Pergamon Biomass and Bioenergy Vol. 8, No. 5, 281-292, 1995 pp.

0961-9534(95)00022-4 Copyright 0 1995 Elsevier Science Ltd

Printed in Great Britain. All rights reserved 0961-9534/95 $9.50 + 0.00

AN ECONOMIC EVALUATION OF CARBON EMISSION AND CARBON SEQUESTRATION FOR THE FORESTRY

SECTOR IN MALAYSIA

ROSLAN ISMAIL Forest Research Institute, Kuala Lumpur 52109, Malaysia

Abstract-Forestry is an important sector in Malaysia. The long term development of the forestry sector will definitely affect the future amounts of carbon sequestration and emission of the country. This paper evaluates various forestry economic options that contribute to the reduction of carbon dioxide in the atmosphere. The analysis shows that, although forest plantation could sequester the highest amount of carbon per unit area, natural forests which are managed for sustainable timber production are the cheapest option for per-unit area carbon sequestrated. In evaluating forest options to address the issues of carbon sequestration and emission, the paper proposes that it should be assessed as an integral part of overall long term forestry development of the country which takes into account the future demands for forestry goods and services, financial resources, technology and human resource development.

1. INTRODUCTION

In the last two decades, Malaysia has success- fully exploited its forest resources for the socio-economic development of the country. As a result, the country is now one of the largest exporters of tropical timber products, oil palm, cocoa and rubber in the world. The export earnings from these resource-based commodi- ties have contributed significantly to the socio-economic development of the country and are expected to continue to play an important role in the future economic development. The effective management of these resources is essential to ensure their sustainable contribution to Malaysia’s long-term economic development.

The development of resource-based industries in the last two decades, however, resulted in large-scale conversion of forest lands. About 4.0 million ha of forested lands have been converted for agricultural and other purposes during this period. Forest conversion constituted about 1.12 million ha in the 1980s and the land area under agriculture correspondingly increased from 3.5 million ha in 1980 to 4.6 million ha in 1 990.4

Forest activities affect the environment in various ways. Conversion of forested areas to agriculture inversely affect forest bio-diversity, water quality, soil erosion, carbon sink and other environmental services. Conversion of virgin forest to rubber and oil palm plantation reduces the carbon sink permanently. This is because rubber and oil palm plantations have

less amount of carbon per ha compared to the natural forest. The carbon stocking is even lower in cocoa plantations.

Not all forest activities, however, lead to a reduction in the carbon sink. Reforestation, afforestation and more environmentally friendly logging operations can either maintain or increase the carbon sink. The carbon is locked up in the forest biomass during the growth process (regeneration). In view of the large areas of degraded and logged-over forests, the rehabilitation of these areas not only increases carbon sequestration but also provides a potential source of timber supply for the wood-based industries.

The successful implementation of forestry activities is subject to financial, technological and human resources constraints. Forestry activities such as forest plantation establishment entail a large amount of capital outlay.

Striking a balance between development and environment is thus a long-term vision of the country. This paper evaluates the various options available in enhancing the contribution of the forestry sector to the long-term economic development of the country and also relates it to the benefits in reducing the carbon dioxide in the atmosphere.

2. BACKGROUND

Malaysia is located very close to the equator and experiences a tropical climate with an

281

282 ROSLAN ISMAIL

average rainfall of 80 in. annually. It has a total land area of 329,758 km* and is divided into three regions: Peninsular Malaysia (13 1,598 km* or 40%), Sabah (73,620 km* or 22%) and Sarawak (124,449 km* or 38%). The population in 1990 was about 17.8 million with an annual growth rate of about 2.5%. About 82.3% of the population reside in Peninsular Malaysia, while 9.4% and 8.3% reside in Sarawak and Sabah, respectively.

2.1. Economic development

The Malaysian economic growth is expected to remain robust. The economic growth rate consistently registered over 8% per annum during the later part of the 1980s. It is forecasted that the economy will grow at an average annual growth rate of 7% for the period 1991-2000. Export earnings increased from RM28.17 billion in 1980 to RM79.54 billion in 1990. (1 RM = 2.5 USD; where RM = Malaysian Ringgit).

