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Subsidies to the Use of Natural Resources

Environmental Economics Research Paper No.2
This report was prepared by a consultant,
the National Institute of Economic an Industry Research (NIEIR),
for the Department of the Environment, Sport and Territories.
Commonwealth of Australia, 1996
ISBN 0 642 24864 8

6. Extraction of forest products

6.1 Introduction

It is estimated that since European settlement in Australia, 40–50 per cent of pre-settlement forest cover has been removed for timber and land clearing purposes. Forest activities encompass logging for the pulp and paper industries, construction timber and fuel supply. These activities take place on public and private land. Activity on public land dominates — about 75 per cent of forested land is publicly owned in Australia. Extraction from community owned forests is subject to a variety of charges, depending on the jurisdiction involved and the type of forest products extracted.

Australian native timbers are mainly hardwood and are predominantly extracted from natural native forests. Over the past 50 years there have been substantial public and private plantings of coniferous softwood plantations and some hardwood plantations and in 1994–95 softwood production was nearly equal to that classified as hardwood. Australia is a net importer of forest products; net imports were valued at about $1.780 billion in 1993–94. (see note 1 below)

There is considerable debate on whether Australian forestry practices are sustainable. The ESD-Forest Use study (ESD-F) was unable to reach a conclusion on the issue.(see note 2 below) The States claim that forestry operations are sustainable, and the extensive RAC Forest and Timber Inquiry (see note 3 below) concluded that State sustained yield management practices for timber production were appropriate. However, there is considerable environmental concern over timber operations, particularly in old growth and other native forests that are important repositories of habitat, biodiversity and aesthetic values.

The National Forests Policy Statement (NFPS) (see note 4 below) agreed to in 1992 by all States and Territories except Tasmania (which has now agreed), sets down goals in eleven areas. These areas are as follows.

Wood production and industry development
Integrated and coordinated decision making and management

1 Australian Year Book, 1988, E S D - Forestry Use, pp.20–25, Australian Year Book, 1994, and ABARE Commodity Statistical Bulletin, 1994 (ABARE, 1994), were among the sources used for background to the Australian forest industries.
2 See ESD-F, p.30.
3 Resource Assessment Commission, Forest and Timber Inquiry Final Report (RAC Inquiry), AGPS, 1992.
4 National Forest Policy Statement: A New Focus for Australia’s Forests, Commonwealth of Australia, 1992.

Private native forests
Water supply and catchment
Tourism and other economic and social opportunities
Employment, work force education and training
Public awareness, education and involvement
Research and development
International responsibilities.

While coverage of the aims in each of these areas would require a lengthy discussion the general thrust of the statement is summed up by the following passages taken from the statement.

“Under the ecologically sustainable development approach accepted by the Governments, the public and private native forest estate will be managed for the broad range of commercial and non-commercial benefits and values it can provide for present and future generations. Efficiently and sustainably managed public and private forests will provide the basis for nature conservation and maintaining forest biological diversity, and for regional economic development and employment opportunities in a wide range of sectors, including wood production from native and plantation forests, tourism and recreation, water supply, grazing and the pharmaceutical industry.” (NFPS, p.7)

Within this frame work, specific policy objectives and key policy initiatives in each of the goal areas set down above, are underpinned by the following agreed approaches to forest management.

While these principles and approaches appear sound, their translation into forest management practices is not always easy as indicated in the early 1995 debates on wood chip exports and release of areas for timber operations.

Much of the debate on forest policies arises because public forests are today regarded as multiple use resources, a situation which is explicitly recognised in the 1992 National Forest Policy Statement. Thus forests are now valued not only for their marketable timber resources, but also for their other use values.(see note 1 below)

These values include those associated with non-timber products, recreational use, biodiversity preservation and water quality enhancement. This multi-purpose use of forests gives rise to a range of issues as each use has both economic and environmental implications. In some cases, for example biodiversity preservation which can enhance conservation values and the maintenance of genetic material for pharmaceuticals, there is potential for multiple use of forests to address environmental and economic goals. At some stage, however, these goals come into conflict as for example, harvesting of forest products for pharmaceuticals can cause some environmental damage.

