Chapter 10
Policies Today and for the Future

William F. Hyde

Virginia Polytechnic Institute and State University

The focus of discussion to this point has been on process and measurement. My assignment is policy. Specifically, my assignment is to find the largest potential environmental policy impact and, to do this, I think I should begin with the problem rather than with the process.

We all agree that the United States, and the world, will continue to use wood as a raw material and that, wherever we harvest this raw material, we will have an impact on the forest environment. The problems are how to control the environmental impact and how to leave us with a sustainable natural system. There are no easy solutions because any adjustment in the environmental impact will have its own consequences: on production costs and consumer expenditures, on substitute materials that have their own environmental sources, and directly on the forest environment itself. Therefore, our real problem is not just to control the environmental impact of industrial wood production, but to control it relative to the financial, political, and environmental costs of the control activity.

This chapter has three underlying themes: how to measure environmental impact, what the government role should be in any environmental solution, and what the impact would be of any potential solution on the international competitiveness of the wood products industries. I am going to address the impact measurement topic, propose my idea of the most environmentally effective policy. and then examine the role of government, and international competitiveness, in that order.

A good opportunity emerges from this organization of the problem. This opportunity is technological progress in the wood-processing industries. I am going to try to convince you that technological progress in these industries is something that clearly benefits consumers, industry, and especially the environ-



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Chapter 10 Policies Today and for the Future William F. Hyde Virginia Polytechnic Institute and State University The focus of discussion to this point has been on process and measurement. My assignment is policy. Specifically, my assignment is to find the largest potential environmental policy impact and, to do this, I think I should begin with the problem rather than with the process. We all agree that the United States, and the world, will continue to use wood as a raw material and that, wherever we harvest this raw material, we will have an impact on the forest environment. The problems are how to control the environmental impact and how to leave us with a sustainable natural system. There are no easy solutions because any adjustment in the environmental impact will have its own consequences: on production costs and consumer expenditures, on substitute materials that have their own environmental sources, and directly on the forest environment itself. Therefore, our real problem is not just to control the environmental impact of industrial wood production, but to control it relative to the financial, political, and environmental costs of the control activity. This chapter has three underlying themes: how to measure environmental impact, what the government role should be in any environmental solution, and what the impact would be of any potential solution on the international competitiveness of the wood products industries. I am going to address the impact measurement topic, propose my idea of the most environmentally effective policy. and then examine the role of government, and international competitiveness, in that order. A good opportunity emerges from this organization of the problem. This opportunity is technological progress in the wood-processing industries. I am going to try to convince you that technological progress in these industries is something that clearly benefits consumers, industry, and especially the environ-

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ment. It is also something the United States is good at. I think the evidence is strong that technological progress yields greater environmental gains than most direct, on-the-ground environmental regulations, and it is probably less expensive and more generally palatable to a breadth of constituencies. In terms of the environmental interests expressed by many, it saves wood energy. The problem is how to find the policy structure that encourages it. Let's begin with the broadest general definition of our problem, measurement of the environmental impact, and then consider the policy recommendation. Measuring Environmental Impact Our first task is to find a general measure of forest-based environmental impact. Many specific environmental features of forests require protection, and many analytical techniques provide the means to measure our successes and our failures at protecting forested environments. We can find useful physical indicators of protection for almost any special environmental feature we desire. For example, we have no difficulty identifying, counting, or establishing indicators of the secure protection of uniquely scenic vistas or the habitats of endangered species. The difficulty arises when we try to make policy decisions across competing environmental features and try to set priorities among them. For this task, we need a more general measure. Life-cycle analysis, as discussed in this volume, is one alternative. Economists have another system of value and several specialized techniques for assessing nonmarket values. Neither life-cycle analysis, economics, or any other comprehensive assessment technique receives universal approval—and I am not going to argue for my favorite technique. This is one occasion when I think argument is unnecessary. I will argue that, in our case, industrial forestry, a simple area measure of land actively used for timber management and harvest, is sufficient and that, generally speaking, the smaller the total land area in commercial wood production the more environmentally friendly the forest practice. Of course, this is a general rule. It does not deny the critical importance of specialized environmental standards for special cases involving specific forest land areas. Our usual focus in forestry—for life-cycle analysis, economics, or whatever—is on a fixed and constant area of forest land: an acre, a timberstand, a watershed, a small ownership. We plan timber harvests for fixed areas of forest land, and we regulate compliance with acceptable forest practices on similar well-defined land units. This focus is appropriate for small landowners with fixed areas for their land use activities. It is inappropriate for large landowners, for industrial consumers of wood as a raw material, and for environmental policy analysis. Forestry is an extensive land use, and most of the important trade-offs in forestry are between acres or timberstands or watersheds rather than between alternative management practices on one acre or one timberstand. I cannot deny

