Forest Economics

© Peter Berck 2008,2013,

2014
Forest class notes on Linear
Programming and Forests
The Basic Model of Forestry

 The control variable is a treatment, a

complete harvest is the one we will
examine.
 Other treatments include
 Partial harvest or thinning
 Fertilizing (pays in Sweden)
 Clearing understory with fire
Objective

 We examine Net Present Value

 Foresters are trained to ask about the
(usually multiple) objectives of owners.
Examples:
 Estate tax payment so as to allow a long
term ownership to continue. (Sweden)
 Environmental or Aesthetic
 Water, Wildlife (hunting), visual buffer,
etc.
Time conventions and cut
 Type of Site, j: soil, tree species, altitude, etc
 Many “birthdays”
 First is –M. : That is today is day zero.
 hj(t,s)
 t is calendar time
 s is birthday of stand; t-s is therefore age
 h is acres harvested
 Dj(t-s) is volume per acre
Present value of cut

 v(t) is cut at t from all stands and ages

 V(t) =j s>=-M Dj(t-s) hj(t, s)
 P(t) is price of standing trees at time t,
called the stumpage price
 Present value is
PV (t )   P ( s )V ( s ) 1  r 
 ( s t )

s t
Conservation of acres

 Initial Acres =  Cut acres at t re-

Acres cut over all grow and are recut
time at a > t
 Aj(s) = t>s hj(t,s)  s hj(t,s) = a hj(a,t)
 s is birthday  Cut at t from all birthdays
(s<=t) is what is reborn
at t and therefore cut in
 Recall: h(current time, times a>t.
birthday)
 A(s) are the initial  This is where bio
conditions differs from fish.
This is Johnson and Scheurman, Model II.
Full Problem
Choose h >= 0 to maximize PV
s.t. the three constraints and A  Comment: This
given.
version generates
PV (t )   P(s)V ( s) 1  r 
 ( s t )

s t
the most compact
V(s) =j z>=-M Dj(s-z) hj(s, z)
linear programming
code.
Aj(s) = t>s hj(t,s)

s hj(t,s) = a hj(a,t)
Easier to understand and
program

 Add another
variable, x(t,s) the
number of acres
standing at time t of
land regenerated at
time s.
x is what is left standing at z
from stands born in s <= z
 x(time, birthday)
 xj(z,s) = Aj(s) - t<Z hj(t,s)
 For stands born before time zero s< 0, A(s) is given.
 For stands born at zero or later.
 Let Aj(s) = a hj(s,a)

 What is left at time z from what was born

at time s = what there was to start, A,
less what was cut up till now=time z.
Compact Set Up

 The same problem explicitly as an LP

in matrix form.

 We reduce the number of stands to

one, which is fine until there are
constraints between stands.
Easier to use x as a vector

 Originally we had x(t,s)

 We find it easier to use
 Xt=(x(t,t),x(t,t-1),….x(t,t-n-1))’
 That is X is now a vector of acres by
age class. We also make n-1 the
oldest possible acres.
 In what follows A will NOT be the A
from before—sorry!
 A LP One Stand Example

 x1  0 0   x 1   h 1    1 1 1 1 1   h 1 
            
 .  1 0 0   .   .    0 0 . 
 .   1   .    .      . 
           
.  1   .   .     . 
x     x   h    0  h 
 n t 1  1 1   n  t  n  t   0   n t

X(t+1) =< A(X(t) – h(t)) +Bh(t)= Ax(t) +(B-A) h(t) All in acres.
 Stack em: 3 periods
  x 1 
 
 I    x 2    x 1 * 
  x   
A I B  A    3    0 
 A I  B  A    h 1   0 

 h 
 2

(x)t is the col. Vector of (x1,x2,…)t.