1 A comprehensive assessment of approaches to the valuation of forests with a critique in Australian practices is found in Francis Grey, Estimating Value, an unpublished report prepared for the Department of Environment, Sport and Territories, January, 1994 (draft). The valuation of forests from an accounting standards viewpoint is addressed in “Accounting for Self-Generating and Regenerating Assets”, a September 1995 discussion paper of the Australian Accounting Research Foundation.

Today it is increasingly clear that timber operations reduce the current and potential value of non-timber products that often do not fully register in the market economy. The magnitude of the non-timber resource values endangered by forest operations is unknown. In the United States, however, it is estimated that the market value of non-timber forest products may exceed the $1 billion of timber extracted from United States national forests in 1992.(see note 1 below) Forests are also important for their scenic and recreational values. For example, a study in the state of Oregon, indicated that Oregon’s scenic values — mountains, forests, streams and beaches — make a significant contribution to the State’s attractiveness as a place to live. Thus surveys show that people will work for less pay in Oregon than for similar work in less scenic locations. The total value of these pay reductions, an average of $500 per employee, almost equalled the combined payroll of all the State’s timber and wood product firms.

The economic value of medicines taken from forests is very significant. Forty per cent of prescription drugs dispensed by United States pharmacies have active ingredients derived from wild plants, animals, or micro-organisms, many of them from forests. Given that the global pharmaceuticals industry is worth $200 billion per year, that the use of biologically derived medicines probably exceeds 40 percent of prescriptions outside the United States, and that a significant share of biologically derived medicines originate in forests, it is likely that annual sales of drugs with active ingredients derived from forests might approach $100 billion per year.(see note 2 below)

Furthermore, medicinal evaluation has been conducted on only a few thousand of the world’s estimated 10 million species — perhaps half of which dwell in tropical forests. Harvard University biologist Edward O. Wilson conveys the magnitude of the potential: “A newly discovered species of roundworm might produce an antibiotic of extraordinary power, an unnamed moth a substance that blocks viruses in a manner never guessed by molecular biologists. . . An obscure herb could be the source of a sure-fire blackfly repellant — at last. Millions of years of testing by natural selection have made organisms chemists of superhuman skill, champions at defeating most of the kinds of biological problems that undermine human health.”(see note 3 below)

Similar observations on the non-timber economic, social and environmental importance of forest “products”, particularly those from native forests, have been made in a number of Australian reports and studies.(see note 4 below) For example in the pharmaceuticals area a Western Australian conospermum species is being evaluated for development of a new drug with potential in the treatment of AIDS.(see note 5 below) A range of other Australian flora species are the basis of pharmaceuticals.(see note 6 below) Although these flora species do not currently appear to be under threat from forestry or other activities, species of gastric brooding frogs which produce substances which could be important in the treatment of gastric ulcers, have not been sighted for some time. These frogs are found only in the rainforests of Queensland.

1 World and United States data from Alan T. Durning, Redesigning the Forest Economy, State of the World 1994, World watch Institute, Washington D.C.,1994.
2 Ibid, p.34.
3 As quoted in Durning, op. cit.
4 See for example the RAC Inquiry and Webb, L., Brereton, J. Le G., Whitelock, D., (Eds.), The Last of Lands: Conservation in Australia , Jacaranda Press, 1969. Papers on conservation/biodiversity values are included, particularly in Part II; for example, The Australian Flora, Trace, Webb and Williams, pp.75–82 and Australian Plants and Chemical Research, Webb, pp.82–90.
5 Annual Report, 1993–94, Department of Conservation and Land Management, Western Australia.
6 See, for example, Biodiversity and its value, Biodiversity Series, Paper No. 1, Biodiversity Unit, Department of Environment, Sport and Territories,1994, p.18.

