Forest banking and forest landowners forgoing management rights for guaranteed financial returns

Abstract

Forest banking provides a new tool for forest conservation in which a landowner cedes development rights on their forested property in exchange for an annual payment, based on the assessed value of the timber. The Nature Conservancy is in the process of establishing a Forest Bank in Virginia, Indiana, and possibly elsewhere in the US to protect water quality and imperiled species. This study examines monetary willingness to accept payments for enrollment in the Forest Bank through a referendum-type survey of forest landowners in Southwestern Virginia. A logistic regression model that predicts the probability of enrollment is estimated using survey data that includes the landowner acceptance or rejection of a given annual payment level, landowner demographic characteristics, and tract characteristics. Findings suggest that landowners are responsive to annual payment bid levels and that financially viable bid levels (relative to local land prices) may generate reasonable probabilities of Forest Bank enrollment. Further, some tract and landowner characteristics are significant in predicting enrollment probability, including the desire to bequeath land to heirs, which suggests that forest-banking arrangements should take the target owners and properties into account—especially recognizing the potential reluctance to accept perpetual arrangements.

Introduction

Historically, government and non-government organizations have been the source through which forest landowners could receive incentives for conservation and stewardship activities. Often in the US, government intervention has taken the form of reforestation incentives or tax exemptions for planting.¹ A new approach for providing private forest landowner incentives, called forest banking, is currently being advocated by some environmental interest groups in the US with the objective being encouragement of forest stewardship through sustainable forest management. A major proponent (and originator) of this program is the Nature Conservancy, a large non-government organization operating within the United States and around the world. The Nature Conservancy is best known for purchasing sensitive habitats on private land to ensure continued preservation of imperiled species or promotion of water quality (US Environmental Protection Agency, 2001).

Forest banking may be administered through the private sector and is intended to ensure environmentally—sensitive forest management, while guaranteeing forest landowners a regular source of income. Landowners who enroll in the program waive development rights (e.g. timber harvesting, construction or mining) to at least a portion of the forest land in their possession, and the collection of forest land enrolled by landowners who participate is instead managed by the bank. The bank determines the method, timing and intensity of harvesting and replanting for all forest lands enrolled in the program. Revenues from timber harvesting are deposited in private investment funds. Participating landowners receive an annual payment from these funds that depends on the returns secured by the investments.

Forest banking has characteristics that are similar to many other approaches aimed at cooperative control of forest resources throughout the world. In the US, private forest land has restricted use access, but the non-timber benefits produced from this land (i.e. species habitat and water quality) represent national and global public goods. Forest banking is a means to encourage continued production of these public goods, through the sharing of rents generated from harvesting on selected areas for all landowners enrolled. Thus, the program is similar to rent-sharing programs in many other developing and developed country settings. Consider community forestry programs in Nepal or joint forest management contracts in India, where management of forest land is transferred to a group that manages the forest sustainably, in return for revenue-sharing guarantees that result from production of marketable forest products. In most cases, these cooperative agreements are made between governments, i.e. at local and national levels. The involvement of the private investment sector makes forest banking unique among cooperative forest incentive-based approaches policies where management rights are transferred from one party to another.

In this paper, we use data from a survey of Virginia landowners to examine incentives to enroll in a forest banking program. We do this by estimating an equivalent variation, or willingness to accept, for landowners to forgo management rights on their land in return for guaranteed financial returns. We show how this willingness to accept depends on landowner preferences and characteristics, as well as characteristics of the forest tract. The study is unique in that we uncover a value (or cost) that landowners attach to the management rights for their forest land. Our findings will be useful in future forest policy work where cooperation is forwarded as a means to protect forest habitat.

Our approach for estimating the equivalent variation follows accepted guidelines developed in the referendum voting literature, however, given that the market returns of forest harvesting are known and do not constitute a non-market good, there should be fewer of the biases associated with referendum methods applied to valuing non-market goods. Nevertheless, we follow the survey design methods outlined in the literature to ensure any biases are minimized.

The remainder of the paper proceeds as follows. First, we provide additional discussion of the Nature Conservancy Forest Bank as it is envisioned in Virginia. We then outline a simple model to identify the equivalent variation for a landowner who is considering enrollment in the program, and we characterize an econometric approach, based on referendum voting elicitation, that can be used to examine a landowner's willingness to accept a bid proposed to enroll their land in a forest bank. Following the model discussion, we present our results, which include descriptive statistics, logistic estimation results of our enrollment model, and a discussion of the relationship between bid levels and enrollment probabilities. Finally, we offer four conclusions based on our findings.