Negative rents from forests?

Early last week a newspaper article reported that logging of native forests in NSW are loss making operations. This revelation comes in the face of calls by some political parties in the NSW Parliament to expand logging of native forests based on the argument that this will keep people in the logging industry on the job. Representatives of other parties in the parliament have quite rightly pointed out how ludicrous this proposition is.
This can be seen by looking at the very basic principles of resource economics. Natural assets (forests, fish, water, minerals, etc.) have values that are quite obvious, and can be very, very large, but do not have prices because they are given by the Nature. But, once these natural assets are transformed into marketable commodities (logs, fish fillets, saleable ore) they command a price. The difference between the revenue obtained for these marketable commodities and the costs – inclusive of all factors of production, and particularly inclusive of some ‘normal’ return on invested capital – , of putting them on the market is sometimes called a ‘shadow’ value, and reflects the value of these assets as represented by the Natural Resource Rent.
Now, what is the report of losses from native forest logging telling us? The implied Natural Resource Rent is negative, which translates into saying that these forests are not valuable at all, and in fact we, as society, should be paying for someone to cut them down! This clearly defies logic, as we all know that native forests are valuable not only for the timber and pulp that we get from them, but also for the numerous eco-system services that they provide: land and water protection, biodiversity conservation, and recreational and aesthetic services. So, if society does not get anything for something that it is so clearly valuable, we should immediately stop using the asset in the way we do. This means that logging of native forest in NSW should not proceed at all until that time when society can capture a positive and significant rent from this activity.
What’s more, the rent should be high enough to more than offset the loss of values of eco-system services that will eventuate as a result of the logging. Given the likely magnitude of those values, logging native forests should be very profitable to justify its existence. Stopping it when it is not profitable should be a no-brainer!

Author: Tiho Ancev

Tiho Ancev is a Professor of Agricultural and Resource Economics in the School of Economics, University of Sydney. His main research areas are agricultural, environmental, natural resource and energy economics. Tiho’s main contributions have been in water economics and policy, economics of energy, economics of air pollution and climate change policies, and economics of precision agriculture and agricultural input use. He has published widely on these topics in top international peer reviewed journals. Tiho has led and contributed to national and international research projects in these research areas. He is currently the Managing Editor-in-Chief of the Australian Journal of Agricultural and Resource Economics.