| The South-East Forests: Cost-Benefit Analysis |
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Done by Resource Assessment Commission (RAC)
Quantified Unquantified Calculating benefit-to-cost ratio
The RAC undertook a cost benefit analysis because it recognised the importance of externalities which would not have been included in a conventional financial appraisal of logging operations in the area. For example, if logging went ahead in these areas, the loss of national estate forests, although important to many people, would not appear in the account books of the logging contractors, Harris-Daishowa, nor of the forest management authorities. Similarly, if logging did not go ahead, those account books would show some of the costs; but not the social costs associated with the unemployment that might be caused. The RAC assumed that old-growth logs (as opposed to those that come from trees grown in areas that have already been logged) would not be available after the year 2012 in the Eden area and after the year 2040 in the East Gippsland area, whether or not the estate areas were preserved. If estate areas were logged, this would mean that the forestry industry would get more logs each year until the old-growth areas ran out. It estimated that total sawlog stocks would be reduced by 17 per cent and pulpwood stocks would be reduced by 15 per cent if the area was preserved. In order to work out the cost to Australians of not getting those logs in the estate areas, the RAC used market prices for the final products (sawn timber and woodchips) but deducted the cost of processing those products and the amount of money sent to Harris-Daishowa in Japan. The estimation of market prices in the future was not easy because of the rising and falling prices of woodchips on the world market. The RAC considered there would be gains and losses for recreation and tourism from preserving the estate areas. Some people would want to visit the area for bush-walking, bird-watching and to enjoy the natural beauty if it was unlogged. Others would visit the area if it was logged and opened up with access roads, for activities such as four-wheel driving and trail-bike riding. To work out what these recreational values were worth, the RAC undertook a survey of travel costs of those visiting the area (described in next section). Preservation of the natural environment The RAC recognised the preservation values of the forest, including its role in maintaining biodiversity, providing material for scientific research and maintaining water quality, preventing soil erosion, supplying wind control, and providing wildlife corridors and habitats for rare and endangered species. They also mentioned wilderness value, and aesthetic and spiritual values. The RAC claimed that logging would impact on the environment and reduce these values in various ways, including the construction and maintenance of roads, the removal of trees, controlled burning, and various management techniques for encouraging regrowth. The RAC attempted to value the natural environment using a contingent valuation study which is described on the next screen. The RAC estimated that preservation of the estate areas would result in the loss of 110 jobs directly involved in forestry operations, and that half of these people would not find other jobs quickly and would be unemployed for an average of three years. This would entail a direct economic cost covering unemployment benefits and lost tax revenue totalling $400 per week for fifty-five people. The social costs of unemployment are more difficult to quantify; the RAC argues that it is not possible to place a dollar value on them. They include, according to the RAC, ‘increased risk of domestic violence, drug and alcohol dependency, crime and indebtedness, loss of self-esteem, community dislocation and family difficulties’. It should be noted that environmentalists dispute the assumption that fifty-five people will be unemployed for a long time if logging were prohibited in these areas. They argue that the regional economy is strong and diverse, that only a very small proportion (6 per cent) of jobs come directly from logging hardwood timbers, and that employment growth in the area would take up any slack that might be created by preservation of areas (Formby 1991). Calculating benefit-to-cost ratio The RAC used a discount rate of 7 per cent for its cost benefit analysis. This discount rate was used, even though it recognised that discounting may not be totally appropriate for environmental benefits and that the real value of environmental benefits was likely to increase over time compared with the value of timber and woodchips. It did its analysis over forty-nine years to the year 2040, arguing that ‘in an economic analysis it makes little sense to look beyond a horizon of around 40 years because the use of discount rates, even low ones, means that any subsequent costs and benefits have very low present values’ (1991, p. 20). Using this discount rate, and initially ignoring the environmental benefits and social costs of unemployment, the RAC found that preserving the national estate forests would have a net cost of $11 million in present-day money values. If the discount rate was increased to 10 per cent, the cost became $8.8 million; and if it was reduced to 4 per cent, the cost became $14.7 million. The RAC also tried varying some of its other assumptions to see what difference they would make to the outcome. When it varied the assumptions to favour preservation (less long-term unemployment, lower prices for logs, and higher costs of processing) the net cost of preservation was reduced to $2.9 million (at 7 per cent discount rate). When the RAC altered its assumptions in favour of logging, the costs increased to $19.7 million. To cover the social costs of unemployment, the RAC costed a government funded compensation package for retrenched workers that would provide seed funding for new industries in the area and relocation subsidies for displaced workers. This was estimated to cost $40 million over three years for 110 workers, and would cover the economic and social costs of unemployment. Using these figures, the RAC worked out that environmental benefits would have to amount to at least $43 million for preservation to be worthwhile. If every adult in NSW and Victoria were willing to pay at least $6.05 once off to save the area, this would ensure that benefits outweighed costs. This amount would be much less if it was a yearly payment. |
Costs
and Benefits
© 2001 Sharon Beder