Post Graduate Institute of Agriculture, Peradeniya, S.THIRUCHELVAM

EC 5153 (2) RESOURCE PLANNING AND MANAGEMENTSEMESTER I : 2005/2006 I BASIC CONCEPTS KEY PROCES OF NATURAL RESOURCESLECTURE NO. 3SUSTAINABLE ECONOMY AND NATURAL RESOURCE MANAGEMENT Post Graduate Institute of Agriculture, Peradeniya, S.THIRUCHELVAM

The Meaning of Constant Capital • Sustainability can be analyzed in terms of a requirement to maintain the natural capital stock- KN • Meaning of Constant Capital Stock -Physical quantity and constant real value -Unit value of e service flow of KN in real terms,ShadowP -Constant value of e resource flow form KN - whenquantity decline P rice will keep value const. Existing (KE) & Optimal (K*) Capital Stock Conserving e KN stock is consistentw several situation There are Cost & Benefits of changing KN C curve is e foregone development B - not conserve B curve is e Total Economic Value = UV + NUV of KN

B /C Total Economic Value (UV + NUV) B C B C Forgone Dev. Value KE<K* KE<K* 0 KE= K* KN Cs & Bs – Conservation 0 KE K* 3.1 Existing and Optimal Capital Stocks B /C V.F is kinked at KE = K* TheCs& Bs of Env. Change KE < K* Conservation

Reasons for Conserving at KE • KM increase, Decrease KN • Valuation of Multiple functions of KN • Non efficiency benefits of KN • WTA > WTP • S.D Idea is maintain “Constant KN” • Conserving KE ishigh priority

Environmental Functions of Forest Sources of Sink for Waste General & Life Materials & Services Support Function • Timber Waste Assimilation Genetic Pool • Fuel Wood Recycle Nutrition Climatic Regulation • Non Wood Pro. WS Protection Carbon Fixing • Genetic Reso., Protect Soil Quality Habitat – People • Ag. Production Resist Erosion Flora & Fauna • Recreation Aesthetic & • Tourism Spiritual Source • Scientific Data

3.2 Linking Poverty & Environment in a Sustainable Development Framework • WHAT are the key issues linking P, E & Env. w SD? • WHICH methods are available to trace the linkages? • HOW to identify practical options by applying e FW? Key Issues Linking Poverty, Equity & Env. with SD Poverty , Equity & Environment interact Closely with Sustainable Development Especially in Developing Countries SD Challenges – Agenda 21, Millennium Dev.Goal • Alleviate Poverty and Inequity: 1.4 bil people live < $1/dy ; 3 bil people live < $2/day Top 20% income group uses 86% & bottom 20% uses under 1.3% of resources

Millennium Development Goal MDG Contd. Food: 800 million people malnourished today food production must double in the next 34 yrs. Water: 1.3 bil. P without clean W; 2 bil without sani. Energy: 2 billion people without electricity Healthy Env. : 1.4 bil. people are exposed to D. Env. Safe Shelter : Many live in areas susceptible to civil strife. Number of people living in absolute poverty in developing countries = almost 1.5 billion. Bet. 1970 – 1985, in developing countries proportion of poor decreased by 8%, but due to rapid population increase the total number of poor increased by 22%.

Practical Target: Making Development More Sustainable • An approach that will permit sustained improvement in e quality of life at a lower intensity of resource, thereby preserving for future generations an undiminished or even enhanced stock of productive assets. (Manufactured, Natural & Social capital) Application Framework: SUSTAINOMICS • Integrating economic, social & environmental elements, with both optimal and durable approach. Challenges: • Defining “Poverty, Equity and Environment’ • Understanding processing linking poverty & env. • Developing strategies to improve both poverty & the env.

Defining “Poverty & Equity” • Traditional definitions were based narrowly on economic aspects like household income, consumption, & access to economic assets. • Modern definitions encompasses environmental, econ. & social, dimensions of sustainable dev. • Some determinants within these dimensions include: Natural resource base, Env. conditions, Vulnerability, Basic needs like energy, food, water, sanitation & shelter. Education, Social capital, Participation in decision making Access to markets, etc.

Defining Environment • Environmental Services => NR base provide 3 major services “Source”: food, fiber, energy, shelter, medicine etc.; “Regulatory functions”: recycling pollutants, flood control, cleaning fresh W, stabilizing climate etc. “Cultural functions”: enriching quality of life through aesthetic, recreational, educational, cultural, & spiritual experiences • Environmental Degradation => Depletion – declining NR stocks deceasing productivity. Pollution – decline in capacity of the env. to sustain natural systems, thus reducing Welfare.

