Issues impacting the sustainability of family forest ownership and the functioning of working forests :
What we know and don't know.

Bruce Lippke
Rural Technology Initiative
College of Forest Resources, University of Washington
August 22, 2001 (review draft)

Summary:
There have been substantial changes in forest management practices and ownership over the last decade driven largely by the economic impacts resulting from changing regulations and social pressures. Many of the impacts like land conversion, accelerated harvests, shorter rotations, and liquidation of older forests, are counterproductive to the intent of the regulations and the publics concerns. A better understanding of what causes these consequences and what might be done to sustain working forests and rural communities is needed. A review of many studies suggests there are a number of gaps that should be filled for an effective program to motivate sustained management practices that will produce desired future conditions in rural communities.

• Small owner case studies are being used to characterize the many economic problems created by regulations as well as how alternative forest management and road plans can better serve both small owner and public interests. More such studies are needed in order to learn how to avoid unintended consequences across diverse site conditions. (see 2.1-2.6 & 3.1-3.5)
  
  
• Habitat suitability and in-stream functionality models need to be developed and calibrated with local data in order to identify best management practices that can be sustained. These efforts are just beginning and will need continued support for some time including periodic re-sampling of populations in upland and riparian monitoring areas. (see 2.7 & 3.3-3.5)
  
  
• The complexity of determining how to meet regulatory requirements prohibits many owners from achieving best practices, suggesting the development of more programmatic approaches such as pre-approved county level multi-owner Habitat Conservation Plans (HCPs) that are designed to produce desired future conditions. (see 2.1-2.3 & 3.1)
  
  
• Regulating practices that increase costs to owners while enhancing public values will produce unintended consequences until we learn how to provide incentives with the cash flow to motivate and sustain best management practices. (see 2.7-2.8 & 3.7-3.9)
  
  
• Training and technical assistance are essential elements in developing better management practices but are unlikely to receive adequate support given budget curtailments. (see 2.1 & 3.3-3.5 )
  
  
• For a more detailed list of gaps and needs see 4.0.

1.0 Introduction
Management of forestland in the Pacific Northwest has changed substantially over the last decade as a consequence of public pressures and regulations to manage for non-timber objectives. New technologies are also emerging that take advantage of our evolving understanding of the science of forest growth and habitat management. There are concerns that small owners will not be able to adjust to these changes with out negative economic and environmental consequences. This summary will identify a number of issues impacting family forest ownership and management. It will then review some of studies that have been completed to help understand these issues and their impacts. Finally, important gaps in the analyses will be identified.

The magnitude of the problem is evident in even macro-economic data. The ratio of personal income between Washington's urban and rural timber communities has increased from 1.4 to 2.4, a 66% increase in less than two decades. The number of lumber mills has declined substantially and the unemployment difference between timber dependent and urban counties remains high. Current harvest levels are more than 30% below those believed to be sustainable a decade ago (Lippke et al 2000b). These are but symptoms of the accumulating problems in the forest sector that put at risk family forest ownership and management. The impact of regulations has been a large contributor resulting in substantially increased costs by landowners at little or no cost to the public for the benefits they have received.

• Revenue losses from regulatory constraints on harvest and thinning
• Increased reporting costs
• Increased planning requirements and related costs
• Increased administrative costs


• Increased harvest costs associated with changing regulations
  higher costs from fragmented sites
  higher costs from reduced volume per site
• Reduced interest in owning forestland for other values (habitat, aesthetics, family legacy, privacy) given the increased complexity and cost
• Cost of road planning requirements
• Cost of road upgrades
• Cost and risk of developing alternative plans that are allowed under the regulations

2.2 Regulatory risks:

• Changing regulations have decreased the asset values anticipated from investments made as much as 50 years earlier increasing the risk premium required by prudent investors (decreasing rather than increasing the value of sustainable management).
  
  
• Absence of any protection from additional regulatory changes and asset takings (with the possible exception of a costly and uncertain negotiation to obtain a habitat conservation plan (HCP)).

