Introduction

The United Nations System of National Accounts (SNA), which are utilized by most countries in compiling data for macroeconomic policy analysis, have undergone changes in recent years to more broadly include natural resource assets and environmental phenomenon. Likewise, since the United Nations Conference on Environment and Development in 1992, there has been greater and greater emphasis in forestry on "sustainable forest management". Concomitantly there have been corresponding increases in both the appreciation of the broad array of forest benefits and more widespread recognition of inappropriate or wasteful forest uses. As these changes in the forest policy environment have occurred, there has been an increasing demand for new macroeconomic policy analysis data and methods as countries seek ways to reconcile conflicts and find balancing points between the ecological, socio-cultural and economic matters which envelop forestry in the late twentieth century. In order to more adequately address these issues, forest economists and national economic policy analysts will need revised conceptual models and new numerical foundations in forest sector analysis.

Conventional national income accounting procedures (UN, 1993) include aggregate measures of forest sector activities. However, the forest sector account focuses on forests in a very narrow sense of the word. Only forest assets that have commercial timber value are included in the forest sector. As a result, the important linkages between forest production and wood product conversion are not included in estimates of valued added. Furthermore, many important forest sector activities are noncommercial in the sense that they lack market exchange values. While there are forests that should be classified as "non-commercial", these assets are still likely to be important environmental assets which provide many valued services such as fish and wildlife habitat protection, recreational use opportunities, watershed protection services, and climate modification functions that may result from carbon take-up and storage. Finally, some important forest products and services are typically reported in other economic sectors. For example, the value of wild berries, forest grazing, and game may be reported in the agriculture sector.

The result of the broad approach to forest sector reporting is that policy analysts and policy makers who rely on national income accounts are not easily able to get a comprehensive anddetailed picture of the contributions of forests, both positive and negative, to societal well-being. As was just suggested, this is due primarily to the very nature and role of forests in any economy and the necessary lack of detail in SNA. Forest values are many. Several important values are not typically traded in the marketplace. And many values are reported in other economic sectors. But, in recent years, as the level of timber harvesting has escalated in many areas of the world to the point that sustainable long-term economic development is threatened, it has become clear that national income accounts could do a better job of helping to analyze sustainable development. Because stock estimates of forest land, timber and other valuable forest assets have not traditionally been included in the list of a nation’s assets, depletion of forest assets can be severely understated. Furthermore, verification or investigation of sustainable development from the standpoint of long-term wealth accumulation is beyond the scope of macroeconomic analysis if the nation’s natural wealth endowment is not included in national income accounts. Likewise, important environmental indicators such as the rate of deforestation or forest degradation are not reported so that these phenomena are easily overlooked.

In recent years, there have been substantial changes in the System of National Accounts (SNA)which allow more detailed analysis and improved reporting of natural resource assets and environmental accounting UN (1993a, 1993b). These changes also provide for the introduction of satellite accounts or Systems of Environmental and Economic Accounts (SEEA). The existence of an SEEA for the forestry sector in an economy will allow even more precise macroeconomic analysis.

This report presents and discusses the evolution and current status of forest sector satellite accounts in economic and environmental accounting. These accounts are presented in terms of their relationship to SNA. With a better knowledge of expanded forest sector national income accounting capabilities, attention is given to their potential uses in forest sector policy analysis. The report has two intended audiences. First, we address policy analysts and policy makers with expertise in the forestry sector of an economy. Second, we address national income accountants and applied economists who may work at adopting or using satellite accounts. The objective of the introductory chapter is to establish the contemporary context for utilizing satellite accounts for the forest sector. What problems can they be expected to solve? The second chapter reviews forest accounting in the 1993 SNA as a basis for introducing the satellite accounting information presented in Chapter 3. Chapter 4 reviews a broad set of case studies, forest sector accounting trials and policy studies that utilize forest sector account information. Here are examined patterns of use, approaches to valuation, potential problems and limitations in the use of this important policy information system. Finally, action steps to improve the status and use of this evolving information system are discussed.

There are a number of challenges to national income accounting which emanate from the environmental dialogue surrounding contemporary forest management issues. It is important to enumerate these issues before looking at specific ways to adapt and utilize the SNA in meeting these analytical challenges. A list of major forest policy challenges would certainly include the following.