Let the giant matrix be F. This is
F ( (x) ,h )’ < ( x1,0,0)’.
 Stack em: 3 periods
  x 1 
 
 I    x 2    x 1 * 
  x   
A I B  A    3    0 
 A I  B  A    h 1   0 

 h 
 2

z ≤b
F
Expanded Objective Function

 Let E(s,t) be value of wildlife, etc

 Y(t) = j s>=-M Dj(t-s) hj(t, s)P(t) +
 j s>=-M xj(s,t) Ej(s,t)
 Max present value of Y(t).
Objective
Git  Di Pt / (1  r )t where D is the volume in age class i
E it is the value of stock in class i at time t, e.g. for
carbon or spotted owls
G is the vec(G it ) and E is vec  Eit 
max E ' x  G ' h subject to constraints on
previous slide and x,h  0
LP

 Let F be the giant matrix and c be the

vector of E’s and G’s Let z = (x,h) and
b= (x*(1),0…0)’ ( a ‘ is a transpose)
 Max c’z s.t Fz ≤ b (x(1),0…0)’ primal
 A result from LP is that an equivalent
problem is
 Min b’  s.t. F’  ≥ c dual
Lagrange and dual

max z c ' z s.t. Fz  b

min  0 max z L()  c ' z + '( b  Fz )
min  0 max z L()   ' b  (c '  ' F ) z = b '   z '(c  F '  )
min  b '  s.t. F'  c
 The dimension of b is the number of constraints, say m. So 
is also a m-column vector. Dimension of z is the number of
states plus controls, say n. So F has m rows and n columns.
 Recall that ’F >= c’ is just fine for the dual constraint.
Writing out our probelm

 Lets cut this down to size: 3 periods

and 3 age classes. So x is just born,
one year old, two (or more) years old.
 Write out problem and dual.
 Solve dual for a simple rule.
 Sketch below
Steps

 Write out A and B for 3 age classes.

What are the dimensions of A and B?
 What are the dimensions of F?
 I count 9 constraints, one for each age class in
each time period. Group your  so that ()1=(age=1,
time=1,  a=2, t=1,  a=3, time=1).
 Group your c’s the same way. Recall that the first 3 c’s are the value of
standing stock and the last two the value of harvest.
Using your neat new notation

 Write out ’F >= c’ in terms of the A’s

and B’s. You should have 5 matrix
equations.
 .
Dual

 One can show that the dual to the

simple problem is:
 Max( value of cutting, value of leaving
alone)
 Cutting is just Dj(t-s) P + shadow of bare
land at t.
 Leaving stand is shadow of land one
period older next period.
Expanding the model
When to cut with more
constraints?

 How much old timber to hold?

 Costs of not profit max policies
 Like don’t cut till CMAI (top of growth
curve)
 Like hold onto oldgrowth for a while
 Like have a nondecling flow of timber
 National Forest Management Act.
More meaning to the model

 Types of sites, j  More Constraints

 different species  Don’t cut type j
 site classes  Keep N% of forest
 critical locations at age, t-s, > 100
 near streams  More treatments
 visual buffers
 commercial thin
 pre-commercial thin
Biology

 Could use stand table.

 McArdle Bruce Meyer tables for doug fir
 Could use stand simulator and then
table the results
 Must handle changes in stand
discretely—possibly as stand with new
growth function—eg. After fertilize
 This JS model was basis for huge
planning exercise for national forests.
 Required by RPA
 (Resources Planning Act of 1974)
 Hampered by large numbers of
additional constraints on types of land
that could be cut and when.
 Eventually died of its own weight.
Stochastic

 Can be turned into stochastic program.

Dixon and Howitt do this by taking
linear quadratic approximations and
solving them. (AJAE)
 Fire, insects, make stochastic
advisable if planning is objective.
Valuing stock

 Easy: Just add terms to the objective

function of the form
 XE
 Where X is stock and E is value
 Dual now includes added term in E
 This formulation takes care of carbon
sequestration.
Carbon

 Imagine adding 1t co2e to the stock in the

DICE model and finding the change in
value. That is the price of carbon for each
time.
 Now imagine cutting a tree and having it
release carbon over time while its
replacement is growing.
 There will be a delta for each time. Got to
multiply by the shadow value.
Example:

 Price of co2e: 10, 15, 20 in 3

decades.
 Cut 1 ton co2e tree in first decade,
20% goes back to atmosphere each
decade.
 Growth is 2., .3 , .4 tons
 Net is 0, .1, .2 tons; Hence +$ 5.5
 Need to do this over a very long time
to get it right.
Example 2

 Plant a forest that burns after 30 years.