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that stricter environmental controls on one acre will alter timber management and harvest practice on that acre. Stricter controls do tend to decrease harvests (and raise timber management costs) per acre per year, but they also tend to push some timber harvests to new land areas that would not have been harvested as soon or as frequently. Therefore, even where environmental control is placed on a specific land area, its impact rapidly extends to new land areas. Consider three general examples: Silvicultural regulations in British Columbia decrease harvests by 12–17 percent (Price Waterhouse, 1995). We know that most of these harvests will be replaced with harvests from someplace else, perhaps inland Canada, perhaps Oregon or Washington, perhaps Siberia, perhaps the tropics. Each of these alternative regions has its own environmental disadvantages. For a second example, public forest managers in the United States, in the presence of increasing environmental protection, attempt to maintain their national "allowable cut" targets. To accomplish this, they must replace harvest reductions in newly protected areas of national forests with additional harvests from other national forest lands. The large wood-processing companies provide the third example. Their heaviest capital investments are in their mills. Closing or moving these mills is expensive. Therefore, in the presence of more stringent rules for environmental protection, many of them moderate their forest management and timber harvests on some acres, harvesting less and improving environmental protection. But they compensate by extending the areas of their timber purchases to lands and landowners who would not have sold timber or would not have sold as much timber as often. We can anticipate that the new areas of extended harvesting are less attractive. They are less commercially viable and more environmentally risky. They have steeper slopes and shallower soils, or they occur on sites with poorer drainage. If they had been commercially and environmentally better sites, then they would have been scheduled for earlier harvests. Therefore, direct environmental controls improve the environment on currently managed forest land, but they also cause us to expand the harvest area, and thereby to depreciate the environment on other, usually more fragile, lands that would not have been harvested in the absence of the environmental protection. I do not have a good quantitative estimate for the trade-off between environmental improvement on one acre and harvest extension and environmental deterioration on another. I suspect that the land areas involved are large and the impacts are significant. One bit of suggestive evidence of the potential area affected comes from the best available long-term projection of world timber supply. Sedjo and Lyons (1990) project that one-half of the world's industrial wood fiber through the year 2050 will originate from marginal lands or frontier forests. This means that the world opportunity is great for using our increasing environmental concerns to shift our timber harvests to ever more marginal forest lands, and it means that we take large advantage of this opportunity now and we will continue to do so until at least 2050.