2.3 Reduction in conservation easement values:

• The affect of current regulations on land and timber value is to reduce the "basis value" of land and timber substantially thereby reducing the value potential for conservation easement alternatives, i.e. the regulatory approach devalues land and timber rather than raising the value to reflect societies increased demand.

2.4 Taxation:

• Investing in timber management with no return for many decades inherently results in a higher effective tax rate paid on capitalized investments (i.e. private timber investments pay a higher effective tax rate than agriculture or other shorter term investment alternatives).



• The yield tax can eliminate this tax bias at the state level when substituted for property taxes but is otherwise a double tax (i.e. paying a tax on the value of the crop, i.e. the inventory, as well as on the lands ability to produce revenue based on its profit potential taxes the revenue stream twice).



• Property taxes are not being reduced as a result of increased regulatory costs and asset takings producing much lower and sometimes negative "bare land values" for many cases (negative motivation to continue managing the land in forests).

2.5 Cash flow management constraints:

• Small owners experience long periods of negative cash flow with few opportunities for inflows. Constraints affecting harvesting and thinning magnify this problem. The long lag from investment in regeneration to cash inflow can be many decades.



• New road and other planning costs increase the cash flow requirements even though inflow opportunities have been reduced.



• Small owners express a desire to keep their land forever yet the turnover is substantial often driven by the need for cash. Any number of sources of cash flow (carbon credits, development rights, habitat incentives, or reduced estate taxes), could provide the motivation for sustained management.

2.6 Fire protection:

• Cost of fires and fire protection are increasing yet the priority for protecting small owners assets would appear to be very low, a disparity in costs and benefits



• State, federal, and private cooperation on fire protection has eroded along with the increasing levels of distrust

2.7 Increasing social pressures and values expected by the public from forestland:

• In spite of the publics increasing interest in forest values for recreation, habitat, clean water and air, aesthetics and wood products in conjunction with the value of sustaining rural jobs, the publics actions have reduced timberland values with no compensation for any of the new values desired by the public (the Forest and Fish agreement's riparian easement program to partially compensate owners for lost assets reduces but does not reverse the negative impact).



• Public media mis-information on who produces these benefits, who benefits and who pays is a major disincentive for managing land in forests



• While the public demands for social benefits (social values) has been increasing, the publics accountability in preventing trespass, dumping, etc appears to be declining resulting in increasing owner liability.

2.8 Increasing attractiveness of alternative investments:

• Rates of return on other securities have increased


• Rates of return from other wood supply regions have increased


• Rates of return from land conversions have increased


• Urban encroachment is increasing with development subsidized by not paying the full cost of roads, schools, utilities, other needed infrastructure, and habitat protection /restoration

3.0 Recent studies on these issues and their impacts

It is difficult to rank these issues by their impact and may even be difficult to understand the complex nature of the impacts. However, many impact studies have been completed and at least some are reviewed here. This is not the product of a literature search so many useful studies may have been omitted.

3.1 Economic Impact Assessments:

• UW faculties have conducted a number of economic impact studies in response to requests from state regulators, non-industrial owners and trust beneficiaries. These studies have demonstrated the economic impacts and environmental tradeoffs from regulations affecting management at the state level (Adams et al 1992, Conway 1994, Bare et al 1995, Lippke et al 1999, Perez-Garcia et al 2000), at the regional and county level (Lippke and Conway 1994, Lippke et al 2000a), for the state managed lands (Bare et al 1996, Bare et al 1997) and for a number of case studies covering individual landowners (Zobrist and Lippke 2001). These studies demonstrate a wide range of economic impacts across owners, and for small owners the potential for substantial mitigation of the regulatory costs under the state's riparian easement program albeit still with a high cost impact and loss of flexibility in meeting ownership objectives. The studies also demonstrate that alternative management strategies exist that could lower the cost for the same economic benefit but that these strategies require different incentives than possible under current regulations.