Sustaining timber output without regard for environmental impacts can result in replacement of ecosystems and the reduction of biodiversity. For example loss of trees has a large impact on wildlife. Eucalypt woodland suffering dieback from forestry operations or other causes may have only 10 per cent of the birds found in healthy woodland. In healthy woodland birds may take about half the insects produced, about 30 kg per hectare per year. Small animals such as sugar gliders and predatory insects and spiders take a sizeable proportion of the remainder.(see note 1 below)

Negative environmental impacts from timber extraction have led to the development of new forestry in the Pacific North West of North America. New forestry principles, which attempt to minimise negative externalities, include production techniques which leave elements of forest ecosystems intact, for example canopy layers, patterns of plant succession, cycling of nutrients and protecting biodiversity by means such as preserving waterway corridors. Forest ecosystems are so complex that new forestry will continue to evolve. For example, until ten years ago there was little scientific appreciation of the role that fungi varieties play in forest ecosystems; it is now recognised that they enable tree roots to absorb phosphorous and other nutrients.

Current forestry practices, or old forestry, are less expensive because it externalises many of its costs. For example, Durning reports that in the Pacific North West region of North America the price of old growth for timber does not include the losses suffered by the fishing industry that result from damage to salmon habitats by current logging practices.

Recycling of forest products reduces the demand for virgin forest materials. Thus market trends and government programs which promote recycling of forest products reduce the economic and environmental effects of subsidies to forest resources.


6.2 Financial subsidies

Failure to recover the full costs of public forest management agencies and inadequate resource use payments through access fees, royalties (stumpages) and other user fees are potential sources of financial subsidies to forestry operations.

In principle user charges for timber and other activities in public forests should reflect the full cost of these operations, i.e. they should cover a normal return on capital, the forest management costs related to these operations, appropriate resource use payments and the repair of any environmental damage caused by these operations. Resource use returns to the community (as owners of public forests) should be set at levels that reflect the estimated value of the basic resource, i.e. the trees and other forest resources. If the marginal market value of the extracted products is less than the marginal value of the full resource costs of forestry operations, the operations should alter or discontinue. Valuation of community owned resources raises contentious issues, for example: what costs to include in the valuation, and how to discount future uses. There is also debate on how to structure charges; for example, on a “ reserve” or fixed royalty charge basis, or on a profit/economic rent basis.

1 Richard Eckersley, Regreening Australia, Occasional Paper No. 3, CSIRO, June, 1989.


Non-timber values provided by intact forest ecosystems


Gene pool


Soil conservation



Recreation, tourism

Economic importance

Forests contain a diversity of habitats, species, and genes that is probably their most valuable assets; it is also the most difficult to measure. They provide the changing conditions of climate and soil and can provide the raw materials for breeding higher-yielding strains. The wild relatives of avocado, banana, cashew, cacao, cinnamon, coconut, coffee, grapefruit, lemon, paprika, oil palm, rubber, and vanilla — world-wide exports of which were worth more than $20 billion in 1991 — are found in tropical forests.

Forests absorb rainwater and release it gradually into streams, preventing flooding and extending water availability into dry months when it is most needed. Some 40 per cent of Third World farmers depend on forested watersheds for water to irrigate crops or water livestock. In India, forests provide water regulation and flood control valued at $72 billion per year.

Forests keep soil from eroding into rivers. Siltation of reservoirs costs the world economy about $6 billion per year in lost hydroelectricity and irrigation water.

Forests protect fisheries in rivers , lakes, estuaries, and coastal waters. The viability of 112 stocks of salmon and other fish in the Pacific Northwest depends on natural, old-growth forests; the region’s salmon fishery is a $1 billion industry.

Forests help stabilise climate. Tropical deforestation removes carbon sinks and releases the greenhouse gases carbon dioxide, methane, and nitrous oxide; globally deforestation accounts for about 25 per cent of the net warming effect of all greenhouse gas emissions. Replacing the carbon storage function of all tropical forests would cost an estimated $3.7 trillion — equal to the gross national product of Japan.

