land characteristics, including not only its productivity, location, but also the opportunity cost of that land. In this section we examine how land is allocated within a market system and implications for forestry. We will then examine the idea of forest land use planning and specialization. Describe how land would be allocated under a market system Determine the optimal allocation of land between alternative uses Understand the idea of specialization and intensification Reading: Chapter 5 Deforestation and Degradation 20 March One of the most pressing environmental issues facing the global community is the deforestation and degradation of forest ecosystems. In this lecture we will examine what drives deforestation and degradation and different approaches to slowing or stopping it. Reading: tbd Describe the difference between deforestation and degradation Examine the underlying economic drivers Explore approaches to halting deforestation. Certification 25 March One new idea that has emerged in the past three decades is using market instruments to correct market failures. In this section, we examine the use of Certification schemes that are designed to promote more environmentally sustainable practices. In particular, we will review the different schemes that have emerged around supporting sustainable forest management and examine how certification is meant to work; how it has evolved; and its role in future in promoting sustainability. Understanding of how market instruments can be used to correct market failures

10 Examine how certification systems work Reading: Chen, Innes and Tikina, Private Costs-Benefits of Voluntary Forest Product Certification Ecosystem Services 27 March In the first part of the course we discussed why many forest outputs are not valued and why markets may not yield optimal outcomes. In these classes we investigate the idea of ecosystem services, and how it is being linked to economic values to improve decisionmaking through different mechanisms such as Payment for Ecosystem Services (PES). We will also explore how markets could be used to address those issues through the development of payments for ecosystem services that would take into account externalities and public goods. Describe the evolution behind the idea of ecosystem services Understand the theory behind PES Describe different types of PES Examine conditions that would enhance or limit the use of PES Reading: Gómez-Baggethun, de Groot, Lomas, Montes, The history of ecosystem services in economic theory and practice: From early notions to markets and payment schemes; Arriadaga and Perring, Making Payments for Ecosystem Services Work; Wunder, Payment for Ecosystem Services: some nuts and bolts Guest Lecturer: tbd Bioenergy 1 April Forests have historically served as an important source of energy (and continue to do so in many places around the world). Interest in this use has been renewed driven by concerns over climate change and energy security. In this class we will explore different bioenergy options utilizing forest biomass, and assess bioenergy from a business case perspective (does it make commercial sense?) and from a social perspective (is it better for the environment than fossil fuels)?

11 Evaluating the economic benefits and costs of bioenergy Incorporating the environmental impacts of bioenergy and other issues affecting its utilization. Reading: tbd Climate Change 3, 8 April In this concluding section we examine how climate change might affect our forests and what are the economic implications of those impacts. We will look at the impact of natural disturbances (wildfires, pests) and also explore different ways in which we might adapt to climate change, including proposed changes in planting strategies, timber harvesting, and strategic planning. Reading: tbd Understand the basic impacts and threats posed by climate change Understand the economic consequence of those changes Explore different approaches to adapting to climate change Evaluating options under uncertainty

12 LAB SCHEDULE January 6-17 Introduction; Review of economic problem-solving techniques Bargaining game; Hand out Problem Set (PS) 1 January Quiz 1; PS 1 due; Handout PS 2 January Jan Feb. 6 PS 2 due; PS 3 handed out Quiz 2; Work on PS 3; review class material PS 3 due ( ed by midnight to Angie or Mahsa) February 4-7 Hand out PS 4 February February No lab on Monday (BC Family Day); Quiz 3; PS 4 due Friday, Feb 14 th READING WEEK Feb Review Macro; Hand out PS 5 March 3-7 Work on PS 5 ; Group project begins (topics confirmed) March Quiz 4; work on PS 5 March March March 31-April 4 April 7 Lab only PS 5 due; work on group projects Group project presentations Group project presentations Final review Group Project Groups will be asked to either pick an issue, problem or decision that needs to be made and show how economic analysis can either inform an understanding of the issue, problem, or how to make that decisions. The perspective can either be from a private actor (i.e. the decision might be a firm) or public (i.e.. a decision a policy maker might face)., and how economic analysis can be used to offer guidance in that decision. As part of the group project, you will be expected to make a brief presentation in lab (15-20 minutes) and hand in a brief report. Groups will consist of 4 people. Part of your mark will involve a peer assessment.

13 While topics in forestry or conversation are preferred, you can propose other topics. Either the instructor or a TA must approve the topic-you are also encouraged to consult with your instructor or TA to make sure the topic is manageable. The project report is due on the last day of class, April 8 th. A NOTE ON THE MARKING AND GRADING OF THE PRESENTATION AND WRITTEN ASSIGNMENTS Marks are split equally between the presentation and written assignment. Presentations will be evaluated on content, clarity, and communication (i.e. effectiveness of graphics). Group reports should be three pages or less. Examples would be a briefing note, executive summary, or business memo. They will be assessed on style (including grammar), format and content. An excellent group project will involve the identification and collection of relevant information, application of relevant concepts and tools, and either appropriate analysis and/or synthesis. Late Assignments Late assignments will be accepted up to three days after the due date. A penalty of 10% of the assignment's grade will be applied for each late day. After three days, a zero will be recorded as the grade for the late assignment. Plagiarism Plagiarism, as defined in the UBC calendar, carries a penalty of zero for the assignment concerned.