• Estimates of road upgrade and stream crossing costs for small owners as required by new regulations are also substantial suggesting additional costs of as much as $375 million may be required over the next few years (Perez-Garcia et al 2000, Lippke and Edelson 2001). These upgrade requirements cover a broad spectrum of situations, some important and some with minimal environmental impact, suggesting that the cost could be much lower if site specific criteria were considered.



• The cost of developing HCP's for small owners to incorporate more site specific information is generally prohibitive based on the substantial planning and analysis and negotiating efforts required in prior HCP's. The potential for a family farm programmatic HCP approach provides a major opportunity, if the funds for the planning effort can be arranged. Federal funding has been made available for a pilot project in Lewis County.



• Much of the declining competitiveness of small owners can be traced to regulatory changes. Lippke and Bare (1997) characterized the economic impact of regulatory costs on small owner economics and looked at small owner survey information to identify the most important factors. They also characterized changes in the motivation to harvest early rather than later. Other studies have shown how the changing regulatory impacts are an important element in the regions declining competitiveness in world markets (Lippke et al. 2000b). The closure of many mills partially related to the decline in federal harvest has also reduced the number of mills competing for larger diameter higher quality wood thereby lowering the price and reducing the motivation to manage for longer rotations and higher quality wood. Imports have increased while production in and exports from the Northwest have declined.
  


• There are many situations in which the increased regulatory costs drive the bare land value negative, a high incentive to convert to other uses of the land (Zobrist and Lippke 2001, Lippke and Bare 1997). The fact that small owners are motivated by more objectives than timber revenue has generally resulted in management practices more supportive of biodiversity than large-owner commercial practices. But, owners are still known to be very sensitive to their ability to derive cash when needed with a reasonable rate of return on their investments, and their motivation to sustain their lands in timber will changing rates of return. Zobrist and Lippke (2001) analyzed the economic impacts of the Forest and Fish Rules using a number of small owner case studies. These case studies show that while the process is very complex, most owners can mitigate much of their timber losses using Washington State's riparian easement program. However their bare land values are substantially lower and in many cases negative suggesting increasing land sales and conversions. Costs are so variable that many more case studies are needed to fully understand the impacts of changing regulations and new management practices.

3.2 Development trends:

Urbanizing forested areas is a continuing trend and the rate of urbanization appears to be accelerating. Lester DeCoster described the process under which less land is maintained as forestland at the Forest Fragmentation Conference (2000). Development and fragmentation of forests are increasing faster than population. The extent to which development costs are not paid by developers yet habitat protection costs are paid by forestowners, increases the attractiveness of conversions. Washington State has been losing at least 100 acres a day (56 square miles a year) of forestland to non-forest use for the last ten years (WA DNR 1998).

3.3 Sustaining habitat (and endangered species) across the landscape:

As a consequence of the listing of the northern spotted owl, the Washington Forest Landscape Management Project (Carey et al 1996), a federally funded project carried out by a large multidisciplinary team of scientists, focused on how to manage forests to restore more old-forest functionality. With recognition that forests are dynamic and that reserve areas (with no-management) are not by themselves sustainable given the natural risks such as fire, windstorms, disease, and geological changes, the emphasis was on a broader mix of management treatments that could restore more old forest functionality at lower cost. The study summarized in Carey et al. (1999) developed management treatments that produced and sustained more old forest functionality, thereby restoring some of the biodiversity loss resulting from commercial practices, but at a substantial revenue loss to the landowner (20-30% or more). The more effective strategies involved periodic thinning with longer rotations while producing higher quality wood. The greater labor intensity associated with the treatments and the production of higher quality wood contributed to a more stable long-term job base. The study set new benchmarks for quantifying forest diversity and habitat as well as economic impacts. Many subsequent studies have been modeled after this study including the impact of Habitat Conservation Plans and changing regulations.