Forests serve as recreation destinations and as tourist attractions. Forest biodiversity values have recently received some higher priority and recognition. For example, Australia’s reservation of the Wet Tropics Heritage Area and the allocation by the federal government of $23 million to a Daintree Rescue Program for uses such as buy-back private land of outstanding conservation importance.1

1 For example, see N. Preece and P. van Osterzee; Ecoz-Ecology Australia and D. James,Ecoservices Pty Ltd, TwoWay Track: Biodiversity, Conservation and Ecotourism, Biodiversity Series, Paper No. 5, Biodiversity Unit, Department of the Environment,Sport and Territories,1995.
Source:Adapted from Durning, op. cit., p.33.

In practice governments have mainly relied on fixed royalties (“stumpages”) for timber operations and no or nominal charges for other uses and the effects of forestry operations. The most recent comprehensive data available (ABARE, 1994) indicates average stumpage fees varied significantly by state and type of forest product.(see notes 1,2 below)

Competitive bidding for extraction rights is practised to some extent (e.g. in Victoria and Western Australia), but lack of an adequate number of bidders to ensure competition can inhibit the use of competitive bidding approaches. To some extent this problem can be overcome by use of a floor or reserve price that reflects the opportunity cost of using the resource, but this again raises the resource valuation problems. It should also be noted that the bidding process does not account for non-timber values.

In 1992 the Industry Commission (IC) reported that forest pricing and management practices in some States were not consistent with meeting a 4 per cent rate of return on forest assets. The IC report indicated that returns to forests could be raised by increasing saw log royalties for larger trees, by shorter growing and felling rotations and by a general improvement in forest management practices. Softwood pulpwood royalties in Australia were found by the IC to be high compared with those in New Zealand, the United States, Canada, Chile and Fiji.(see note 3 below)

The trend is to recover more public agency costs from forest industries and for forest agencies to make dividends and in some cases tax payments, to state governments. That is, public forest operations are becoming more market oriented. This is in line with principles laid down in the National Forest Policy Statement which in this area states that:

In 1993–94 the State Forests of New South Wales (SFNSW) reported agency revenues of $121.9 million from forest products against operating expenditures of $94.3 million and capital expenditures of $30.9 million, a result substantially better than that achieved in the two preceding years. When revenues from other activities and the incremental value of forest stock estimated by SFNSW were taken into account, the agency reported an 8.8 percent real return on assets. An allocation of$17.5 million was made for dividend payments to the state government.

The Queensland Forest Production program in the same year reported an operating surplus of $10.4 million and a dividend payment to the state treasury of $8 million.

Again in 1993–94 the Forest Commission of Tasmania and the Western Australian agency (CALM) reported royalty and other fee revenues that just met operating expenditures and in Victoria revenues almost met operating expenditure. In Tasmania dividend and tax equivalent payments of $7.7 million were made. Agencies in these States reported significant improvement in their financial performance compared with previous years; in these States no rate of return analysis was reported.(see note 4 below)

1 ABARE Commodity Statistical Bulletin,1994, p.120.
2 FABARE 1991, Pricing and Allocation of Logs in Australia, Discussion Paper No. 91.7.
3 Industry Commission, Report on Recycling, op. cit., p.12 and p.95.
4 1993–94 Annual Reports of the State Forests of New South Wales, the Queensland Department of Primary Industries, the Forestry Commission of Tasmania, the Victorian Department of Conservation and Natural Resources and the Department of Conservation and Land Management (CALM).

These financial reports vary considerably as to what is reported. For example, treatment of capital outlays, allocation of agency overheads and treatment of loan funds (past and current) is inconsistent. A major study would be required to unravel and report on the impact of these factors on financial performance of the agencies.

One study which attempted to analyse the overall financial performance of a state agency (Victoria) was conducted by Dragun. In a research paper (see note 1 below) released in January 1995, Dragun found the financial subsidisation of logging in Victoria to be about $50 million a year. This amount is based on Dragun’s estimate of direct costs to the State government. Adding in his estimates of social costs (mainly environmental subsidies), Dragun reported an annual subsidy of about $385 million.

