Calculating penalties for reforestation failures: an Alberta case study

Provincial governments across Canada rely on regeneration requirements and penalties to promote reforestation following harvesting. However, little has been written on how to determine optimal levels of penalties for noncompliance such that tenure holders have incentives to further social reforestation objectives. This paper shows how reforestation penalties may be calculated in the case of Alberta. The calculation of the penalty is shown to be dependent on (i) changes in the values of future annual allowable cuts caused by failure to promptly regenerate, (ii) the portion of stumpage values collected with stumpage fees, (iii) nontimber values influenced by reforestation, (iv) differences in private and social discount rates, (v) costs of detecting noncompliance, and (vi) the probability of detecting infractions. In the case of Alberta, (v) and (vi) are minor considerations, as detection costs are low and probability of detection is high. However, values of (i) through (iv) have large potential impacts on the optimal penalties. For example, if (i) annual allowable cuts drop by 99 m3 for a 3-year reforestation delay (vs. an acceptable 2-year delay) on a 783ha forest, (ii) stumpage fees are $10 below stumpage value, (iii) nontimber values are zero, and (iv) the private discount is 9%, while the social rate is 6%, then the optimal penalty is $49.17CAN.ha^-1. However, if we change (ii) and (iv) such that stumpage fees are $30CAN below stumpage value and the private discount is 9%, while the social rate is 3%, then the optimal penalty is $168.58CAN.ha^-1. With zero nontimber values, zero monitoring costs, no divergence between public and private interest rates at 9%, and a probability of detection of 1.00, the current penalty of $30CAN.ha^-1.year^-1 would approximate the optimal amount if stumpage fees were $20CAN.m^-3. The variability in values of (i) through (iv) across forests and over time suggests that problems will arise in establishing a constant penalty for all provincial forests and that penalties should be revised as values change over time.