3.4 Habitat impacts from intensive management:

The WFLMP study unfortunately focused largely on old-growth functionality and did not look at the contributions to habitat that might be achieved by treatments designed to improve habitat in younger intensively managed forests. Studies commissioned by TFW/CMER have shown fairly stable wildlife populations under various treatment options (Aubry et al 1997, Hallet et al 1997, O'Connell et al 2000) suggesting the potential to sustain many habitats in working forests with shorter rotations on much of the land thereby substantially lowering overall costs. Habitat linkages are currently being developing for managed younger forests similarly to that developed for the Washington Forest Landscape Management project based on the most recent wildlife population studies, most of which were funded by CMER. The objective is to be able to project habitat and economic impacts over time to support better management strategies.

3.5 Instream impacts of management:

Neither the WFLMP study or TFW/CMER studies produced an adequate set of instream functionality measures for the protection of salmon although the theoretical foundations for such were developed (Reeves et al 1996). CMER is in the process of funding a number of basic science studies that are focused on better understanding instream functionality. Impact models are being developed for shade, particulate matter and other instream functions that are sensitive to management alternatives so that the impact of management alternatives on both instream functions and economics can be analyzed.

3.6 Cumulative impacts:

The Forest Inventory and Analysis (FIA data) collected by USFS once every ten years and analyzed for future timber supply and forest conditions has over the last several decades provided the basis for a cumulative assessment of timber and habitat conditions across owner groups (Adams et al 1992, Bare et al, 1994, Lippke et al. 1999). There is however no plan to provide such an analysis using the FIA data now being collected, the first new data in ten years. The environmental constraints imposed since the last analyses provide a constraint overlay to the inventory information as it impacts both timber available for harvest and habitat. The technology now exists to use GIS data calibrated with the FIA data for an improved measure of the forest inventory, stand conditions and habitat. By associating each stand with the most appropriate stand management plan and growth model, much more credible projections of timber availability and habitat are possible. Without such an analysis, assessments of timber availability and changing habitat conditions are likely to remain local and incomplete. Without developing a comprehensive analysis of future forest conditions related to current inventories and management plans, there can be no comprehensive assessment as to the ultimate impact of current policies.

3.7 Valuation of Benefits vs. Costs

• Much of the pressure to manage forests for non-timber outputs derives from the desires of urban interests. Contingent Valuation (CV) methods make use of carefully designed and administered surveys to elicit non-market values from individuals. This method produces information useful in the calculation of benefits that forest landowners produced which other publics enjoy but for which no market has been developed to directly determine what people would be willing to pay for those benefits. The contingent valuation technique constructs an experiment in which an opportunity is created to pay for environmental goods. The good in question may be the maintenance of aesthetics, community jobs, biodiversity, and or fish bearing habitat for which no market transaction data exists. While there have been many objections to contingent valuation methods, the method has been employed for the past 30 years with much improvement over the last ten years, many of which deal with early objections. A panel of economic experts was assembled in 1992 to determine whether the methods could produce legally valid estimates of non-market values for environmental goods related to the Valdez oil spill. Their recommendations produced guidelines for survey development to assure reliability and usefulness of the information that is obtained.



• A UW thesis project using CV methods developed statistically significant monetary values (willingness to pay) that urban and rural populations place on aesthetics, job losses, and biodiversity, each being directly and measurably impacted by forest management (Xu 1997). Comparing these values showed that increasing the active management to partially restore old forest habitat with better aesthetics and biodiversity produced a greater increase in public values than private costs, offering the potential to compensate landowners for their costs while producing a higher overall net social benefit. Current regulatory approaches appear to increase costs more than benefits since they do not offer any incentive compensation as motivation to manage for social objectives. Urban publics place much higher value on aesthetics than on biodiversity or habitat. Incentive methods such as compensating landowners to produce non-timber values have long been favored by economists to achieve social goals since they have the potential to provide greater efficiency with fewer inequities. Adopting incentive methods to motivate forest management holds promise where they can achieve the same objective as environmental regulations.