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This all suggests that one useful comprehensive metric for assessing industrial impacts on the forest environment is acres of land used. The more acres, the greater the environmental impact and, conversely, anything that decreases total forest acreage in industrial use probably improves general environmental quality. Reducing Land USE and Environmental Impacts The three possible approaches to decreasing the environmental impact of growing and harvesting wood are increasing on-site environmental protection or improving timber management and harvest practices, restricting timber management and harvest activities altogether from the most fragile sites, and decreasing the demand for industrial timberland. We discussed the first in the previous section and rejected it because it often expands the harvest area and, therefore, increases the environmental impact. The second approach is absolutely necessary to satisfy some important environmental values. This approach is identified with more than 24 million acres that are unavailable for the land base of industrial timber activities in the United States. Undoubtedly, the political debate over these acres and additional forest land set-asides will continue. I will not deny the controversial issues of the second approach, but I will concentrate on the third. There are two methods for decreasing the demand for industrial timberland: intensifying timber production on some acres (produce more timber on less land) and decreasing the industrial demand for timber as a raw material (produce the same amount of lumber, furniture, or paper from a smaller volume of standing timber inventory). Foresters are trained to focus on the first, and those of us with environmental interests naturally do the same. There can be no doubt that we possess the biologic production insight to sharply increase timber yields per acre. Our actual performance, however, has not been particularly good, perhaps because intensification is so expensive, especially compared with the alternative of harvesting those nearby marginal forests where mature natural timber stands ready for harvest. Consider southern pine productivity, for example. The southern pine industry undoubtedly demonstrates the most rapid rate of technological advance for any segment of the U.S. timber-growing industry over the past half-century. It is well-known for the remarkable successes of its investments in tree improvement and its applications of intensive forest culture. Furthermore, the industry's continued willingness to invest in tree-growing research is evidence of its continued high expectations for some productivity increasing investments. Nevertheless, the overall rate of productivity increase in southern pine has been in the neighborhood of only 0.4–0.6 percent per acre annually, and this rate actually has been decreasing for the past 20 years (Hyde et al., 1992). The rate of productivity increase for southern hardwoods, and for softwoods from other regions of the United States or the world is probably smaller yet.

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The overall rate of productivity increase in forestry itself will remain small because forestry continues to have a production opportunity to harvest from those less accessible acres whose importance I stressed earlier. This opportunity to harvest additional acres of natural material (whether old growth or volunteer forests on reconverted agricultural land) is a substitute for technological change in tree growing. It is a truly unique characteristic of forestry because neither agriculture, wood processing, nor manufacturing in general have similar unexploited and replenishing natural stocks of their basic inputs. Compare the experience with improving silviculture productivity with the experience of productivity change at the mill. Risbrudt (1979), for example, found an average productivity increase for four SIC 24 (wood and wood products) and SIC 26 (paper and allied products) industries about 1.9 percent annually. Robinson (1975) found a 1.75 percent rate of annual technical change for the six SIC 24 classification (wood and wood product) industries. Greber and White (1982), Stier (1980), and Kendrick and Grossman (1980) each published similar results. Stier and Bengston (1992) reviewed these and 20 additional analyses. Their summary judgment is that technical change in the wood products industries is "wood neutral," which means its resource-saving impact on wood has been approximately the same as its general impact on all other inputs—or somewhere in the range of 1.75 to 1.90 percent annually. Loosely speaking, this means that technological change in the wood products industries annually saves more than three times, and perhaps more than five times, as much land as new silvicultural technologies save. Consider just two specific innovations that make the point even more sharply: the powered back-up roller in a plywood mill and tress frame housing. The powered back-up roller applies even pressure on the raw log, thereby assuring smooth and continuous peeling for plywood. This single technology was designed, modified, and adopted by most plymills in the United States in the short span of 3 years. It is a small component in the full measure of wood-processing technical change, but it alone saves 17 percent on plymill wood consumption, or approximately one percent on all industrial wood consumption in the United States, and perhaps a comparable percentage of industrial forest land, Tress frames are built at central locations before shipment to various construction sites. Bulk production to standard specifications saves lumber in comparison with the alternative of individual beam, joist, and riser construction at each new housing site. The U.S. Forest Service calculated that truss frame construction annually saves a volume of wood greater than the programmed allowable harvests on all existing or proposed wilderness areas (Buckman and Wahlgren, 1989). Policy Incentives and the Government The losses to the environment due to timber management and harvest controls that spill over to harm other forested acres are probably significant, even if

