51st Congress of the European Regional Science Association: "New Challenges for European Regions and Urban Areas in a Globalised World", 30 August - 3 September 2011, Barcelona, Spain
Forests can play a major role in climate regulation by reducing levels of carbon dioxide and other greenhouse gases in the atmosphere. Forests also provide a range of other ecological goods and services such as biodiversity and watershed protection and amenity benefits. On the other hand, deforestation and suburban sprawl have substantially changed and fragmented our landscape. While the economic importance of open space and forest amenities and the implications of nontimber benefits for harvesting within the traditional Faustmann framework are well understood, the feedback effects between urban development and forest land changes are not. However, the development of a framework to fully exploit the interplay between urban development and deforestation may reinforce the workings of emission reduction programs if co-benefits from land-based mitigation are realized. The purpose of this paper is to offer a first step towards such framework. In particular, this paper has developed a model of a single forest owner operating with perfect foresight in a dynamic open-city environment that allows for switching between alternative competing land uses (forest and urban use) at some point in the future. The model also incorporates external values of an even-aged standing forest in addition to the value of timber when it is harvested. Timber is exploited based on a multiple rotation model a la Faustmann with clear-cut harvesting. In contrast to previous models, our alternative land use to forest land is endogenous. Within this framework, we study the problem of the private owner as well as that of the social planner, when choosing the time to harvest, the time to convert land and the intensity of development. We also examine the extent to which the two-way linkage between urban development and forest management practices (timber production and provision of forest amenities) contributes to economic efficiency and improvements in non-market forest benefits. Finally, we consider policy options available to a regulator seeking to achieve improvements in efficiency including anti-sprawl policies (impact fees and density controls) and forest policies such a yield tax. Numerical simulations illustrate our analytical results.