The manufacturing sector is expected to continue to lead the economic growth during the period 1991-2000. As the manufacturing sector encompasses many of the export-oriented industries, it will be expected to account for the greater part of the future export earnings of the country. Table 1 shows current percent- age share of GDP for selected sectors of Malaysia’s economy. It shows a declining contribution from the agricultural sector during the 198Os, while the manufacturing sector registered a 6.9% increase in its total economic share.

The agricultural sector is still the biggest employer in the country. However, its contri- bution to employment has declined by 7.3%. The manufacturing sector, although registering an increase in absolute value of the number of people that it employed, only registered a 3% increase between 1980 and 1990. The main beneficiary from the growth in the country’s economy is the service sector, consisting of industries such as hotel, restaurant and others

Table 1. GDP by industrial origin: Malaysia 1978 constant price (RM billion)

1980 1990 Economy activity Value % Value %

(a) Agric. + forest fishery 10.1 22.7 15.2 19.2 (b) Mining + quarry 4.5 10.1 7.7 9.8 (c) Manufacturing 8.7 19.6 20.9 26.5 (d) Hotel, restaurant + other 3.7 8.3 7.5 9.6 Total activities 44.5 78.9

Source: An0n.j

Table 2. Employment by selected economic sector (Malaysia) (in 1000s)

1980 1990 Economy activity Number % Number %

(a) Agric. + forest fishery 1800.5 37.2 1975.0 29.9 (b) Manufacturing 748.8 15.5 1239.2 17.6 (c) Hotel, restaurant

+ other Total

Source: Anon.’

979.3 20.3 1939.2 24.9 4835.2 6839.8

as shown in Table 2. This sector registered an increase of 4.6% of its share of total employment in 1990 compared with 1980.

The share of primary commodoties in foreign exchange earnings is also declining. Primary commodities accounted for 78.3% of the total export earning in 1980 but declined to only 43.4% in 1990. This is due to the increased contribution of other sectors of the economy (such as manufacturing and services).

Although the percentage share is expected to decline further in the future, the primary commodities sectors are still expected to play an important role in steering the economic development of the country. The export values of selected primary commodities are shown in Table 3.

2.2. Forestry sector in Malaysia

Table 4 shows the land-use distribution of Malaysia. Forested areas accounted for about 60.0% of total land areas, while agriculture accounted for about 16.3%. The area under forest has decreased steadily during the last two decades. The forest area declined by about 2.7 million ha in the 1970s and by 1.1 million ha in the 1980s. Much of the deforestation during this period was attributed to the expansion of agricultural development, especially oil palm.

2.2.1. Forest resources. In Malaysia, forestry is under the jurisdiction of the 13 State Governments (11 in Peninsular Malaysia, Sabah and Sarawak). The State Governments are responsible for various activities such as issuing permits and licenses for logging, collection of royalties, and rehabilitating and managing the forest areas. The Federal Government, how- ever, provides guidance on matters such as forest management and development, industri- alization and marketing. The differences in responsibilities necessitated the establishment of the National Forestry Council, comprising members of the State and Federal Government. The function of the National Forestry Council

Economic evaluation of carbon emission 283

Table 3. Export values of selected primary commodities (RM million)

Percentage of Percentage of Primary commodities 1980 total value 1990 total value

Natural rubber 4618.0 16.39 3028.1 3.81 Palm oil and palm oil products* 2981.7 10.58 5337.6 6.71 Saw log (m’) 2622.1 9.31 4034.6 5.07 Sawn timber 1211.3 4.30 3071.0 3.86 Veneer sheet 38.0 0.13 202.8 0.25 Plywood 281.6 1 .oo 862.9 1.08 Moulding 212.6 0.75 487.8t 0.61 Furniture n.a. 0.00 269.5 0.34 Crude petroleum 6895.9 24.48 14026.5 17.63 Petroleum products and LNG Malaysia’s total export 28172.0 79548.0

*Includes palm olein, palm stearin, palm kemal oil, palm kernal cake, palm acid oil, palm fatty acid.

tpeninsular Malaysia, Jan.-Ott. Source: Anon.*

is to coordinate the implementation of forestry policies and activities.

