Biodiversity policies in commercial boreal forests: Optimal design of subsidy and tax combinations

This paper examines the first-best instruments for biodiversity maintenance in commercial boreal forests when landowners behave either in Faustmannian or Hartmanian way. Using an extended Hartman model, we show that biodiversity conservation requires both prolonged rotation age and leaving retention trees. While the former promotes some old growth species, the latter create new structural elements of decaying and dead wood, which can sustain a variety of saprolyxic species. A fully synchronized combination of retention tree subsidy and tax instrument is needed both to lengthen the privately optimal rotation period and to provide an incentive to leave retention trees. Using Finnish data we illustrate empirically the sizes of instruments. When combined with a harvest tax, the retention tree subsidy is 1000 and 750 epsilon in the Faustmann and in the Hartman model, respectively. When used with a timber subsidy or a site value tax, the retention tree subsidy is 1700 epsilon/ha in both models. The harvest tax rate varies over the range 40-65% in the Faustmann model and 20-40% in the Hartman model, while timber subsidy is between 0.5-1.0% and site value tax is about 1.75%. (C) 2006 Elsevier B.V. All rights reserved.