Poverty  Environment Two Way Linkage • Poor are the most affected by environmental damage & live in the most degraded areas. • The poor affect the marginal NR base on which they depend, & may cause further harm by over use. • Failures of policy, market & institutions are the underlying causes. • The poor in some areas worse poverty in other areas. Deforestation Ganges valley flood in B.desh • Poor people are forced to degraded the env. further buy circumstances - deforestation. • The poor depend on NRs are country & region specific. Forest degradation & large scale commercial cultivation in Brazil

How the Environment Affects Poverty ? • The poor are the most vulnerable to env. risks • Env. Deg. exacerbate poverty & reduce welfare • Access to env. (as well as social & economic) assets are essential to lively hoods of the poor. How Poverty Affects the Environment ? • Deforestation–fuel wood, inappropriate ag-pract. • Soil erosion – over use of land & absence of conservation practices • Biodiversity loss – deforestation & soil erosion- resilience • Coastal zone degradation – high population D –untreated sewage discharge. • Freshwater depletion – adverse effects on health& ag, policy, deforestation • Urban env. quality – over crowding in urban areas

Private Optimum Social optimum 0 Unsustainable Sustainable Case 1 Optimal intervention No need for separate Sustainability policy in cases 1 and 2 Social optimum Private Optimum 0 Unsustainable Sustainable Case 2 Optimal intervention Social Opti. Private Optimum 0 Unsustainable Sustainable Optimal intervention “Moral” intervention needed To attain sustainability Sustainable Development

Welfare w Path might well be optimal but is not sustainable, nor survivable. wmin 0 Time (t) w Path might well be optimal but is not sustainable, although it is survivable wmin 0 t w Path might not be optimal, but is not sustainable and survivable. wmin 0 t

Attitude resulting in non-compliance Criminal Messy Sloppy Careless Overloading Of system Forgetful Lack of Attention Incentives Malicious intent Criminal Law Administrative Sanctions, e.g. Civil suits, incentives, information Negligence Informal Enforcement Response Technical information Financial aids

Moving or Solving Environmental Problems ? Damage a b TIME LOCAL NATIONAL REGIONAL GLOBAL (Present nearby future distant future)

Why is economic growth important? Imperative to have the economy grow as long as human population continues to grow. Developing countries must have a mini. of 3% annual growth to achieve equity with developed world. However, if they use current forms of development to achieve this growth, their energy use alone would have to increase by a factor of five! Third world is bearing large proportion of env. cost of developed world’s economic growthHow can these changes be brought about? Agric. production must be shifted to developing world. This is currently undermined by dumping of W.Surpluses Reduce energy cost/unit of production – Recycling will also result in reduced energy &emissions

Economic Feedbacks on to the Environment Most recent example is President Bush’s decision not to ratify Kyoto Protocol. Econ. growth means greater production, more Use of NRs & Pollution. Environment Feedbacks on to the Economy On a global scale, the following issues will affect the world’s economic systems: Ozone hole, Acid rain, Deforestation, Global warming, Desertification For a sustainable economy… Must slow pop. growth. Merge environment & economics in decision making Stop externalizing environmental costs Scarcity is the “enemy” of economic well-being Wise resource use and reuse is Important

Forest Economics Forests is a storable and renewable resource source. Forests provide products and services. Forest products are of timber and non-timber Tree stands go through 3 distinct growth phases Slow in early, rapid in e middle & reaches full maturity Stand Volume (m3) V (t) MUCt Stumpage Value MUCt dMUCt/dt Opportunity Cost of Capital (r MUCt) dMUCt/dt (Increment stand volume) r.MUCt t Years t’ t* tmax Age of trees at harvest

Forest Management • Two basic conditions for effi. resource allocation • The Static Condition • Determine e price ofresource products in any period • Pt = MEC + MUCt ( S = Stumpage Value) • MUC = stumpage value, e P that a logging operator would payfoe e right to harvest a stand of forest • 2. The Intertemporal condition, which determines the optimal stock to carry forward. • The owner of e timber receives e income from its sale • & a interest income by putting e revenue in e bank, but • e owner who delays harvest will receive addi. growth. • The amount of growth depends on e part of e growth • cycle the stand is in. PV Max. at dMUCt / dt = r.MUCt

The Optimal Harvest From an economic point of view, e effi. time to harvest a stand of timber is when e PV value of NBs is maximized. The PV of NBs is maximized when e marginal gain from delaying e harvest one more year (value of extra growth) is equal to e MC of the delay (lost interest income). For longer- than- efficient delays the additional costs out weigh the increased benefits, while for earlier than efficient harvest more benefits (in terms of the increased value of the timber) are given up than costs saved. This relationship is express by eFaustmann Formula. A = age of rotation i = discount rate =

Optimal Harvesting Time of Timber Value or volume of timber S(A) Value Volume Q(A) Age (years) Average and incremental growth in value (Rs/ha/yr) Incremental growth S(A)/A Average growth S = dMUCt/dt t* t max Age (years)

Rate of growth S/S (A) in stumpage value (%/yr) Optimum harvest age for a single crop S/S (A) A* Age (years) Optimal Harvesting Time for Multiple Rotations Annual Costs & Returns (Rs.) Incremental growth in value dMUCt/dt = r.MUCt Incremental cost including land dMUCt/dt = r.MUCt + MUCLt(Annual value of land) i A** A* rotation age years)

Sensitivity of the Optimal Rotation The optimal rotation is to changes in economic conditions, institutions, and policy option. The Price of Lumber - increase in P increase, MUCt, dMUCt/dt, r.MUCt& MUCL increase optimal rotation The Rate of Interest - increase in r raise r.MUCt tending to reduce the length of the optimal rotation. Coast of Harvesting – A cost reducing innovation in timber H would reduce MECt, increase MUCt & O.R Distance from e Sawmills – lowers e MUC reduce O.R. Other benefits (BD, RV) in proportion to the volume of this standing timber, the efficient rotation will be longer. No exclusiveness of trees – accelerate rate of harvest.

Post Graduate Institute of Agriculture, Peradeniya, S.THIRUCHELVAM