The Carbon Cycle and the Value of Canadian Forests

Abstract

SUMMARY.The model derives an equation of the value of forests from a dynamic optimizing framework. This equation gives the marginal social opportunity cost (MSOC) value of the forests, with value added as the numeraire. However, the shadow price is subject to the restrictive complementary slackness condition, which yields a zero shadow price whenever a constraint in not fully binding. To overcome this problem, we assume that value-added is valued at par only when there is no externality. In this formulation the shadow price is a cardinal index of the relative scarcity of the forests.The econometric estimates of the shadow price of the forests and the resulting MSOC value of forests per hectare are obtained by a time trend model (Model 2) and an ARIMA model (Model 3). We regard the ARIMA model estimates to more representative of current conditions, and the estimated shadow price of the forests (in 1990) is a premium of the order of 25 to 32 percent. The corresponding MSOC value of a hectare of forest is between $350 to $412 in 1986 constant dollars. Naturally the estimates are subject to the limitations of the data.