 P = 10, 20, 30.
 Growth .2, .3, -.5
 Does this make you wonder about
what the prices must really mean?
 Perhaps clearer if rental rate: take out
one unit co2e in yr 1 and put it back in
year 2.
Turning JS into a estimating
model

 Want to know if private and public

forest were managed differently and if
so what was “optimal” or what the
shadow losses were of public
management.
 Need to estimate future prices and
appropriate interest rate.
 Hotelling: Derivative of profit function
is supply.

CS ( P )   Q( z )dz where Q is demand curve.
p
How do we get P

 Model of previous section has value

function J(P1,…,Pn, r) where P are the
prices in the n periods and r is the
interest rate.
 Let CS(Pi) be consumer surplus of i
 Consider functional Z(P,r) = J + S
CS(Pi)
 Function takes a minimum where
supply = demand (2nd deriv positive)
Demand

 Demand is estimated from time series

data. Price and housing starts are
most important variables in demand
 Forest stock identifies the demand
equation.
 Now– for each choice of r, using the
rule that P mins Z we can find P(r)
 Given the Prices, the planning part of
the model gives the cut, h.
 Residual is predicted less actual cut
 Min sum sq. resids by varying r
 This estimates the model
 Given the r and the P’s it is a simple
matter to value the losses to cmai
(small) and to oldgrowth retention,
large.
Forest Area/Deforestation

 US: Virgin forest to today: less forest

 However NE and S. both regrew
 Large parts of rural US are going back to
forest
 General trend is for less forest
 Foster and Rosenzweig look at India
Naïve

 Many LDC’s have insufficient land

ownership to protect forests
 Marcos denuded the Phillipines for profit
 Nepal has problems with marginal ag
taking over forest regions
India

 Gross forest statistics like US

 Area goes down
 Then up
 Why?
 Market stories require property rights—
FR implicitly assume such.
 Demand for forest products goes up,
forests should go up.
 Long run, true
 Short run could go other way. Not so obvious
FR
 Interest is the in the matched dataset of
sattelite imagery (historical forest cover) to
village surveys.
 Find that increased population or
expenditure on forest products leads to
more forest land.
 Wages, ag land prices insignificant
 New England can be told with wages or time to
regenerate
 Need relative ag land/ forest land price to do this
in the normal way
 Also need the product price for forest, don’t have
 plausible that more income = more forest
Carbon

 Carbon sinks include soil and trees

 From Sohngen and Mendelson
 10% more carbon could be sequestered in
forests
 Either more land
 Or more intensive management
 Unclear how one would keep it tied up in soil or
trees
 $1-150 per ton are estimates for sequestration
Optimal

 To decide what to do need to know the

value of carbon sequestration by time
period.
 S-M model
 Damage function of carbon stock
 dStock/dt = emissions – abatement
 Reducing emissions and abatement are
costly
 Minimize present value of costs
soln

 There is a shadow price of carbon, the

marginal value of reducing the stock
by one unit. Marginal costs = that
 Problem: forestry stores the carbon
for a while. Uses rental rate for carbon
 Interest on value less
 Price increase
 Worth investigating==might not be right
Empirical

 Melds forest and climate model

 Gets price for emissions abatement
 Finds how sequestration changes land
and forest prices
 Finds equilibrium with higher prices for
forest land (bid up because of
sequestration)
 Sequestration makes sense, but is less
profitable than with no price rise
Other subjects

 Employment
 Trade (and the Lumber Wars)
 Private non industrial supply
 Mean reversion of prices
 Diversity and the need for large
untouched blocks vs. diversity in cut
areas
Steps

 1. write out the dual constraints, all 5

of them.
 2. What is lambda(3)?
 3. Now work backwards and get the
other two
 Remember x and lamda are non-
negative. Also need to make lamda
small says the objective function