CLASS 10. ACE, ECONOMIC
IMPACTS, AND FOREST
DEPENDENCY
MARCH 7, 2013
ALLOWABLE CUT EFFECT (ACE)
• The Allowable Cut
Effect exists where
there are
regulations or
policies that
constrain harvest
levels
• Examples in BC are
the metering out of
old growth timber
(key for it to work)
• Improvements in
growth and yield
are spread out over
the entire rotation
• Conversely losses in
timber are also
spread out
(regardless of
whether or not timber
was close to
harvesting age)
USING ACE AS AN INCENTIVE
A New Silviculture Framework for British Columbia:
Options and Recommendations Report
Prepared by
Resource Practices Branch
Ministry of Forests, Lands and Natural Resource Operations
May, 2011
EFFECT OF ACE
Standard CBA
Effect of ACE
• Cost of improving the
stand -$1000 per hectare
• Result-doubling of growth
(an additional 995 cubic
metres)
• Standard cost-benefit:
• If you can take additional
volume over the 58
years… ($13,187/58)
• Discounted Benefit:
$13,187/1.0558=$778
• Cost: $1000
• So NPV =-$222
• Then it looks quite different
• Using a formula-the
present value of a finite
annuity
• Result with ACE
• Discounted benefit =
($13,187/58)*((1.05)581)/.05*(1.05)58 = $4,546
• Same cost but NPV=$3,546
EXPERIENCE WITH ACE
ASSESSING ECONOMIC IMPACTS
• Whether for planning or cost benefit analysis we are
interested in the economic impacts that flow from
different decisions
• We can use Input-Output models that show the income
an output relationship between different sectors of the
economy
• This then allows us to determine the economic impacts
that follow from an event such as
• Change in harvest level,
• Construction (or closure) of a sawmill or pulp mill
• or a project (such as improving infrastructure/road access)
• Often interested in impact on output, employment,
government revenues, or GDP
BASIC ECONOMY
• Remember how the economy works from Econ
100?
http://economics.about.com/od/economics-basics/ss/TheCircular-Flow-Model.htm
INPUT/OUTPUT MODELS OF ECONOMY
• Can use purchases and transactions in economy to
develop simplified models that identify relationships
between sectors
• These input-output models break out these income
flows by different sectors and commodities
• These can be used to identify the potential impact
of one event on a sector in a regional economy
and the change in value-added and income
earned by primary factors of production
DIRECT AND SECONDARY IMPACTS
• Direct impacts are associated with the initial
change
• The secondary impacts follow as those changes
work their way through the economy
• When a sector expands (contracts) it will buy more
(less) from the either sectors
• In turn those other sectors will also buy more (less)
• The process keeps repeating itself into a new
equilibrium is reached
BUILDING BLOCK
These numbers represent how much of an input is required from
each sector to produce output from that sector
So for B to produce $1 of output, it needs to
purchase 5 ½ ($.055) cents of inputs from sector C;
And households (labour) contribute $0.283 for every
$1
DERIVING THE COMBINED EFFECT
• For $1 change in output of sector A results in a $0.185 change in output
for sector B and so on…by the time the new equilibrium is reached, the
overall impact from an increase in output by A for $1 for the overall
economy will be $1.985
• Different multipliers reflect assumptions about how household income is
treated, in-migration of resources, etc.
BC MULTIPLIERS
• Can be used to derive:
•
•
•
•
Changes in overall output
Employment
GDP
Government revenue
• Application can be tricky
BC MULTIPLIERS
EXAMPLE (FROM HORNE 2008)
IMPACT ON DIRECT OUTPUT
• Coefficient
shows 2.89
jobs per
million$; so
dividing
number of
jobs by direct
multiplier then
shows
decrease in
output
TOTAL EMPLOYMENT IMPACT
• So now look
at direct and
indirect + SN
induced
• SN=safety
net, and
induced
counts effect
from
spending by
households
AND THEN EFFECT ON GDP…
• Again
use
direct
and own
indirect
and
induced
• Note
that
overall
impact
is
summe
d up for
all
three
sectors
AND GOVERNMENT REVENUES…
BC STATS
Products and Paper Products sectors are displayed in Tables 7, 8, 9 and 10 where,
again, 2004 figures from Appendix B are displayed for comparison purposes.