The Council was responsible for the formu- lation of the National Forestry Policy in 1978. The National Forest Policy provided for the establishment of Permanent Forest Estate (PFE) to be managed for timber production, protection of water and soil erosion, national parks for conservation of flora and fauna, and areas allocated for future conversion to other land use (Table 5).

2.2.2. Forest management. In Malaysia, logging is carried out according to the sustained yield management system. Two systems which have been used are: the Malayan Uniform System (MUS) which is based on the perform- ance of seedling regeneration; and the Selective Management System (SMS), which allows for more flexible timber harvesting regimes.

Forest plantation is a potential future source of timber supply to the wood-based industry. By the end of 1990, about 100,000 ha had been planted in Peninsular Malaysia and Sabah. The country has set a target to establish 500,000 ha of forest plantation by the year 2000.

In addition to natural forests and plantation forests, rubberwood and oil palm trunks have

Table 4. Land use distribution in Malaysia (million ha)

Land use 1980 1990

Forested area 20.54 19.42 Agriculture 4.282 5,349 Rubber 1.999 1.932 Oil palm 1.023 2.029 Cocoa 0.138 0.400 Coconut 0.354 0.315 Pepper 0.013 0.011 Paddy 0.716 0.651 Total land area 32.9 32.9

Source: Anon.4

been identified as a potential source of timber for the wood-based industries. About 40,000 ha of rubber plantations are replanted annually. Large areas of oil palm plantation are also due for replanting. As a result, it is projected that a large amount of rubberwood (8 million m3) and oil palm trunks (10 million m’) would become available annually. Rubberwood is already a well-established timber for the manufacture of furniture and other wood-based products. Research has indicated that oil palm trunks are technically suitable for the manufacture of panel products. However, this has not been commer- cialized.

2.2.3. Economic and socio-economic contri- bution. The forestry sector plays an important role in the socio-economic development of Malaysia. It increased its contribution to foreign export earning from RM$4.3 billion in 1980 to RM$8.9 billion in 1990. The revenues collected from logging operations and other forest activities contributed significantly to state government coffers for their development.

Besides revenues, the forestry sector pro- vided employment to about 2.5% of the total work force in the country. The number of people directly employed in this sector increased from 148,335 in 1980 to 207,427 in 1992 (Table 6).

Table 5. Forest resources of Malaysia by management categories

Category PM Sarawak Sabah Total

1. PFE 4.74 6.0 3.35 14.09 Productive 2.84 4.5 3.0 10.34 Protective 1.90 1.5 0.35 3.75

2. National parks and wildlife sanctuaries 0.64 0.29 0.29 1.18

3. State land 0.72 2.44 0.85 3.98

Source: FRIM.)

284 ROSLAN ISMAIL

Table 6. Employment in the forestry sector

Private sector 1980 1992

Logging 42,241 54,644 Sawmills 37,369 70,183 Plywood/veneer 13,997 43,485 Furniture and other wood 18,831 31,300 Processing factories 30,897 7815 Public sector Total 148,335 207,427

Source: KPU.’

2.2.4. Wood-based industry. The forest indus- try is well established in Malaysia. There are a total of 1063 sawmills and 80 plywood and veneer mills in the country. Their processing capacity is estimated at m3. The rate of logs utilization is Table 7.

combined 19 million shown in

3. RESPONSE OPTIONS

3.1. Balance approach between development and conservation

Forestry policies in Malaysia are formulated with a clear objective to increase or at least sustain the contribution of forestry to the development of the country’s economy. These policies give priority in improving the pro- ductivity of forest resources and utilization. As the future contribution of the forestry sector to the country’s economy is projected to decline due to a shortfall in timber supply, forestry policies in this case should be directed to increase the timber supply and value-added through down-stream processing. The future development of the forestry sector, however, should take into account its impact on the environment.

The protection of the environment needs two important measures: security of protected forest areas from other activities such as logging; and strict enforcement on activities that can damage the natural eco-system. The areas in this case include watershed and soil erosion; conserva- tion of bio-diversity; and amenity forest for

Table 7. Production of logs and other products (million m’)

Sawn Year Logs timber Plywood Veneer Moulding RW

1980 27.90 6.23 0.512 0.410 - - 1988 36.48 6.63 0.959 0.405 0.28 1.24 1989 39.70 8.42 1.007 0.430 0.25 1.10 1990 37.90 9.06 1.079 0.517 0.27 1.20

Source: An0n.j

recreational purposes. Human activities such as logging are carried out according to guidelines to ensure that such activities will not irreversibly damage the eco-system, especially the water quality, soil productivity, and the diversity of flora and fauna.

