Ecological Economics 33 2000 439 – 455
ANALYSIS
Incorporation of risk in regional forest resource accounts
Michel K. Haener , Victor L. Adamowicz
Department of Rural Economy, Uni6ersity of Alta, Edmonton, AB, T
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Canada Received 13 May 1999; received in revised form 8 November 1999; accepted 13 December 1999
Abstract
To be an appropriate indicator of sustainability, a net income measure projected into the future should consider risk. Several authors have demonstrated how risk can be formally incorporated into welfare measures like Green Net
National Product NNP, however, the resulting measure can be considerably more complex than its deterministic counterpart. A practical alternative to formally incorporating risk is to use simulations of the type outlined in this
paper to provide information about the expected impact of risk. This information can be used to apply a stochastic version of a sustainability rule that requires that the expected value of net income be non declining. This paper
discusses the importance of risk and uncertainty to welfare measurement and more specifically the measurement of net income from forest services in a region of northern Alberta. Two different approaches to valuing resource
extraction are compared. The depreciation approach and the wealth-based approach provide very different projec- tions of net income. We demonstrate that when a renewable resource is subject to risk, the wealth-based approach
provides a more appropriate measure of the influence of resource use on future consumption possibilities and the sustainability of net income. © 2000 Elsevier Science B.V. All rights reserved.
Keywords
:
Resource accounting; Risk; Forest resources; Income measurement www.elsevier.comlocateecolecon
1. Introduction
Theoretical literature related to resource ac- counting suggests that net national product
NNP is the most defendable accounting aggre- gate and that extensions of income measurement
to include the environmental sector should use NNP as a starting point Weitzman, 1976;
Aronsson et al., 1997. Numerous economists have derived measures of ‘Green NNP’ from gen-
eralized and simplified models of economies with environmental and resource sectors, including
Hartwick 1990, Dasgupta and Ma¨ler 1991, Ma¨ler 1991, Dasgupta et al. 1994. Their work
suggests that Green NNP should be adjusted to include the value of flows goods and services
consumed in the current period and account for how current changes in capital stocks will affect
Corresponding author. Tel.: + 1-780-4921518; fax: + 1- 780-4920268.
E-mail address
:
mhaenerualberta.ca M.K. Haener 0921-800900 - see front matter © 2000 Elsevier Science B.V. All rights reserved.
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future wellbeing. Accounting for changes in capi- tal stocks, requires that the value of the stock
change be included in the measure. Essentially, the depreciation or appreciation of capital stocks
must be included in the income measure.
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Other more recent work related to national product related welfare measures considers how
relaxing certain assumptions in the underlying model of the economy, influences the Green NNP
expression and its appropriate measurement. The influences of technological change, population
growth, variable interest rates and future resource discoveries, have all been considered in the litera-
ture; however, in this paper we consider the influ- ence of uncertainty on the net income generated
by a small open economy.
This paper will discuss how fire and price risk can be incorporated into the resource accounting
framework and the implications for the measure- ment of regional net income. The analysis builds
on the resource accounting framework developed for a region of public forestland in northern Al-
berta in Haener and Adamowicz 1999.
The paper is organized as follows. Firstly, re- cent literature related to the incorporation of
uncertainty in national product related welfare measures, will be discussed. Secondly, the meth-
ods used to simulate the effects of fire and price risks on the future values of the case study re-
gion’s net income are outlined and the empirical results are presented. Next, the implications of
these simulations are discussed. The paper con- cludes with a brief summary, discussion of recom-
mendations and suggestions for future research.
2. Incorporating uncertainty in NR accounting