The financial subsidies estimated by Dragun are very different from those estimated by the government agency — the Forests Service of the Victorian Department of Conservation and National Resources (CNR). In 1993–94 the CNR allocation to the Land Resources Management function was $169.215 million. The function comprised forestry services activities, national parks, crown lands management, flora and fauna and catchment land management. However, no complete breakdown of the function elements was provided. Dragun estimated the forest services share of the function, from the limited information available, at about $90.8 million; forest service revenues were estimated by Dragun at $40.4 million ($42.4million in the Annual Report of CNR), leaving a net subsidy of $50.4 million, or $60.4 million when some other costs which might be attributable to forest operations were accounted for.

This is in comparison with comment on financial arrangements in the 1993–94 Annual Report(see note 2 below) which states that a loss of $3.0 million was incurred on commercial native forest operations in 1992–93. No estimate for 1993–94 was provided. The Annual Report stated that costs of managing areas of State forest without commercial forest operations would have been “$16 million higher in 1992–93”, i.e. it is estimated that $16 million of forests services costs are not attributable to commercial forest operations. The report also went on to state that:

“A review of the costs incurred by Forests Service staff in the North–west Area in supervising mining and extractive operations and related site rehabilitation works found high levels of unrecouped outlays, which suggests that full cost recovery throughout State forest needs to be considered.”(see note 3 below)

These estimates and statements present a wide array of information on costs and revenues and their allocation. While Dragun’s estimates of forest costs and revenues appear reasonable from the limited publicly available information it is not clear what proportion of the costs estimated could be attributed directly to forestry operations. The departmental report implies that the public goods aspects and non-forestry elements of the costs could be significant. It is very unlikely, however, that they would be equal to the $50 million financial subsidy estimated by Dragun. They might, however, approach $25 million, leaving a net subsidy of $25 million.(see note 4 below)

Similar detailed analysis to that of Dragun is required on the other States’ forestry operations. Dragun’s work, however, casts doubt on the claims of the other States’ agencies which indicate varying operating results but with inadequate treatment of loans and capital costs and the services provided by other agencies and departments.

1 Dragun,A.K., The Subsidisation of Logging in Victoria, La Trobe University, January, 1995.
2 Annual Report 1993–94, Department of Conservation and Natural Resources, Victoria, p.30 and discussions with CNR officials.
3 Ibid, p.30.
4 Dragun, p.6 reports that Victorian Auditor-General put the subsidy at $13 million based on specific advice from the Department.


Bio-diversity values

Bio-diversity, that is biological diversity refers to the variety of life of a given area — locality, region, country or the entire planet. In any area biological diversity can be described in terms of three levels of biological organisation — genetic, species and ecosystem.

The importance of bio-diversity lies in the ability of the different biological organisations to provide sustenance within and for each other in the form of habitat, food and resistance to disease and aesthetic utility including the rights of non-human species to survive and evolve. In the ESD report on bio-diversity, values of bio-diversity are classified as follows.

A. Consumptive use values — natural products that are consumed directly without market involvement, for example fodder and firewood used on farms.
B. Productive use values — natural products that are commercially harvested, for example fish, timber and some species of native flora and fauna.
C. Non-consumptive use values. These refer to ecosystem functions such as watershed protection, climate regulation and soil production.
D. Option values. These refer to valuation of the role bio-diversity plays in retaining the possibilities for continued evolution and the adaptation of living organisms to change. This helps to keep biological resources available for future generations; society may be willing to pay for the option of future access to a given species or level of diversity.

E. Existence values. Although it is a contentious issue, there appears to be increasing public support for the intrinsic right of species existence, that is benefits are derived from the knowledge that species and habitats exist.

Australia has, in a world context, significant bio-diversity. For example Australia has among countries the second highest number of reptile species (686), is fifth in flowering plants (23 000) and tenth in amphibians (197). More families of fauna and flora are endemic (occur only in Australia) than in any other country. Much of Australia’s bio-diversity remains to be described but those aspects which often display significant variation — a key factor in species robustness, survival and management. An example of this variation is the River Red Gum (Eucalyptus camaldulensis) which has a wider natural distribution than any other eucalypt and which exhibits marked differences in genetic make-up.