An Expanded Accounting of Forestry Benefits

The problem of forestry is well summarized by Vincent and Hardwick (1997). Forestry is an example of an activity whose contribution to the economy in a welfare sense is unlikely to be measured well by value added in the production account. Forests contribute directly to welfare through the provision of amenity values, which may not satisfy the SNAs’ definition of ‘production’. They also provide other industries with services such as watershed protection, whose value the SNA records as part of the operating surplus of the recipient industries instead of as services furnished by forests. For these reasons, the SNA likely understates the economic contribution of forests.

In summary, an overarching challenge is to use macroeconomic policy analysis models that reflect the genuine contribution of the forest sector to national well being.

Assessing the Sustainability of Forest Management

The importance of sustainability was recognized at the Eleventh World Forestry Congress in a call for the development of forest survey capacities in the poorer countries (Lanly, 1997). Without proper survey data and associated environmental monitoring programs, much of the level of harvesting may be unsustainable either from the view of sustainable timber yields or.6 from a more conservation-based perspective of sustainable forest ecosystem management. Because forests may be managed sustainably, it should be possible to examine rates of accumulation and depletion as a direct indication of sustainability. This would mean that current rates of net accumulation (depletion) would be reported relative to long term rates of sustainable use. Of course, this implies that any wealth accruals associated with high and unsustainable levels of harvesting are potentially short-term in nature with the heightened likelihood that a nation could fall back into a low-income development situation as its forests become depleted. The usual view of the SNA is that it is not particularly well-suited to identifying problems of resource depletion and sustainability and thus, the second challenge is to adapt national income accounting procedures which will readily allow analysts to identify these kinds of problems.

Evaluating Deforestation and Changes in Land Use

Another important issue is how to include deforestation and associated land use changes in forest sector national income accounts. Irrespective of whether the land is a commercial asset or not, there are typically many important environmental aspects associated with deforestation. Associated with deforestation is the issue of identifying land use changes and sustainability indicators. Therefore, another challenge to national income accounting principles is to identify and keep track of timber harvesting and potentially related problems of deforestation, desertification and land use changes as they occur. The purpose is to identify these problems in their infancy rather than to delay identification until a time when forest land and timber liquidation is essentially irreversible. This kind of national income statistics can lead to policy decisions which are more stable both from the standpoint of ecosystem phenomenon and wood using industries.

Evaluating Forest Degradation

The quality of forests throughout the world appears to be subject to an increasing number of environmental stresses. These stresses may result from inappropriate management or from activities that originate outside forests. Another important challenge is to develop indicators of forest degradation that can be included in national accounts. The purpose of these indicators is to better report changes in forest quality due to exogenous and endogenous stresses.

Accounting for Non Market Forest Amenity Values

Numerous approaches have been developed and used to estimate nonmarket values. The development and application of these concepts is extremely important because forest ecosystems comprise a broad array of nonmarket and market phenomena. The challenge is to utilize nonmarket values in the forest sector, which are estimated in the macroeconomic or general equilibrium context of analysis. The values must be consistent and comparable with market values in the larger system of accounts so that the forest sector is truly integrated into the larger economic system. Often nonmarket values are estimates of consumer’s surplus for nonmarket goods and services. It must be kept in mind that prices for market goods are treated as parameters in the policy analysis. If this were not the case, consumer’s surplus would also be included in the value of market goods and services as well. Thus, one important issue to resolve is how to estimate values.

Adjusting National Income for Household Consumption of Nonmarket Forest Products

In many economies, there are significant levels of household consumption of non-timber forest products. One of the most important and best known examples is the gathering of fuelwood. In some economies fuelwood is the most important source of domestic energy and excessive levels of fuelwood collection and use may not be sustainable. The fact that fuelwood production and consumption activities are not market transactions means that the value of these activities are not recorded in national income accounts and actual levels of fuelwood production are often unknown. Again, since household consumption of products such as fuelwood is not known, policy makers can not easily evaluate the importance of these kinds of activities. Fuelwood is but one of these kinds of forest products that are important to households and which are not recorded in the transactions of an economy. In spite of the nature of these forest uses, it is important that they be recognized as a component of social wealth so that appropriate decisions may be made about the production and allocation. Thus the challenge is how to estimate the value and sustainability of forest products which are consumed directly by households.