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we cannot estimate with confidence the number of affected acres. The counteracting gains to the forest environment from technological improvement in wood processing are substantial and measurable with more confidence. The structure of the forest and wood products industries is a third reason to prefer technological change as the path to environmental improvement. Consider, first, industrial structure and the problem of enforcing on-the-ground environmental regulations, and then consider the incentives necessary to induce additional technological change. Large firms have their own incentives to meet environmental quality standards. Some gain marketing advantages from setting high standards and informing the public of their performance. Some firms advertise their high environmental standards and, presumably, gain market share because of them. Moreover, those large concerns that do not have favorable environmental reputations are reluctant participants in the opposite—environmental noncompliance—because they cannot afford the negative publicity and the marketing consequences that go with it. Smaller firms do not have such market profiles, and they cannot obtain marketing advantages even if they do maintain high environmental standards. Consider that we neither differentiate the products nor do we even know the names of many smaller forest or wood product producers. Furthermore, smaller firms often have older and less technologically advanced equipment, which usually means that it is more costly for them to make their operations environmentally friendly. I understand that most modern sawmills, for example, are scaled below the size of old-growth timber and that most of the mills that depend on old-growth timber in the Pacific Northwest (where old growth is such a controversial issue) are smaller and older. This means that the potential for environmental gain in forestry is probably greater for enforcement programs that target smaller firms. But smaller firms—especially smaller forest landowners—are dispersed and less recognizable to enforcing agencies. Monitoring and enforcing standards on many smaller operations is more costly and, when effective, enforcement is more likely to drive smaller operators from the business. (Most of us would consider this an unsettling result.) We have some evidence for these points as well. Virginia's state forest practice act mandates reforestation after timber removal. The state forester's office conscientiously spends time and money enforcing the act, but there is no evidence that enforcement induces any increase in reforestation or in subsequent forest inventories (Boyd and Hyde, 1989). We also have the anecdotal observation that it is the small landowners, not the large industrial operations, who respond so vigorously to contemporary political concerns with landowner rights and environmental regulations. If increased enforcement of environmental regulations in the forest would be expensive and if its results might not be very satisfactory, then could we obtain better results from increased investment in our alternative, industrial technology? The evidence here is much better.

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Improving technologies are the results of investments in technology research. Therefore, the historic successes of investments in technology research should be good indicators of the promise of technological improvement. Public investments in technology research for the wood-processing industries have typically produced ex post average returns ranging from 15–500 percent annually and marginal returns often in excess of 15 percent (Hyde et al., 1992). This range of returns is exceedingly wide, but even its lower boundary is in excess of generally acceptable minima for private investments. It is also in excess of the cutoffs generally applied for public investments. It shows that wood-processing technology research generally has been a good use of public funds, and that expanding the research effort often would have been justified on market criteria alone. These calculations were made without any consideration of the value of forest-based environmental protection the investments induce. Adding this environmental value would only increase the estimated returns and improve the justification for expanding investments in technology research for the wood-processing industries. In sum, expansions in technology research would create savings in industrial wood consumption and, therefore, reductions in timber harvests and savings for the forest environment. The public role in research is justified because new technologies reduce product prices. Consumers are the benefactors. The public captures the benefits of price decreases. The industry does not. Of course the industry benefits if the production-expanding effect of technical change is greater than the price-decreasing effect. Each of these cases occurs in different wood-processing industries. The price-decreasing effect is dominant in the sawmill industry, and the production-expanding effect is dominant in the pulp and paper industry. Consumers gain in each case. Producers also gain in pulp and paper. It is not surprising that industrial research expenditures are greater in the pulp and paper industry, and we would predict that sawmill research, with its relatively greater consumer benefits, justifies a relatively larger proportion of public financial participation. The sawmill industry is also a larger consumer of wood as a raw material. Therefore, new sawmill (or, more broadly speaking, lumber and wood products) technologies probably save more wood and more forest environment than would new pulp and paper technologies. International Competitiveness The final question concerns the effect of forest protection on international competitiveness. Environmental regulation increases on-site protection, and environmental compliance also will raise production costs (and extend timber removal to additional forest lands as well). It can only diminish the industry's international competitiveness. On the other hand, if green labeling and other environmental protection activities remain voluntary, then retailers will adopt the more costly labeling standards voluntarily when they perceive marketing advan-