Since European settlement there have been large changes in Australian biological systems through clearing, urbanisation, drainage and the introduction on non-native species. It is estimated that 2.9 per cent of plants and 7 per cent of marsupials have been lost, and that many more are threatened with extinction.

Valuation of this actual and potential bio-diversity loss is difficult and contentious but the limited data available (see Chapter 8 — Natural attractions, of this report) suggests it has a significant value to the current Australian community.

Reference: The conservation of bio-diversity, ESD Working Party report, July 1991; Australian Year Book, 1994, pp.433–5.

The Dragun analysis appears to be the only one available on the overall financial subsidies to forestry operations in an Australian situation, and it might be used, with caveats as to its coverage and representativeness, to estimate an amount for all of Australia. Victorian subsidies are probably around 25 per cent of national subsidies, on the basis of Victoria’s share of national forest product output (about 20 percent) adjusted upwards for the apparent higher subsidies in Victoria. On this basis total Australian financial subsidies to forestry operations could be about $100 million.

Overall, then $100 million might be a reasonable order of magnitude estimate of the financial subsidy, through non-recovery of public agency costs, to extraction from public forests.

The total financial subsidy might well be much higher as here although we have not accepted Dragun’s higher estimates, we acknowledge that more extensive assessment is required. This might well increase the $100 million estimate significantly as, for example, the above discussion does not consider other possible contentious issues such as that raised by Dragun of how to treat Loans Council and other loans which could be attributable to forests management for all purposes in past years. In some cases these loans are still referred to in agency annual reports (e.g. Queensland)(see note 1 below) while in others they appear to have been partly written off (e.g. New South Wales).(see note 2 below) It is for these reasons that we have based the $100 million estimate on a small (5 per cent) upward adjustment in Victoria’s share of national product output despite the reported significantly worse performance of Victoria’s public forest management. Thus we are doubtful of the comparative performance reported and acknowledge the limitations of our estimates.This review of financial subsidies to operations in public forests requires more analysis and debate on the issues before some form of concensus can be reached on the matter. It does seem clear, however, that the trend to higher cost recovery from forestry operations will continue and that these activities will be conducted on a more commercial basis. Higher royalty rates from native public forests would contribute to higher returns from these activities and would increase the incentive to produce forest products from public and private plantations. In the meantime there is a clear need to improve financial reporting in this area.


6.3 Environmental subsidies

As indicated in the introduction to this chapter there are numerous environmental subsidies to forestry operations, particularly those in native forests. These externalities arise from forest industry practices, the alternative uses of forests and the management of forests. For example, softwood stumpages (timber royalties) are, overall, significantly higher in Australia than those for hardwood and this tends to encourage production from native hardwood forests which are important repositories of bio-diversity and other non-timber values. Removal of these subsidies requires attention to forest industry practices and also to what proportion of forests should be set aside for other (that is non-timber) uses.

The main environmental externalities associated with forests are as follows.

Soil erosion. Loss of productive land and siltation of waterways can result from forestry operations.

1 See Yearbook, Queensland Department of Primary Industries — Forest Service, 1992–93,p.43.
2 See Annual Report, State Forests of New South Wales, 1993–94, pp.61–84.

Flora, fauna and reduction in bio-diversity. There have been no known extinctions of native flora and fauna as a result of timber harvesting operations over a period of more than 100 years,(see note 1 below) but there are consider able environmental concerns over the bio-diversity and aesthetic impacts of forestry operations, particularly in old growth and other pristine areas in most States.

The stock of bio-diversity held in Australian forests and other natural areas has a considerable, but unestimated, value for current and future aesthetic, general conservation and commercial purposes. An indication of these values is given in the introduction to this chapter. Surveys indicate the Australian bio-diversity stock has declined since European settlement.(see note 2 below) What is at issue now, and requires further study, is the effects of current and proposed human activities on this stock, that is, the marginal effects/costs of current and proposed future activities.