• As a part of the Small Business Economic Impact Statement an attempt was made to determine the public's willingness to pay for restoring fish populations (Perez-Garcia 2001, Layton et al 1999). Fish populations are being affected by many factors including hatcheries, fishing, ocean conditions, climate change, dams, urbanization, and agriculture, with the impact of forests likely being less than the impact of other sources (USEPA 1990). These studies are not sufficient to allocate a portion of any one of these sources to a measurable impact on fish populations as was made clear by Perez-Garcia (2001). It is not currently possible to assess whether managing forest or agriculture riparian zones will so directly affect fish populations that one can use the publics willingness to pay for fish recovery to demonstrate the magnitude of the benefits from forest management over costs. Nevertheless, the regulatory agency's need to determine if benefits are greater than costs resulted in their presumption that cause and effect exists in order to demonstrate a positive benefit to cost relationship for new regulations. More analysis is needed to validate such a conjecture. However, establishing the public's willingness to pay for forest habitat restoration, aesthetics and job losses can and has been assessed directly, providing a direct tradeoff between cost and the production of a number of amenities that are directly controlled by forest management (Lippke et all 1999b). Inherently this procedure already includes the public's estimate of the value they place on the contribution of forest management to fish habitat and aesthetics. It produces estimates that the public should be paying for the values they receive from management alternatives that induce substantial costs on small owners. More studies along this line would be useful to determine the robustness of these findings.



• The state's riparian easement program might be more effective if converted to an incentive program to manage for multiple values, i.e. more public values including species protection could be purchased for the same cost as the easement.

3.8 Carbon credit markets:

Carbon credit markets are developing slowly under voluntary systems and offer the potential for increased compensation to landowners. Management alternatives that store more carbon in the forest can be complementary to other habitat objectives. However, alternatives that reduce harvest to create habitat will likely induce product substitution by fossil intensive products thereby causing more carbon emissions than sequestration. The Consortium for Research on Renewable Industrial Materials (CORRIM - a national consortium of research institutions) is working to develop valid carbon accounting systems that could support a carbon credit market system. CORRIM developed a thorough research protocol for environmental performance accounting (CORRIM 1998) and will soon publish and interim report on their first phase of research.

3.9 Certification systems:

The requirement to certify management to the same third party standards as are being used for larger owners will be cost prohibitive for small owners. Certification, HCPs regulatory minimums and conservation easements all seek to address similar social concerns. Small owners will be penalized for not being able to respond to theses options until these system come together such that meeting the regulation is equivalent to an HCP and certification. Small owners should not have to respond to multiple regulators and special interest reviewers. Meeting the regulations should offer the protection of an HCP and the marketing benefits of certification. Developing the subtle differences between these labeling systems and bringing them to a common denominator could substantially level the playing field for small landowners.

4.0 Summary of what's still needed:

Increased costs have been most pronounced on a subset of small owners, especially those with a high percentage of their land in riparian zones. Increased costs encourage land conversions and discourage investments in management contrary to the intent of the regulations. The public beneficiaries are willing to pay for many of the benefits they are receiving but under the current regulatory structure are not contributing, producing significant inequities (Lippke et. al, 1999b). Some of the areas needing further work are identified below.

• The wide disparity of regulatory impacts across small owners requires a large sample of case in order to comprehend the full impact of the regulations and potential alternative plans on habitat and landowner economics. The interpretation of the rules is just now stabilizing making this practical.



• Road upgrade costs are large and procedures to avoid spending enormous sums on situations of low priority improvements are needed. There may also need to be compensation to support road upgrades, as there will be insufficient cash flow to support these improvements. A number of road upgrade case studies are probably required in order to determine how to develop priority sensitive procedures and justification for compensation.



• Other regulations including the Growth Management Act, County and Municipal regulations and covenants also need to be quantified and analyzed with respect to their impact on NIPF sustainability.



