Can I pay you not to harvest that timber?

From BBC News, Norway is going to pay Liberia to cease all harvesting of trees from its rainforest by 2020:

Liberia is to become the first nation in Africa to completely stop cutting down its trees in return for development aid.

Norway will pay the impoverished West African country $150m (£91.4m) to stop deforestation by 2020.

Why would Norway want to do that? Apparently…

Liberia’s forests are not as big as other countries but the country is home to a significant part of West Africa’s remaining rainforest, with about 43% of the Upper Guinean forest.

It is also a global diversity hotspot, home to the last remaining viable populations of species including western chimpanzees, forest elephants and leopards.

“We hope Liberia will be able to cut emissions and reduce poverty at the same time,” said Jens Frolich Holte, a political adviser to the Norwegian government, speaking to the BBC on the sidelines of the UN climate summit in New York.

So apparently (assuming “Norway” is acting on behalf of its citizens) Norwegians value the forest because it provides habitat for endangered species and because it acts as a carbon sink. Well, that’s not really that surprising – plenty of studies have shown that residents of one nation value ecosystem services provided by forests and other kinds of habitat in other nations.

But what is surprising is that the two nations were able to strike a deal. Here’s why: typically, the benefit to the nation owning the forest (here, Liberia, whose harvesters can sell the timber) of harvesting from it is greater than the cost of harvesting, which includes not only costs of equipment and labor, but also costs of giving up carbon storage and the costs of harming wildlife habitat. Let’s call the benefits of harvesting to Liberia Bl, and the Costs of harvesting to Liberia Cl. However, forests provide services like carbon storage and wildlife habitat that benefit not only the nation which controls the forest, but residents of other nations as well. So let’s say we have some nations whose names start with a, b, and c. The typical problem is that, even though Bl > Cl, Bl is yet less than Cl + Ca + Cb + Cc. So, from the perspective of the entire world, it’s economically inefficient to harvest from the forest, but from the perspective of the owning nation, it’s economically efficient to harvest from the forest.

This problem comes up repeatedly with the Amazon rainforest which is primarily controlled by Brazil. As far as I know, Brazil has never entered any similar deal with another nation or group of nations to receive payments to not harvest from its rainforest.

In the case of Liberia and Norway though, a deal was struck because the benefits to Norway of not harvesting the forest are greater than the $150m payment it gives to Liberia, and the $150m that Liberia receives is greater than its costs of not harvesting from the forest (i.e. forgone profits from selling timber). And, again, this assumes that each nation has made a decision that is actually best for its own nation.

As the article mentions, success of the deal will depend on being able to enforce the ban on logging, and Norway is prepared to help with that.

By the way, this is also the same exact problem that makes coordinating a global effort to curb greenhouse gas (ghg) emissions difficult (e.g. the Kyoto protocol). For each individual nation, the costs of cutting down on ghg are greater than the benefits of doing so. But from a global perspective, the costs are less than the benefits of doing so because curbing ghg emissions in one nation benefits all other nations.

You don’t see this kind of deal that Liberia and Norway struck very often, if ever. And one of the nice things about it is that residents of other nations besides Norway benefit as well, for example, the U.S. Many U.S. citizens would be happier protecting the habitat of the chimps, elephants, and leopards than allowing the habitat to be cut down. That increase in happiness? Economists would consider that to be a benefit that should be accounted for in any economic analysis of the decision – but most non-economists aren’t used to thinking about these kinds of benefits.

That’s why I describe economics in my principles class as the study of how to make the best decisions by comparing all the costs and all the benefits of an action.