FRST 318 / 2011 Final Examination
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This exam is worth 140 points. Please read it carefully before starting. It is divided into three parts.

Part I. Multiple Choice (2 points)

Please read carefully. You may select one or more answers for each question.

  1. What is the Fall-down effect?
  2. As stands reach maturity and the growth rate become negative as trees start to die
  3. The effect on timber supply as we move from primary to second growth forests
  4. When supply shocks in one market are transmitted to other markets
  5. None of the above
  6. What is maximized under the assumptions of perfect competition?
  7. consumer surplus
  8. producer surplus
  9. economic profit
  10. deadweight losses
  11. Under a full life cycle assessment, which of the following Carbon pools are included in the accounting?
  12. Forest
  13. Harvested Wood products
  14. Wood products in landfills
  15. All of the above
  16. When reforestation costs decrease, the optimal rotation age will:
  17. Increase
  18. Decrease
  19. Depends on the discount rate
  20. Will not change

  1. Which of the following impacts on forest resources are directly associated with climate change?
  2. Forest Pests
  3. Forest Disease
  4. Job loss
  5. Fire
  6. Famine
  7. If firms were paid for the amenity values for how they managed forests, harvest levels would likely:
  8. Increase
  9. Decrease
  10. Remain the same
  11. Depend on the discount rate
  12. Multiple land use makes sense when different land uses are:
  13. Complementary
  14. Competing
  15. Exclusive
  16. None of the above
  17. If your MAR increases, the NPV of an investment will typically:
  18. Increase
  19. Decrease
  20. Remain the same
  21. Depend on the IRR
  22. Stumpage on Crown lands in BC is designed to:
  23. Collect economic rent
  24. Correct the negative externalities associated with timber harvesting
  25. Promote timber growing
  26. Provide funds for reforestation
  27. Which of the following could be considered a public good?
  28. Non-timber forest products (mushrooms)
  29. Timber
  30. Biodiversity
  31. Esthetic values

Part II. Short Answer (10 points)

1. You head a government department charged with creating Carbon offsets. Your top analyst has come to you with an estimate of what it would create a series of afforestation projects.

Land purchase costs:

  • They estimate that land costs average $8000 per hectare
  • They estimate planting costs are $1000 per hectare
  • They estimate that annual stand tending costs are $100 per hectare.
  • They calculate the Present value of the stand tending costs are $1000.
  • They estimate that you would be able to create 2500 tonnes of Carbon on average on each hectare at the end of a forty-year period. They then discount that to a net present value of 1000 tonnes.
  • The current price of Carbon offsets is $20 per tonne.
  1. What is the per hectare cost of creating a Carbon offset based on the information given?
  1. You would like to create a series of large scale afforestation projects in the region from which the cost estimates above are drawn. Can you use the information above to provide an accurate estimate of what the costs might actually be? Why or why not?

2. You are a timber analyst with a large forest products company, planning on your future supply where you rely on timber from public lands. Currently you draw some of your timber supply from the extensive margin.

a. Do you earn any economic rent at the extensive margin? Why or why not?

b. You forecast that US housing starts will increase next year. What will happen at the extensive margin?

3. You have been hired as an expert witness to evaluate a court case. The witness produced by the other side has prepared some numbers showing how much the logging company’s costs increased after timber supply was reduced in the last year:

Before reduction / After reduction
100,000 m3 / 50,000 m3
Average Fixed Costs / $30/m3 / $60/m3
Average Variable Costs / $40/m3 / $40/m3
Average Total Costs / $70/m3 / $100/m3

The lawyers don’t disagree about what has gone into the cost calculations and tell you that log prices have averaged $80/m3 for the past few years. They tell you that the company continued logging operations even after their timber supply was reduced.

The law states that they need to be compensated for the loss, such that they are just as well off as if they had not faced the supply reduction, and the lawyers want you to tell them how much compensation is due the company. (You can either calculate the amount or show how you would do it)

4. You are in charge of the budget for a large forest products company have been given a budget of $2 million and told you can select among the different projects (you can choose more than one).

Based on the information below, what should you do to maximize the return from your budget?

Project A / Project B / Project C / Project D
Present Value / $ 1.4 million / $2 million / $0.9 million / $1 million
Present Cost / $1 million / $1.3 million / $0.75 million / $0.8 million

5.. Currently Chinese buyers only buy lumber from BC because of log export restrictions. What would happen in the log market if those log export restrictions were removed? Illustrate and explain.

6. Table 1 (at the end) shows the Land Expectation Values associated with growing timber just for timber values, along with the return from earning Carbon credits (the returns for two different prices are shown) on a per hectare basis.

  1. If there were no market for Carbon, what rotation age would the timber grower select?

B. Assume the Government values Carbon at $20 per tonne but does not want to set up a Carbon credit system. What would the optimal rotation age then be? If the government made the timber grower harvest at that age, would they be worse off? If so, how much?

C. Assume the timber grower can enroll in a Carbon Credit system and sell Carbon generated for $30/tonne. Are they better off? If so, how much?

7. Select a particular forest management project for Carbon (i.e. Afforestation, Avoided harvest, or Avoided deforestation) and illustrate how the Carbon that is sequestered is to be measured.

8. The Province is currently in the process of reducing timber supply in those areas affected by Mountain Pine Beetle in the Interior. What happens to the local sawmilling industry in the short run? In the long run?

Essay Question (40 points)

Please select and answer ONLY one of the three questions.

There has been considerable effort to promote the environmentally friendly aspects of wood, as a source of renewable energy, a preferred building material, and even a way of mitigating against climate change. Are there any potentially negative environmental aspects to promoting wood?

Payments for Ecosystem services have been proposed as a way of creating incentives to manage for the full range of forest ecosystem values. Please describe an example of a PES and how it works.

Carbon Offsets. What is a Carbon offset and what are some of the issues involved in creating Carbon offsets?

Table 1. Returns from Timber Only, and Timber plus Carbon
Timber Age / Current Timber Value / Timber LEV / Timber + Carbon @ $20 / Timber + Carbon @ $30
- / $- / $- / $- / $-
10 / $7,000 / $70.00 / $71.00 / $71.50
20 / $7,500 / $72.00 / $73.00 / $73.50
30 / $8,000 / $74.00 / $76.00 / $77.00
40 / $10,000 / $76.00 / $78.00 / $79.00
50 / $12,000 / $78.00 / $81.00 / $82.50
60 / $14,000 / $80.00 / $83.00 / $84.50
70 / $16,000 / $82.00 / $86.00 / $88.00
80 / $18,000 / $84.00 / $88.00 / $90.00
90 / $20,000 / $82.00 / $90.00 / $94.00
100 / $22,000 / $80.00 / $88.00 / $95.00
110 / $24,000 / $78.00 / $86.00 / $93.00
120 / $26,000 / $76.00 / $84.00 / $90.00
130 / $28,000 / $74.00 / $84.00 / $89.00
140 / $26,000 / $72.00 / $82.00 / $87.00
150 / $25,000 / $70.00 / $80.00 / $85.00