Of course it is truly impossible to imagine the total number of different kinds of policy analyses made possible by an integrated set of Forest Sector SNAs and SEEAs. The following list represents a starting point and resulted from both brainstorming and from examining a list developed by Hamilton and Lutz (1996). In summary form, we suggest the following possible uses.

Improved Monitoring of the Forestry Sector Performance

Because savings and investments play a very important role in developing countries, approaches to gauging the economic performance of an economy that ignore the depletion or accumulation of natural capital can yield very erroneous insights into the functioning of the economy. Developing national accounts for natural resource assets inclusive of their quality, quantity, rates of use and net investment can be a most important step in examining sustainable development where sustainable development is simply defined as the continued accumulation of all forms of wealth.

Accounting for Total Forest Production in National Economic Aggregates.

Given the discussion of the production relationships between the forest sector and other related sectors (agroforestry, hydropower, fisheries, and manufacturing), developing appropriate production relationships between the forest sector and the related sectors will help create far better insights into how the management of forests contributes to total economic well-being. Examining budgets for forest activities or examining the effects of macroeconomic or trade policies on the forest and related sectors are two extremely important ways that the green SEEA can be effectively utilized.

Accounting for Management Costs and Habitat Protection Costs.

Establishing habitat protection zones or bioreserves is an important element of sustainable development. In some important respects these kinds of decisions represent decisions to reallocate wealth between important sectors of the economy. In other words, because capital can be somewhat fluid, these decisions imply the substitution of one form of wealth for another with aggregate income and distribution effects. Examining these kinds of decisions is an important potential use of forest sector specific SEEA.

Monitoring the Relationship between Forest Sector Activities and Pollutant Flows.

By establishing the appropriate links between forest sector activities in input/output tables with other sectors, physical waste flows may be traced as pollution flows to other industries and activities. Beyond this, pollution reduction policies such as emissions regulations and pollution taxes can be evaluated and monitored.

Assessing the Effectiveness of Government Policies such as Taxes and Subsidies on the Forest Sector.

Many new policies, which are designed to maintain or improve environmental quality, will be considered in the future. The development of a forest sector SEEA should allow better capacities to evaluate the effectiveness of these kinds of policies.

Monitoring the effectiveness of broad macroeconomic policies of such as trade policies on the forestry sector.

Many broad economic policy instruments have differential effects on particular sectors of an economy. Development of a forest sector satellite account (SEEA) should allow more precise analysis of these kinds of policy instruments on the sustainable development.

Monitoring the Implementation of International Treaties.

Many international environmental issues will be solved through international treaties which could influence forest land use, or timber harvesting by the establishment of such agenda items as carbon sink requirements, special habitat areas or related approaches. A forest specific SEEA would help in monitoring these treaties

Land Uses.

Because of the concern with deforestation, desertification and land depletion, a critical policy issue well suited to a forest sector specific SEEA is the examination of genuine savings and depletion in the nations land account. While, land of course is fixed in it physical proportions, the productivity of land can be enhanced or degraded by human activities. Furthermore, some forest practices may ultimately lead essentially to the abandonment of potentially valuable forest land assets. By developing different land use accounts, a nation can keep track of the sustainability of its forests by keeping track of its land uses. In addition, the nation will also help track long term biodiversity implications.

Biodiversity Trends.

There are a number of ways to examine asset depletion in a nation's wealth of flora and fauna. Broad trends in depletion are indicated by rates of change in the number of extinct species. Perhaps more importantly from the standpoint of the forestry sector is need to identify spatially important areas of exceptional species richness and then monitor maintenance of this richness.

Forests are multiple-value resources. It is important to examine forest values in a broad way so that national income accounts and related satellite accounts may be more clearly understood. In order to make certain that the multiple resources of forests are valued consistently and comparably some of the broad values may be excluded from satellite accounts. That means that some analyses may be conducted with incomplete information.

Several authors have proposed a scheme for valuing total forest benefits. Kengen (1997), Gregersen, et al. (1995, 1997), and Kumari (1995) all draw from the work done by Pearce (1993, 1990). Total economic value consists of the sum of fiv e kinds of values: direct use value, indirect use values, option values, existence values or quasi-option values. Because forest management has consistently and traditionally examined the direct use values, other values are often ignored.

