Towards sustainable and accountable subsidy design: Identifying effective subsidisation systems for forest stands

Abstract

Governments often subsidise forest stands to ensure a sustainable supply of wood and environmental services. Governments need to design subsidy systems to effectively achieve policy goals with less government expenditure. This study explored effective subsidy systems for forest stands by comparing four subsidy systems using a simple forest resource model. Although a system formulated with minimal constraints required minimum government expenditure in all cases, the rotation age in a stand could change cyclically with the target supply. Assuming that forest owners cooperate with the government, the maximisation of a cost-effectiveness index in each stand could provide the second-lowest government expenditure for almost all cases. However, when we assumed that forest owners were economically rational and strived to maximise their land expectation values, the optimality of this system was disturbed. In this situation, alternate optimisations of rotation ages by forest owners and subsidy rates by the government converged on the subsidy system with the third-lowest government expenditure. The system adjusts the subsidy rate so that the maximum land expectation value is zero, which is the pure-strategy Nash equilibrium between the forest owners and the government.