An integrated analytical economic framework to inform future Australian plantation policy

Abstract

Australia's plantation forest estate expanded rapidly between 1995 and 2008, consistent with the intentions of the National Forest Policy Statement and Plantations for Australia: the 2020 Vision. The near-doubling of the plantation estate, to almost 2 million hectares, was financed largely by small-scale investors under favourable tax and investment arrangements. Almost all the plantations were short-rotation eucalypts grown for woodchips. Expansion of these 'simple' plantation forests coincided with the emergence of new domestic policy initiatives in many arenas of relevance to Australia's forestry sector, which also sought to drive the internalisation of production externalities across much of the Australian economy. Thus, the plantation sector was exposed to emerging and often contentious policies governing water use, the sequestration of greenhouse gases and the delivery of other environmental services, as well as changes in the tax policy settings. This thesis explores the policy settings which might favour the establishment of plantations to deliver multiple goods and services, rather than just the production of wood, and the analytical framework for assessing the economic implications of those settings. A typical economic approach for testing policy impacts is cost-benefit analysis. Such an approach is insufficient to capture the interactions between multiple policy arenas. A more sophisticated integrated analytical framework was required to address this challenge and investigate the tension and synergies in tax, water, climate change and environmental services policies. The analytical framework made it possible to assess their likely net effects influencing private sector decision makers, measuring the effects in terms of the financial returns, volumes and types of wood grown, and the flow of environmental service such as the amelioration of salinity or dis-benefits such as the impacts on catchment water yields. The bias in recent investment towards short-rotation plantations was demonstrated to be a consequence of the tax and investment rules, and the lack of policy enabling factors: there was no requirement for growers to internalise their water use as a factor input, no national market for trading carbon credits, and no means for realising the value of environmental services provided by plantations. By integrating multiple policy elements into a single analytical framework, it was possible to estimate the net effects of proposed and alternative policy settings, and to suggest particular changes for reducing the policy bias towards short-rotation and single-purpose forestry. Changes to the tax rules would provide equal treatment for all plantations, encourage more efficient water use and carbon sequestration within the forestry sector, and indicate where incentives might be best used to encourage targeted investment in plantations that also deliver environmental services. The structure of the integrated analytical model makes it possible to incorporate other policy dimensions relevant to forestry into the assessment framework, such as investing in roads or other public infrastructure. While an advantage of using this approach is a greater capacity for quantifying the net effects of multiple policy settings, a major challenge is accessing the information necessary to build and maintain such a framework.