Direct uses of the forest are ones in which there are specific consumers of forest goods and services. These consumers may or may not pay market-clearing prices for the rights to use these forest goods and services. These users could be recreation users, timber purchasers, water users who either benefit or suffer from forest management activities, or economic agents who graze domestic stock on forest land.

Indirect uses of the forest essentially occur because of the broad nonspecific environmental services provided by forests. For example, carbon uptake and storage helps reduce the deleterious impacts of global climate change brought on by massive fossil fuel consumption in the industrialized economies. At the current time, these services are nonspecific to any particular people or nation. Other important environmental services provided by forests include broad maintenance and stabilization of the earth’s water and nutrient cycles as well as providing areas which collect, filter, and otherwise store toxic pollutants.

Option values have been increasingly recognized as being important to protecting forest dependent life forms. Even if there is no known direct or indirect use value of various life forms, people recognize that some unknown use value may arise so that a value for potential uses may be important. Option values are more common than many people may first recognize. For example, citizens may be willing to pay a tax to keep bus service to their neighborhood in spite of typically using an automobile for primary transportation. Paying to keep bus service protects option to use buses that aren’t expressed in the usual transactions based demand analysis.

Bequest values are related to option values but add an element of intergenerational concern. Recognizing that actions of one generation may close options for future generations, a bequest value represents the willingness to pay to provide and maintain options for future generations that aren’t able to express their values in current markets or political arenas.

Existence values are the values people place on forests regardless of use. These values may be placed simply on forest landscapes or on forest-dependent species. For example, people may be willing to 1) support political agenda to maintain forests, and/or; 2) join groups to support those kinds of agenda, and/or 3) pay to protect forests or forest dependent species. In any case the three examples represent forms of resource allocation to secure the existence of something of value.

Table 1 Classification of Forest Uses by Type of Total Economic Value

_______________ Use Value____________________ Non-use Value

Direct Value + Indirect Value + Option Value + Bequest Value + Existence Value

The components of total economic value are used to classify major classes of forest goods and services in Table 1 above. Unlike Gregersen, et al. (1995, 1997), Pearce (1990) or Kumari (1995), we have made some double entries in the table to more adequately indicate some of the complexities in accounting for forest sector benefits. For example, water products are entered as direct benefits while watershed protection is seen as an indirect benefit. While this may at first be confusing, it is possible to influence the level, timing and quality of water products in a basin (direct benefits), while at the same time contributing in some less known way to the likelihood and damage levels of floods (Flood prevention is an indirect service). Likewise biodiversity is a double-entry forest good and service. Maintaining biodiversity to maintain a stable ecosystem can be seen as an indirect benefit of forest management. The fact that people may be willing to pay simply to know that wild forests exist is an existence value of forests.

There have been many studies designed to develop both the theory and practice of valuation for the kinds of forest values listed in Table 2. We will briefly allude to some of the problems. and complexities of value estimation. Some of the direct use values have actual cash prices. Of these, a subset might be considered as competitive prices. Prices for much of the timber logged around the world is paid for under negotiated rates rather than through the competitive play of market forces. Furthermore, where common access exists for timber or other scarce forest resources, there is by definition, no price. In the case of unpriced resources, two kinds of outcomes pertinent to environmental accounting in the forestry sector can occur. In one case, the unpriced resource is combined with other factors of production and then sold. In the other case, the resource is not sold at all^. Both of these problems in valuation have severe microeconomic implications, as well, because in neither instance is the forest management organization compensated for the value of its products and as a result the incentive structure for efficient management is deficient.

The remaining values in Table 1 are nonmarket in nature. Kengen (1997) summarizes many of the valuation techniques for the various kinds of market and nonmarket forest benefits. From a practical point of view, it is doubtful that all of the total forest values will be entered into forestry sector satellite accounts. There are a variety of reasons for this. Option values, bequest values and existence values pertain to virtually all of the goods and services produced in an economy and are not included in transaction values which are the standard fare values making up revenue flows in the economy. Thus for reasons of comparability, it would make little or no sense to add these three kinds of values to forestry sector activities while not adding them to the values in other sectors of the economy. It would make even less sense to add these values to only certain elements of the forestry sector while leaving them out of other sectors. For example, wood quality of some forms of old growth timber is essentially irreplaceable. High quality stringed musical instruments are made from slow growing high elevation old-growth Englemann Spruce trees. One would expect that there are option values, bequest values and existence values that are not reflected in the stumpage prices for old-growth spruce timber. In summary, it is important that values for the various forest benefits examined in forest sector satellite accounts are comparable. In making a decision for comparability, some values will be excluded. This means that the analyst should carefully examine analytical results to be assured that left-out values won’t "upset" the results of the policy analysis.