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tages from this action. One place they might find a marketing advantage is in those particular international markets that currently demonstrate their environmental concerns by proposing green labeling. Of course, this chapter suggests another alternative. Investments in technology research that decrease the industrial demand for wood can only improve our international competitiveness. New processing technologies decrease forest product prices, and lower prices will enable U.S. industry to penetrate new international markets. The machine manufacturers who supply the improved equipment for the new technologies also will penetrate new markets. The relationship of wood products technology research to green labeling is not so clear. The environmental advantage of new processing technologies is real, but this argument will not be evident to every environmentally concerned wood product consumer. It is much easier to explain the direct and on-site environmental impact of improved silvicultural practices than it is to explain the often greater indirect environmental impact of new processing technologies. Making the environmental argument for new processing technologies could become a marketing challenge itself. Conclusions We have reviewed the measurement of policy impacts on the general forest environment, discussed environmental policies, and proposed that wood-saving technologies in the processing industries have a larger favorable environmental effect than do most policies that target the forest environment directly. I would suggest that a powerful coalition of environmentalists, consumers, the wood-processing industries, and wood technology equipment manufacturers would each obtain advantage from supporting publicly funded wood technology research. Furthermore, the sharply focused targets of wood technology research provide a real administrative advantage over the dispersed targets of regulation in forest environments. The decreased industrial impact on the forest environment will be an important result. Finally, two particular characteristics of forestry must be foremost in the minds of each of us as we consider this recommendation to support technology research—or our own preferences for other policy actions affecting forest environments. Recall that we are not looking for any impact at all. Rather, we must look for the largest impact per expenditure of resources, including financial, political, and environmental resources. As we compare alternative policies, we must recognize, first, that environmental savings on a target forest site often expand the forestland base for the industrial production activity and environmental damage on new acres that otherwise would not have been harvested. Timber production costs are greater on the additional acres and the environmental impacts are riskier. Extending the industrial forest land base also raises the cost of environmental monitoring and enforcement. Second, the structures of the for-

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estry and the wood and paper products industries are key determinants of environmental performance and the costs of environmental monitoring and enforcement. Large firms might be able to differentiate their products and obtain financial benefit from favorable environmental performance. Small firms cannot—and their environmental performance is less predictable. Furthermore, small and dispersed firms—specially small and dispersed forest landowners—are expensive to monitor, and their environmental compliance is irregular at best. These two land use and industrial structure characteristics will be major determinants of the relative effectiveness of whatever policy alternative is adopted. References Boyd, R., and W. Hyde. 1989. Forestry Sector Intervention: The Impacts of Public Intervention on Social Welfare. Ames, IA.: Iowa State University Press. Buckman, R., and H. Wahlgren. Personal communication. Feb. 15, 1989. Greber, B., and D. White. 1982. Technical change and productivity growth in the lumber and wood products industry. Forest Science 28(1): 135–47. Hyde, W., D. Newman, and B. Seldon. 1992. The Economic Benefits of Forestry Research. Ames. IA.: Iowa State University Press. Kendrick, J., and E. Grossman. 1980. Productivity Trends in the United States: Trends and Cycles. Baltimore: Johns Hopkins University Press. Price Waterhouse (W. Stanbury and D. Haley). 1995. An Analysis of Forest Policy and Land Use Initiatives in British Columbia. Vancouver: Forest Alliance of British Columbia. Risbrudt, C. 1979. Past and future technological change in the U.S. forest industries. Unpublished Ph.D. dissertation, Michigan State University. Robinson, V. 1975. An estimate of technological progress in the lumber and wood products industries. Forest Science 21 (2): 149–54. Sedjo, R., and K. Lyons. 1990. The Long-Term Adequacy of World Timber Supply. Washington. D.C.: Resources for the Future. Stier, J. 1980. Technological adaptation to resource scarcity in the US lumber industry. Western Journal of Agricultural Economics 5(2): 165–75. Stier, J., and D. Bengston. 1992. Technical change in the North American forestry sector: A review. Forest Science 38(1): 134–60.