Table 7 – Government Revenue Multipliers: Wood Products Sector excluding fibre
inputs – No Safety Net
Federal
Provincial
Municipal
Direct
Indirect
Induced
Direct
Indirect
Induced
Direct
Indirect
Induced
2004
.040
.039
.027
.023
.027
.028
.003
.005
.005
2004A
.040
.013
.017
.023
.009
.018
.003
.002
.003
Table 8 – Government Revenue Multipliers: Wood Products Sector excluding fibre
inputs – With Safety Net
Federal
Provincial
Municipal
Direct
Indirect
Induced
Direct
Indirect
Induced
Direct
Indirect
Induced
2004
.037
.035
.014
.022
.025
.014
.003
.005
.003
2004A
.037
.011
.009
.022
.008
.009
.003
.002
.002
Table 9 – Government Revenue Multipliers: Paper Products Sector excluding fibre
inputs – No Safety Net
Federal
Provincial
Municipal
IMPORTANT ASSUMPTIONS
•
•
•
•
•
Perfectly elastic supply of inputs
All resources fully utilized (at capacity)
Quantities (technical coefficients) fixed
So Marginal equals average
Static, not dynamic
I/O APPLICATIONS TO CBA
(OR UTILIZING ECONOMIC IMPACTS FROM INPUT-OUTPUT MODELS AND
OTHER SOURCES IN COST-BENEFIT ANALYSIS)
• Tempting to utilize Value-Added as measure of benefit
• But important to realize that those are payments to
factors of production
• So this is the opportunity cost of utilizing them (since they
were employed already)
• So net benefit could be zero
• But where resources are under-utilized or immobile there could
be a net benefit
• So under utilized timber resource could earn a residual return that
would count as a net benefit
• Or if workers were underemployed or unemployed then the
increase in wages would count as a benefit
• Although this is considered more problematic in the long-term
ADDITIONAL FACTORS TO CONSIDER
IN CBA
• Mobile resources (both workers and capital coming
into region)
• Economies of scale
• Forward linkages aren’t quantified
FOREST DEPENDENT COMMUNITIES
Mill closures—permanent (total number of mills closed) and
indefinite (total number of workers laid off) by province, between
January 2003 and December 2009:
•
•
full mill closure jobs lost
•
Alberta
12
1 722
•
British Columbia
75
13 927
•
Manitoba
1
190
•
New Brunswick
17
3 211
•
Newfoundland
3
1 086
•
Nova Scotia
3
550
•
Ontario
52
10 855
•
PEI
1
36
•
Quebec
94
14 550
•
Saskatchewan
11
1 668
•
Total
269
47 795
But had recovered by 32,000 as of Fall 2012
http://www.fpac.ca/index.p
hp/en/economicbackbone/
2006 Economic Dependency Tables for Forest Districts
Table 1 – 2006 Employment Estimates by Sector
2006 Economic Dependency Tables
for Forest Districts
DATE: February 2009
Garry Horne
Campbell River
Chilliwack
North Coast
North Island Central Coast
Haida Gwaii
South Island
Squamish
Sunshine Coast
Fort Nelson
Fort St. James
Kalum
Mackenzie
Nadina
Peace
Forestry
Mining &
Min Proc
Fish &
Trapping
Agric. &
Food
Tourism
High
Tech
Public
Sector
Const
Other
Non Basic
Total
5,551
1,163
1,422
1,586
6,172
193
13,279
3,721
1,626
12,296
47,011
16%
3%
4%
5%
18%
1%
38%
11%
5%
36,411
13,064
6,603
39,878
91,241
62,511
301,571
94,377
205,856
449,071
1,300,581
4%
2%
1%
5%
11%
7%
35%
11%
24%
340
106
1,740
164
1,060
14
2,244
305
523
1,414
7,910
5%
2%
27%
3%
16%
0%
35%
5%
8%
1,618
55
1,007
168
948
59
2,192
369
203
1,157
7,778
24%
1%
15%
3%
14%
1%
33%
6%
3%
354
20
297
17
488
25
891
141
83
455
2,772
15%
1%
13%
1%
21%
1%
38%
6%
4%
14,662
2,144
3,464
5,808
35,468
8,424
107,332
27,871
22,153
93,408
320,733
6%
1%
2%
3%
16%
4%
47%
12%
10%
824
208
62
361
7,559
837
6,598
3,057
1,593
4,844
25,943
4%
1%
0%
2%
36%
4%
31%
14%
8%
3,536
471
894
612
2,503
334
6,323
3,114
1,418
6,780
25,986
18%
2%
5%
3%
13%
2%
33%
16%
7%
802
826
1
33
502
0
679
165
306
616
3,930
24%
25%
0%
1%
15%
0%
20%
5%
9%
839
13
0
51
100
0
625
39
51
147
1,865
49%
1%
0%
3%
6%
0%
36%
2%
3%
1,963
2,400
320
129
1,455
29
4,835
1,021
492
3,360
16,004
16%
19%
3%
1%
12%
0%
38%
8%
4%
1,821
0
0
11
197
6
461
32
75
266
2,867
70%
0%
0%
0%
8%
0%
18%
1%
3%
2,167
139
1
254
507
2
1,379
230
71
921
5,671
46%
3%
0%
5%
11%
0%
29%
5%
1%
2,580
7,728
49
1,845
3,003
57
6,436
3,366
2,187
7,947
35,200
9%
28%
0%
7%
11%
0%
24%
12%
8%
• Emphasis on
economic
dependence
ignores other
aspects
• Aboriginal
communities
• Tourism not wellrepresented
ed by [The University of British Columbia] at 07:26 07 March 2013
BROADER VIEW
From Beckley 2008