The environment, in this case, is not only for protection. It should also be improved. Forestry policies could address the need to improve the environment through reforestation of degraded forest areas as a result of past activities; and re-afforestation activities on non-forest areas which were destroyed by non-forest activities such as tin-tailing areas. Currently, there are about 200,000 ha of tin-tailing and bris soil areas.’ Forest planta- tions established in these areas will not only provide economic gain in terms of timber value, but also benefit from other services such as carbon sequestration and improvement in soil productivity.

3.2. Forestry strategy in the attainment of Vision 2020 target

In order to attain the status of a developed economy by the year 2020, an annual average growth rate of 7% would be required.5 To this end, the manufacturing and other down-stream processing sector has been identified to take the lead. Based on the target of an annual growth rate of 7%, the forestry sector is required to contribute RM60.8 billion in 2020.

Table 8 shows one possible scenario of the future contribution of the forestry sector. The scenario takes into account the differences in prices and future growth rates of each of the forestry sub-sectors. Based on the current log production in the early 1990s that is about 35 million m3, the value of the timber industries could generate about RM22 billion which is a shortfall of the 7% target of economic of the future economy. Although a number of scenarios could be generated to indicate other possible ranges, the figure of RM60 billion is far from the future target. Hence, much larger contributions are also required from each of the sub-sectors, including the need to have a larger volume of log production. Other possible contributions should also include the increase in revenues generated from non-timber forest products (NTFPs) including pharmaceuticals; and environmental services such as from eco-tourism, and water.

Sub-sector

Log Sawn timber Veneer Plywood Moulding Furniture Total

Economic evaluation of carbon emission

Table 8. A scenario of forestry strategy in attainment of the Vision 2020 target

Percentage unit Logs price increase Volume Volume

Current price Future price annually (1000 m’) (1000 m’)

200 500 5 6000 6000 585 1200 3.4 5000 10,000 608 1500 4.8 2000 4255 851 1700 3.3 1176 2503

1200 2500 3.6 1600 6400 1300 2700 3.5 1481 5900

35,084

285

Total Contribution (RM million)

3000 6000 3000 2000 4000 4000

22,000

3.3. Possible forestry options to increase the carbon sink

reduce and

It is strongly acknowledged that good management practices will provide economic benefit from the timber, as well as from carbon sequestration. In order to realize these benefits, the following actions would be proposed:

(a) an increase in the productivity of natural forest and a reduction in logging damages;

(b) an increase in value-added down-stream processing activities;

(c) greater utilization of logging residues and other wood processing wastes;

(d) increased utilization of rubberwood and oil palm trunks;

(e) an increase in the rate of rehabilitating logged-over and degraded forest areas;

(f) the establishment of large forest planta- tion areas to ensure adequate log supply;

(g) to ensure that adequate forest areas are set aside for the protection of bio-diversity, soil erosion and water quality.

All of these options will enhance the capacity and the capability of forestry in Malaysia to retain and increase the existing carbon storage, while at the same time contributing significantly to the sustainable management of its forest resources.

4. METHODOLOGY

Three types of forest management are examined for their role in carbon sequestration in this paper. They are:

(i) Protective forestry (ii) Production forestry (iii) Plantation forestry

Carbon and cash-flow tables are then derived for each of the above types of forest. Discount rates of O%, 1% and 3% are used in the carbon flow analysis. Costs and revenues are inflated at

1% per annum. The following three criteria are used to evaluate the effectiveness in carbon sequestration:

(i) Net Present Value (NPV)--This is derived from the cash flow using a discount rate of 8%.

(ii) Net Present Value of Carbon (NPVC)- This is derived from the carbon flow table using discount rates of O%, 1% and 3%.

(iii) CRAC-Benefit of Reducing Atmos- pheric Carbon is the ratio of NPV divided by the NPVC multiplied by the sum of the discount rate and decay rate of atmospheric carbon.