• Upland habitat suitability models have been linked to the Landscape Management System (LMS) and other GIS and stand structure growth projection systems to project future habitat conditions. As updated habitat suitability models based on more recent data become available, they can easily be included to demonstrate the impact of management on habitat. Regulators should become familiar with such projection oriented systems so that site specific plans can be developed providing better habitat protection at lower cost. Improvements over current regulations should be sufficient justification for alternative plans. Alternatively, if current regulations offer more habitats than historic conditions, the base for comparison should be relaxed to historic conditions.



• Riparian zone habitat models need to be completed based on the recent CMER population studies and reviewed in order to provide the same capability as has been developed for upland habitat suitability models.



• In-stream function models need to be completed based on a range of available sources to provide a similar capability.



• Completion of habitat suitability for uplands, the riparian zone and instream functions should become the basis for adaptive management changes to and under the regulations hence validating habitat modeling should become an integral part of the evaluation monitoring process.



• The complexity of alternative planning will inhibit many owners from taking on the task. Family farm programmatic HCPs may offer a better planning model with lower costs. The Lewis County programmatic HCP will provide a pilot test for such a capability if supported by a thorough analysis.



• While the desired future condition (DFC) in the Forest and Fish Rules has been defined as a simple average, in reality the sample had a larger variance across all parameters used to describe the stand conditions. So long as alternative plans are not statistically different from the historic distribution there is no basis to consider the plans inferior, offering landowners greater ability to customize their plans. A procedure should be developed to allow leaving more of some amenities of importance and less of others since no one site can ever provide everything. Similarly, developing the historic range for parameters of importance and their correlation would make it possible to develop better alternative plans. Protecting more where it is more important and protecting less where it is less important can provide better overall protection at lower cost. A modeling framework to make such a determination is needed.



• Even under the best alternative plans, the costs to a substantial portion of landowners operating under new regulations will be high enough that many will by necessity consider conversions and limit their investment in management. Developing better compensation programs, i.e. incentive programs for producing non-timber public benefits holds the greatest promise. Additional contingent valuation modeling would likely support a broader incentive compensation system. Developing institutional structures to provide incentives as an alternative to uniform standards should be an objective. The riparian easement program does offer substantial mitigation in costs but may not be sufficient.



• Given the very uneven and at best periodic income small owners receive from there property, devising ways to provide a more stable income stream would almost certainly contribute to more sustained ownership and management. Incentive programs or easement compensation with ongoing rather than lump sum payments should be considered. Providing compensation in the form of tax benefits may not be effective as few owners may be in a position to benefit. Developing institutional approaches to support cash payments as incentives, easements and compensation for foregone development rights could be more effective than tax benefits.



• Cost sharing assistance such as the Stewardship Incentive Program, SIP, could be effective but have generally been funded by Congress at such low levels that the Washington State share is far below local needs.



• Carbon credit systems offer another compensation possibility to improve the motivation to sustain land in forestry rather than conversion. Carbon accounting models for alternative management are being developed. Determining how to make carbon credits more complementary to habitat and instream protection could substantially improve the conditions that would support sustained forest management by small forest owners. Any carbon credit system must deal with carbon stored in product form as well as the carbon stored on the ground in order to avoid potential counter productive substitution by fossil fuel intensive steel, aluminum, brick, plastic and concrete products. The Consortium for Research on Renewable Industrial Materials (CORRIM - an national consortium of research institutions) is developing carbon accounting models from forest regeneration, through processing, construction, building use and disposal. Their models are being integrated into LMS to facilitate the projection and analysis of carbon sequestration under various management alternatives.



• The impact of roads and culverts on sediment delivery needs to become more quantitative to avoid poor decisions on road upgrading or closure.



• Training of regulators and consultants will be critical to the implementation of the most effective and efficient management and road upgrading plans.



• Compiling and monitoring GIS based statistics in test site areas at one level of detail, and at a regional and statewide basis at another level is needed to track changing trends and the effectiveness of the programs in place.
  


• Case studies of how certification systems, HCP criteria and regulatory requirements differ are needed in conjunction with an analysis on how to bring these disparate labeling systems into a common framework that is not biased against small ownership.