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1. background
1.1 Threshold Value Analysis
The economic efficiency of alternative allocations of forest resources between extractive and protective uses can be assessed through the application of benefit cost analysis (BCA). In a BCA, the various implications for the well-being of the community of alternative forest resource allocations are estimated in dollar terms and aggregated. The technique’s application is often problematic because the estimation of non-market benefits and costs in dollar terms can be difficult. Whilst methods designed to provide such monetary estimates are available – for instance, contingent valuation, choice modelling and hedonic pricing – they can be expensive and time consuming to implement. In addition, their application has, on occasion, been controversial (Bennett 1996).
In circumstances where BCA is problematic, one way to provide decision makers with information that will assist in the assessment of the economic efficiency aspects of alternative forest resource allocations is through a Threshold Value Analysis (TVA).
TVA is best explained in the context of a decision involving an extractive option and a protection option for a forest resource. Whilst the costs of foregoing the extractive option can usually be estimated from market information, the benefits arising from the protection option are likely to be non-marketed and not so readily estimated. In a TVA, the value that the nonmarket benefits of protecting the forest would need to reach for it to be in the community’s best interest to forego the extractive benefits is estimated.
So whilst the decision rationale under the BCA is:
protect the forest if the estimated benefits to society derived from its protection exceed the estimated benefits derived from its development,
the decision rational under the TVA is:
protect the forest if the decision makers assess that the benefits to society from its protection exceed the estimated benefits derived from its development.
The TVA therefore involves the estimation of the marketed benefits of forest resource extraction and the setting of that estimate in a specific format. Decision makers are asked to address the question:
are the benefits of protecting the forest greater than the value of the extraction benefits that will be given up?
Central to the TVA is the estimation of the benefits of the extractive option that are foregone when the protection option is selected. This “opportunity cost” is the difference between the (monetary) value of extractive benefits under the extractive option and the (monetary) value of the extractive benefits yielded by the protection option.
Under a TVA, the burden of estimating the non-market value to the community of protecting the resource is placed before the decision makers in a way that makes the implications of their decision quite clear. Hence, if the decision is made to protect theforest, it is explicitly recognised that the benefits of resource protection are judged to exceed the “threshold” of extractive benefits foregone. Conversely, if it is decided to allow the extraction of the resource, then it is clear that the decision makers have concluded that the protection benefits of the forest are below the “threshold”. One way of assisting decision makers in their assessment of whether the protection values are in excess of the threshold is through the analysis of protection benefit estimates generated by other studies. This is known as the process of benefit transfer.
In June 1999, the New South Wales Resource and Conservation Division commissioned a TVA as part of the Regional Forest Agreement (RFA) process for the forests of the Southern New South Wales CRA / RFA region. The TVA contributed to the towards the comprehensive assessment of the forest usage and reservation scenarios for the region, in effect informing discussions relating to the extractive and non-market benefits associated with various forest management regimes.
The Threshold Value Analysis of Non-Use Values of Forest Preservation project aims to provide a threshold value analysis of the outcomes of the comprehensive regional assessment process for the Southern NSW CRA/RFA region.
Due to the nature of the outcome in the Tumut sub-region, it was possible to perform a TVA for the South-Coast sub-rion only. This was because under the outcome for the Tumut sub-region, there was an increase in both the area of forest under protection and an increase in the volume of timber being harvested in that sub-region. This situation results in a “win-win” situation for the community, as there is no trade-off between protective and extractive benefits. Thus a TVA investigation if trade-offs was not applicable for the Tumut sub-region.
In this report, the TVA for the coastal sub-region is outlined. For consistency with linked project reports, the outcome for the South Coast sub-region is referred to as “Current Commitments”. This outcome is defined in terms of the volumes of timber allocated to mills, thus implying particular areas of forest being allocated to reserve status. The per annum timber volume harvested under this outcome amounts to 135,310 cubic meters of saw logs and pulp logs.
This outcome is considered relative to a “reference option” which is defined as the actual level of timber supplied from State Forests for the sub-region in 1998/99. This is the amount of timber allocated by State Forests to the hardwood timber industry in the financial year 1998/99 and amounts to 136,155 cubic meters for the year. It should be noted that this amount is higher than the “Current Commitments” outcome. Furthermore, the composition of the timber allocated under the reference and protection options differs. Whilst pulp wood volumes are identical between the two, saw log allocations differ.
The opportunity cost calculation that is central to the TVA relates to the differences between the extractive values under the “Current Commitments” outcome and the “reference option”. The extraction values relating to each were estimated by Gillespie (1999) in the Industry Response Modelling project and reported on in the Regional Economic Impact Assessment project for the Southern RFA/CRA region.
The extractive values considered relate solely to the timber harvested from the forests under consideration. It should be noted that other extractive values may be foregone with the introduction of the scenario assessed for the South Coast. For example, mineral resources that are currently available for exploitation may become inaccesible following a change in land tenure. Likewise, some forms of recreation and tourism – such as horse riding and four wheel driving – may not be permitted, grazing leases within forest areas may be cancelled, and so on.
The effect of excluding these non-timber extractive values from the threshold value assessment is to increase the opportunity costs associated with any forest protection scenario considered. The extent of the underestimation that results from the exclusion is difficult to estimate given the lack of data on these activities and will vary between differing levels of forest reservation. Some qualitative assessment is possible. For instance, the tourism and recreation opportunity costs are likely to be small because of the availability of substitute areas. Similarly, the grazing costs will be minimal because of the low density of grazing that can be undertaken in such forest areas.
This report is structured in three parts. In the first part, a “constant value” TVA is outlined. This is the basic form of a TVA under which the foregone extractive benefits of the forest areas being considered for reservation are estimated. Within this part of the paper, the fundamental principles underpinning the TVA are explained in brief.
In the second part of this paper, a “dynamic value” TVA is presented. While based on the fundamentals of the “constant value” TVA, the dynamic value version takes into account the potential for the streams of benefits from forest protection and forest extraction to change asymmetrically over time. The second part therefore begins with an explanation of these differential rates of change over time and a description of the model that incorporates them into a TVA. This is followed by the application of the model to the case at hand. Some benefit transfer results are included in section 3 in order to place the threshold values into some “order of magnitude” perspective.
22 Feb 2010