Water catchment. Melbourne Water and the Perth Water Authority have studied the value of forests to water quality and concluded that the forested catchment areas confer significant benefits in terms of water yield and quality.(see note 3 below) Conversely forest removal in water catchment and contiguous areas has significant external costs. Work on the impacts of logging on water catchment for domestic, business and agricultural purposes has been undertaken by the Australian Conservation Foundation (ACF)(see note 4 below) and in a study for Melbourne Water and the Victorian Department of Conservation and Natural Resources (MW and CNR).(see note 5 below) In this latter study on the impact of forestry operations on water production in the Thompson River catchment area in Victoria, the net economic value based on net present value of water and timber production of various logging options was estimated. In the base case, using a discount rate of 5 per cent real the net economic value to the State of Victoria from timber and water yields from the Thomson would be increased by any change from current practices, but particularly by either ceasing logging or by increasing the rotation length or by an increased use of thinning techniques. The result is not greatly affected by discount rate changes though the no logging option is more attractive at lower rates, and is not very sensitive to water prices above about $300/ML at the dam (before deducting supply costs).(see note 6 below) A 1994 study which refined the estimates has not been released by the Victorian Government, but is believed to verify the 1992 study conclusion that foregone water production has a higher value than logging in the area studied .

Aerial forest spraying for pest control can result in significant water quality and biodiversity costs.

Tourism and heritage impacts. It is estimated, for example, that the value of tourism and recreation in and around the Wet Tropics World Heritage Area was $377 million. (see note 7 below) In 1991–92 logging in these and similar areas would have a negative impact on tourism, the effect depending on logging practices, and the attraction of the area involved. Similarly forest disturbance and removal in some areas can impact significantly on heritage values, particularly for the indigenous community.

1 See ESD-F, p.29 and RAC Forest and Timber Enquiry Final Report, Vol. 1, pp.177–178.
2 As reported in Native Vegetation, Clearance, Habitat Loss and Biodiversity Decline, Biodiversity Series, Paper No. 6, Department of the Environment, Sport and Territories, Canberra, 1995 and the Australian Year Book, 1994, p.433.
3 See ESD-F, p.20.
4 See, for example, The impact of logging on water production in the Thompson River Catchment, ACF, 1992.
5 Read, Sturgess and Associates, Study of the Thompson River Catchment regarding the value of forests for water catchment, prepared for MW and CNR,1992.
6 Ibid, p.41.
7 N. Preece, et. al.,op. cit., p.42.

Greenhouse impacts. Deforestation contributes to CO2, CH4 and N2O greenhouse gas emissions and reduces greenhouse emission sinks. The net impact of current reforestation and deforestation on greenhouse gas emissions is contentious. It is likely, however, that there is a significant net deforestation effect that leads to a net increase in greenhouse gas emissions.(see note 1 below)

Fire damage from forestry operations can give rise to greenhouse and other external affects such as damage to bio-diversity and property values.

Estimating the magnitude of environmental subsidies to forestry operations is difficult to undertake directly but can be approached in several indirect ways, for example by contingent valuation surveys and by the change in productivity technique, that is, estimating the cost of ceasing operations in high conservation value areas. The latter approach, that of estimating the costs of ceasing operations, is essentially a control cost approach.

For the RAC Inquiry Streeting and Hamilton(see note 2 below) estimated, for South–East Australian forests on the National Estate Register, that a once-off payment to equilibrate costs and benefits of ceasing forest operations in these areas and paying compensation for unemployment, would amount to about $7 (1994 dollars) per adult in New South Wales and Victoria, a total of about $60 million. Extrapolation of this result to all such areas in Australia is contentious because of the approach used and limitations of currently available data.

Another “control cost” approach is to estimate the loss of turnover for ceasing forestry operations in areas of high conservation values in Australia in 1994. From ABARE data on turn over in native forest operations and DEST Forest Branch estimates (Carl Binning, pers. comm.) of the proportion (40 per cent) of higher conservation value areas being forested, (see note 3 below) estimated cost of ceasing operations in these areas can be determined. Turnover for hardwood log sawmilling and hardwood woodchips in 1994 amounted to about $1.150 billion,(see note 4 below) and with about 40 per cent in high conservation value areas loss of production in these areas would be valued at about $460 million.

