webb 2016 Poster Wibe Prize

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The fundamental lynchpin of forest economics has been the venerable Faustmann formulation, which has been used to answer all manner of questions regarding the management of forest stands. In fact, 6 of the 43 articles published in the 2014 and 2015 issues of the Journal utilized the Faustmann equation for their analysis, and has continually been the most common starting point for answering management questions. And still, there are new areas of analysis to explore. As the questions that forest economist’s deal with become more complex, the old stalwart has shown remarkable resilience in its ability to provide theoretically sound and fundamentally useful results. The rising concern regarding the role of forests in the storage of carbon and its impact on climate change provides the latest opportunity to test the limits of this approach

In this paper by Hoel et al., we are provided a systematic, simple, and comprehensive analysis of climate issues using the well established and theoretically sound Faustmann framework. While keeping the analysis very general and tractable, it covers the key features of forest growth and the carbon cycle. The inclusion of the social cost of carbon and the consideration of the case of negative commercial profit from harvesting are interesting and useful. The paper covers a wide range of issues related to forest growth and carbon storage and emissions and analyzes the effects of all these factors on optimal forest rotation. The framework provides a good starting point for empirical work for alternative policy scenarios.

The authors present an adjusted Faustmann Rule for optimal harvest of a forest when there is a social cost of carbon emissions. The theoretical framework takes account of the dynamics and interactions of forests’ multiple carbon pools and assumes an infinite time horizon. This effort provides a theoretical foundation for numerical model studies that have found that a social cost of carbon should imply a longer optimal rotation periods and that if the social cost of carbon exceeds a certain threshold value the forest should not be harvested. The work establishes that the rotation age lengthens with increasing social costs of carbon, but the amount of timber used for building material shortens the rotation age, and, depending on the parameters, the use of bioenergy wood may shorten or lengthen the optimal rotation age. At the same time, there could be a net social benefit from harvesting even if the commercial profit from harvest is negative. If that is the case, the optimal harvest age is decreasing in the social cost of carbon.

The 2016 Prize Selection Committee comprised of: Shashi Kant, Markku Ollikainen and David Newman (chair).