The system for classifying forest values in Table 1 is also useful for broadly examining economic activities and the interaction within subsectors of forest accounts and between broader economic sectors. When people consume final economic goods and services, their actions represent a final step in many connected activities that take place in making the good available for consumption. Production activities often span many sectors of an economy and the activities that take place between sectors are called linkages. Linkages are very important in several ways. If linkages are not well defined for the forest sector, then the impacts of changes in outputs of forest sector activities on regional or national aggregates will not be properly quantified and the development role of the sector will likely be understated.

Table 2 Typical Forward and Backward Forest Sector Linkages

Forward linkages represent forest sector goods and services that either become factors of production for other intermediate and/or final goods and services. Backward linkages represent purchases of goods and services that are utilized in the production of the forest goods in question. These linkages are viewed as flows between sectors of an economy.

Table 2 summarizes some key expected linkages in forest sector activities. The term expected is an important one because many of the linkages are not often easily discerned. Based on experience in Finland, Simula (1997) recommends that a cluster analysis be done to more carefully quantify linkages.

The entries for Table 2 are limited to the direct uses in Table 1 because the direct use linkages are better understood than the indirect ones. It may be possible to model residual flows in an economy. If that is the case, then such factors as pollution flows between economic sectors may also be included in the table as well. This leaves the door open to including indirect use values. Options values, bequest values and existence values and their respective "activity levels" present more serious analytical difficulties. SNA is a report for a reference period such as a year. If there is in fact no option, bequest or existence activity for an environmental resource in the reference period, and no money has been exchanged it appears impossible to make a national income account entry for these values. Furthermore, there could in principle be option, bequest, or existence values for market as well as non-market goods. Since these values are typically excluded from exchange values in market goods, it would be prudent to totally exclude them to make values comparable.

While some important valuation concepts may be left out of income accounts for reasons of comparability, it is also important to recognize that the measures of many important forest ecosystem components is also often highly imprecise. For instance, there are no doubt, important and as yet undiscovered biochemical compounds linked with the indefinable and indescribable gene pools of the world’s forests. In lieu of actual inventories of all life forms, Canada (1997) has developed a complex and detailed set of Criteria and Indicators (C & I). The process of developing C&I was launched by the Canadian Council of Forest Ministers, an extremely important step since the provinces control the vast majority of the commercially important forest lands in Canada.

Before leaving the discussion of linkages, it is important to mention one other problem associated with forest sector accounting. One of the most common uses of forest sector income accounts is to study and evaluate the impacts of policies on employment. Traditionally, the employment activity analysis has focused on both forest activities (forestry, logging and related service activities) and wood processing sectors (pulp and paper, lumber, panel products, and roundwood products). Poschen (1997) reports that on a global basis, total forest employment far exceeds recorded employment. The traditional definition of employment as participation in the paid labour market is not really adequate for capturing the reality of most persons for whom forests are the main source of livelihood. For the majority of these persons, the distinction between wage employment, self-employment and work for subsistence production is not meaningful. There are different ways of making a living that are often interchangeable. The same person may harvest wood for fuel for home consumption, make simple wood furniture for sale as a self-employed and work as a daily wage labourer planting trees.... While the problem of invisible forest sector employment is now being documented, just what to do about it in the sense of employment analyses, is far less clear at this time.

The term, sustainability has at least three relevant and important meanings in the context of forestry. Traditionally, the term meant perpetuation of timber supplies. In recent years, the focus has turned to sustainable forestry, sustainable ecosystem management and sustainable development. These changes in what is to be sustained reveal a broader forest management focus toward many uses and values as opposed to dominant timber production. The changes reflect growing concerns with avoiding environmental and social irreversibilities. While these different approaches to what is to be sustained may seem to be in conflict with each other, we shall see that forest sector satellite accounts, if constructed wisely, may be helpful to proponents of any of the various sustainability schools of thought.