1996. Commercial forestry comprises : 62 of the total. Refer to Haener and Adamowicz
1999 for a brief description of the region and discussion of the methods used to estimate net
income.
Haener and Adamowicz 1999 apply the ‘Green NNP’ approach but they do not consider
the influence of uncertainty on the measurement of regional net income. Fire and price risks were
identified as potentially important forms of risk in the case study region. If these forms of risk
are significant, the literature discussed in the pre- vious section suggests that the net income mea-
sure for the region should account for the influence of these forms of risk on future rev-
enue flows. Without these adjustments, the in- come measure will be inaccurate and use of the
index to assess sustainability may be inappropri- ate.
Formally adjusting the net income measure for the region requires re-formulating the model of
the economy to account for stochasticity. A stochastic differential equation, which character-
izes the influence of risk on future revenue flows, would have to be added to the problem. How-
ever, a number of other complicating factors would also have to be considered. Hartwick
1990 and Ma¨ler 1995 explain that only unan- ticipated or partially anticipated shocks to the
economy are relevant to current measures of wellbeing. Correctly anticipated changes have ‘al-
ready been capitalized in other prices and there- fore, already been included in the net national
income concept’ Ma¨ler, 1991, p. 13. Estimating contingent shadow prices could be complicated,
since it may be difficult to determine the degree to which current prices already reflect risk.
The practical question that must be addressed is whether it is enough to simply qualify our
interpretations of net income or whether the net income measure for the region should be for-
mally adjusted to account for risk. Simulation exercises such as the one carried out in this pa-
per, provide a practical alternative to re-formula- tion
of deterministic
welfare indices.
The simulation allows the significance of risk and its
expected influence on sustainable income to be assessed.
5. Simulations
A series of simulations were conducted to demonstrate how fire and price risks influence
regional resource revenue flows and timber stocks. The simulations use value estimates from the 1996
resource account developed for the region in Haener and Adamowicz 1999.
The simulations illustrate the effect of fire and price risks on the realization of the study region’s
net income over a 20-year period. Only the effect of these risks on commercial forestry pulp and
lumber production, changes in the stock of timber capital is considered. All simulations assume that
fire and price risk do not influence other components of net income. Therefore, the sum of
the other component values i.e. produced capital depreciation in the forest industry, commercial
fishing
and trapping
recreational activity,
traditional aboriginal
land use,
biodiversity maintenance
and carbon
sequestration stay
constant at 10.56 million. In reality, the other components of the net income measure would also
be influenced, especially in the case of fire risk. We simulate the future paths of resource revenue
flows and changes in the merchantable timber stock when fire and price risks are considered.
Using the resulting distributions, we compare income
measures calculated
using Repetto’s
approach and the wealth approach supported by Brekke 1997 to value annual changes in timber
stocks. Using the depreciation approach, income from resource use is calculated as resource
revenues minus plus the change in timber capital valued at the net price rent for the specific year.
Using the wealth approach, the expected net present value NPV of the timber stock i.e.
expected NPV of future revenues at the beginning and the end of each year is calculated using a 5
discount rate. These expected NPVs are used to calculate the maximum sustainable consumption
MSC which is the annuity equivalent of the NPV. Resource revenues from the period are adjusted by
the change in expected MSC over the period which may be positive or negative. The change in
MSC accounts for how the current period’s consumption alters the consumption level that can
be sustained in future periods.
As noted, the simulations predict revenue flows and stock changes for the next 20 years. This
simulation period is used since this corresponds to the duration of the FMA and to the planning
horizon used in a typical general development plan Land and Forest Service LFS, 1998. For
each of the 20 years, 500 draws are made from the probability distribution characterizing fire andor
price risk. A large number of draws is required, because, as will be seen, the distributions are
highly stochastic. It was anticipated that 500 draws would be sufficient to characterize the
shape of the distribution of the annual net income values. A greater number of draws would give a
more precise picture, but would also be more computationally demanding.
In all cases, income measures are reported in 1996 Cdn. Annual values are not discounted and
therefore, represent the net income predicted to occur in that year. Firstly, fire risk is simulated,
then price risk and finally both types of risk are simulated together.
6. Fire risk simulations
