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

Highlights

• Effective subsidy systems for forest stands were explored.

• A system of minimum government expenditure caused a cyclic change of rotation age.

• Subsidy systems adequate for different behaviours of forest owners are identified.

• A system was Nash equilibrium between rational forest owners and the government.

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.

Introduction

Governments often control the use of forest stands through subsidy systems to ensure a sustainable supply of forest resources and various environmental services, such as preserving water resources (Komatsu et al., 2009), acting as a habitat for wildlife (Bettinger et al., 2003), and promoting carbon sequestration (Dong et al., 2020a). In fact, governments in several countries have implemented subsidy policies and associated systems in practice (e.g., Gain and Watanabe, 2017; Heilmayr et al., 2020; Liu and Wu, 2017; Shigematsu and Sato, 2013). For example, Japan has implemented a subsidy for forest stands for wood production (Japan Forestry Agency, 2022a). Although 27.4% of the land is covered with planted forests (Japan Forestry Agency, 2022a), the profitability of forestry is low for historical and geographical reasons (Akao, 2002). As a result, the timber self-sufficiency rate was only 18.8% in 2002, while the rate increased to 41.1% in 2021 (Japan Forestry Agency, 2022a). This situation implies that Japan uses the forest stands of other countries, even though the country has large planted and renewable forest resources. Therefore, it may be reasonable for the government to implement subsidy systems to compensate for the costs of reforestation, silviculture, and commercial thinning operations in forest stands that are primarily managed for wood production (Japan Forestry Agency, 2022b, 2022c).¹ As the world's demand for wood may increase in the long term (Elias and Boucher, 2014; FAO, 2018), similar subsidy systems may be beneficial to guard against the global overuse of forests and deforestation in the future.

However, subsidy systems often do not work effectively or may even cause undesirable results. For example, Nakajima et al. (2007) found a rare contribution from an auxiliary subsidy system for forest management to increase managed forest areas in Gifu Prefecture, Japan. Heilmayr et al. (2020) suggested that the Chilean subsidy system for afforestation in 1986–2011 might have replaced natural forests with planted forests and decreased biodiversity without an increase in carbon storage. Similar research that evaluates practically implemented subsidy systems has clarified the possible issues as well as positive effects (e.g., España et al., 2022; Haeler et al., 2023). However, forest policies can have long-term effects owing to the long rotation cycle; likewise, problems sometimes only come to light after critical events occur. Practically implemented subsidy policies can only be evaluated after a long time has passed since the implementation and if distinguishable problems have occurred. Discussing the fundamental principles of designing effective subsidy systems for forest stands is also important for the sustainable use of forest resources and accountable use of public funds.

There are two viewpoints that define the effectiveness of a subsidy system. The first is cost-effectiveness, defined by the government expenditure necessary to achieve a policy goal. In general, governments should design subsidy systems so that they are accountable to taxpayers for their expenditures. This principle is usually implied in research exploring desired forest policies and associated forest management (e.g., Battuvshin et al., 2020; Cho et al., 2017; Nakajima et al., 2011). However, we should note that the existing forest policies and subsidy systems in practice have also been designed based on this principle, although such subsidy systems are often found to be inefficient or can even cause undesirable results. Therefore, the second viewpoint of effectiveness may be defined as the ability to avoid unexpected suboptimal or problematic situations.

A possible reason that an optimally designed system becomes suboptimal is a change in the optimal strategies of subsidy recipients (Fullerton and Mohr, 2003). Subsidies and taxes for forestry change the economically optimal rotation ages (Guthrie and Kumareswaran, 2009; Toyama et al., 2017; Van Kooten et al., 1995). Consequently, the subsidy systems designed before the changes can be suboptimal after the system is implemented. Although the dependency of the rotation age in each forest stand on the subsidy system has sometimes been the focus of study, few studies have integrated the avoidance of unexpected suboptimality to design subsidy systems for forest stands on a regional or national scale.

Using a specific forest resource model, Moriguchi et al. (2017) proposed an integrated subsidy system for reforestation costs to achieve a given target supply involving the change in optimal rotation ages due to subsidisation. Moriguchi (2021) further generalised the system to allow general forest resource models to be utilised and reported that the necessary government expenditure is reduced from what is typically assumed in the evaluation of potential long-term supply (Battuvshin et al., 2020; Matsuoka et al., 2021). The model was developed on the principle that “the subsidy for a stand should be minimised so that subsidised forest owners do not receive private profit associated with subsidisation” (Moriguchi, 2021). However, this principle is a constraint, and it can prevent the minimisation of government expenditure. Therefore, from the first perspective of effectiveness, other subsidy systems have the potential to further reduce government expenditure. Effective subsidy systems for forest stands should be identified by integrating the two viewpoints of effectiveness.

In this study, we explore effective subsidy systems for forest stands by comparing four candidate systems, each can be “optimal,” from these two perspectives. The first system applies a uniform subsidy rate for reforestation costs to all stands, similar to the current subsidy system in Japan. A similar principle has been applied in the evaluation of potential supply (Battuvshin et al., 2020; Matsuoka et al., 2021); however, we introduce a further mechanism to reduce government expenditure. The second system is the method of Moriguchi et al. (2017) and Moriguchi (2021), which adjusts the subsidy rate of each stand such that the maximum land expectation value (LEV), the net present value of profit obtained from infinite rotations, is zero. The third system uses a cost-effectiveness index in each stand as the objective function to determine the optimal rotation age, expecting a further reduction in government expenditure. The fourth system numerically explores the minimum government expenditure without such principles. The third and fourth systems, newly defined in this study, are expected to reduce government expenditure more than the first and second systems. In contrast, the four candidate systems might cause unexpected suboptimality; thus, we explore effective subsidy systems from the two perspectives.

The remainder of this paper is organised as follows. In Section 2, basic assumptions, the four subsidy systems, and the forest resource model are formulated. In Section 3, the method for identifying the optimal solution for each system and analyses for comparing the four systems are described. Section 4 reports the results of this investigation. In Section 5, we discuss the results to clarify the principle of designing an effective subsidy system and the limitations of this study. Section 6 summarises the results and implications of this study.