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Tuesday, July 18, 2006

Correcting Market Failure in Timber Markets

This is from Tim Haab at Environmental Economics:

How to lengthen timber rotations, by Tim Haab: Since the mid-1800's economists have understood that a private owner of a stand of trees will harvest the trees when the future returns to leaving the trees in the ground (to grow) dip below the returns that could be earned by cutting the trees. But, if the trees provide external--social--benefits beyond those captured in the private market, like for example storing carbon, then the private owner of the trees must be given the monetary incentive to incorporate these benefits. Otherwise, the private benefits and the social benefits will not be the same and the trees will be cut too soon. That's exactly the premise behind Forest Protocols program of the California Climate Action Registry. As the AP explains it (via ENN.com):

The nonprofit California Climate Action Registry was set up by the state six years ago to encourage corporations and government agencies to track, and ultimately reduce, their emissions. The Forest Protocols program will allow environmentally minded citizens to pay to preserve enough trees to offset their personal carbon emissions.

The registry has calculated how much the timber industry loses by allowing trees to grow longer and bigger -- past the time they are normally harvested. The industry would then be compensated by other companies that buy carbon credits -- or shares of the trees -- to offset their carbon emissions.

Foresters will be paid to lengthen the rotation period.

I'm starting to become a big fan of these offset programs. One of the major problems with markets is that it is difficult to for multiple individuals to convey social costs (or benefits) imposed by the actors in a market without government organization. But private, nonprofit groups provide just such a means without the government bureaucracy.

While these groups help to solve the coordination problem, participation is voluntary so they don't solve the free-riding problem. I have no incentive to participate in carbon emissions reduction-- either through contributing to an offset program or through changing my behavior. But if the government did decide to mandate my carbon reductions, I would much rather have the choice to pay someone else to do it for me rather than just be forced to change my own behavior. I'm not saying I wouldn't change my behavior, I'm just saying I want the choice. I like more choices...most of the time.

    Posted by on Tuesday, July 18, 2006 at 04:03 PM in Economics, Environment, Market Failure | Permalink  TrackBack (0)  Comments (18)


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