An ABS estimate of the commercial timber value of publicly-owned Australian native forests, extrapolated by NIEIR to 1994 from 1992, on the basis (dubious but none other available) of GDP growth was about $7 billion (see note 5 below) of which 40 per cent (DEST estimate, see above) might be of high conservation interest, giving an estimated commercial value of these areas amounting to $2.8 billion. At an 8 per cent real rate of return, the annual value of these areas in 1994 would be $224 million, an amount which would be lost if these areas were removed from commercial forestry operations.

Estimates using these approaches are, however, dubious at this time due to the problems of defining areas to conserve, of valuing the forests resources within them and of valuing the other costs and benefits of conserving these areas.(see note 6 below) For these reasons these estimates are not included in the study estimates.

The evidence reported above suggests, however, that the negative environmental externalities of current forestry operations, particularly in native forests, are probably substantial.

1 See, for example, ESD-F, pp.192–194, and NGGI, 1994 and Buxton, M., Integrating conservation and development through the planning process: the case of vegetation protection and restoration, a paper to the National Greening Australia Conference, 4–6 October, Fremantle, W.A.,1994.
2 Streeting, M., and Hamilton, C., An Economic Analysis of the Forests of South–Eastern Australia, Research Paper No. 5,RAC Inquiry, 1991.
3 This proportion is now being re-evaluated.
4 ABS, Quarterly Forest Product Statistics, March quarter, 1995.
5 ABS, National Balance Sheets for Australia, op. cit., p.81.
6 Besides the above approaches, see also Dragun, op. cit.

Internalisation of current forestry externalities could be partly achieved by preserving high conservation value areas, partly by regulation of forest use and partly by imposing specific charges on forest operations and other forest activities. The decision by the Federal government in March 1995 to introduce a system to preserve 15 per cent of pre-European settlement forests will reduce the costs of forest operations in terms of biodiversity and other non-timber value losses. The extent of this internalisation is, however, uncertain and other instruments need to be considered after review of the externalities involved.


6.4 Summary

The above discussion indicates that financial subsidies may be significant and that the environmental subsidies to forestry operations are probably substantial. That is, there are probably substantial opportunity costs of current, planned and proposed forestry operations in Australia. Policies should be directed initially at a detailed analysis of these costs and following this analysis consideration should be given to the removal of subsidies.

When considering policies to remove subsidies from forest products there is a need to address subsidies to substitute products, for example concrete, steel and imported timber. Also there is a need to consider social effects of removing subsidies, for example the job and income loss effects in forest activity communities. While in the medium and longer term job and income gains from tourism and recreation may offset the forest activity losses the winners and losers are not precisely coincident groups. The potential impacts of subsidy removal are not confined to the forest sector but are also found in the other resource areas covered in this study.

A summary of the study’s findings on financial and environmental subsidies to public forestry operations in Australia is presented in Table 16.


Table 16: Summary of financial and environmental subsidies,1994, public forests

image: table 16


  1. Requires detailed analysis of governments’ policies and potential to raise revenues from extraction of forest products to provide appropriate community returns and recover public agency costs.
  2. Agency reports indicate forest product revenues are, or close to, meeting agency operating expenditures but the actual situation is unclear; estimate included under access fees, etc. above. See text for basis of estimate.
  3. Direct subsidies do not appear to be paid. There are some State consolidated revenue and Commonwealth payments to the States for forest assessments, adjustments, etc. and the estimates on public agency cost shortfalls attempts to take these into account.
  4. Not estimated due to current valuation problems. A priority area for further study.

A review of State budget papers indicated that information contained in them on forest levies, access fees, royalties and expenditures are inadequate. Therefore it was necessary to review State forest agency annual and other reports. No analysis appears to have been undertaken in Australian on the adequacy of community returns from extraction of timber from public forests.

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