4.1. Protective forests 4.1.1. Roles of forest conservation. Carbon

release from forest vegetation is a major issue in global climate change. One of the roles of protective forests is in reducing carbon release. Some protective forests are made up of logged-over areas (mainly in the hilly areas). Their role here is to sequester carbon dioxide until it reaches the climax stage where the net carbon sequestered is zero.

4.1.2. Approach to the analysis. The benefit of protecting carbon in the protective forests takes into consideration the following conditions:

(a) forests in hilly virgin areas avoid release of carbon to the atmosphere. The cost (opportunity cost) includes the loss of revenue from carrying out selective logging in that particular area; and

(b) forests in non-hilly logged-over areas will sequester carbon for 30 years after which time they reach an equilibrium state. Once they reach that state, their function is to avoid releasing carbon into the atmosphere. As in (a), there is a loss in potential timber revenue.

Selective logging is considered as the alterna- tive to protection as these areas are generally hilly and are not suitable for agriculture. Protective forests are generally not suitable to be managed as production forest as regener-

286 ROSLAN ISMAIL

ation is much slower. In this case, it is assumed that the selective logging of these areas will only generate half the volume (25 m3 ha - ‘) of logs as will that in the production areas. The pro- ductivity of areas (generally non-hilly) under national parks, virgin jungle reserves (VJRs) and recreation forests, however, are assumed to regenerate with full capacity as those under production forests.

4.1.3. E&ct on the carbon flow. Results of the carbon flow analysis for the two conditions of stocking in the protected areas are summarized in Table 9. 4.1.3.1. Npu. All the NPVs are negative. This is because by not logging in these areas we tend to lose the timber revenue that can be generated. Furthermore, maintenance costs are incurred in keeping these protective forests. Thus, the opportunity cost of conserving these forests is reflected in the large negative values. 4.1.3.2. Npuc. For the less hilly areas, the higher positive NPVC reflected the greater carbon sequestering capacity of the area. In compari- son, the hilly areas had negative NPVC (meaning that there is a net release of carbon to the atmosphere). This is due to the lower regeneration rate and thus its lower carbon sequestering capacity.

The result of the analysis, as expected, shows that forest areas protected from any human activities that damage their eco-systems gener- ally will not give a positive return to financial investment. Logging in the hilly areas, however, risks soil erosion as well as a low rate of growth. The low rate of growth registered in hilly areas is not suitable for sustainable management for

Table 9. The carbon flow analyses for protective areas

NPVC NPV (8%)

(a) Full logging (i) Less-hilly areas (50 m3 ha - ‘)

0% 2.46 - 32,383 1% 0.86 - 32,383 3% -1.48 - 32,383

(ii) Hilly areas (25 m'ha- ‘) 0% -2.19 - 18.236 1% -3.02 - 18,236 3% -4.13 - 18,236

(b) Half logging (i) Less-hilly areas (25 m’ ha- ‘)

0% 11.01 - 19,652 1% 8.34 - 19,652 3% 4.49 - 19,652

(ii) Hilly areas (12.5 m3 ha - ‘) 0% -0.19 - 11,870 1% - 1.19 - 11,870 3% -2.55 - 11,870

Table 10. Investment needed to maintain protective forests

Million ha PM Sabah Sarawak Total

National park 0.645 0.490 0.290 1.425 Protection of PFE 1.900 1.400 0.350 3.650 VJR 0.081 0.088 - 0.169 Recreation 0.006 0.020 - 0.026 Areas requiring:

Demarcating 1.900 1.400 0.350 3.650 Monitoring 0.732 0.598 0.290 1.620

Cost (RM million) 10 years 102 76 30 199 20 years 51 38 15 100 30 years 34 26 10 69

timber production. The main purpose of the protection forests is to conserve the intangible benefits of such forest services as bio-diversity and for carbon sequestration. As these benefits are difficult to quantify in monetary values, they are not included in the analyses.

4.1.4. Benefit from the investment. The greatest benefit to protect the various forest services in the protection areas is to ensure that these values could be protected from any disturbance of forest activities. In this case, a forest which has been designated to protect the bio-diversity and its eco-system will continue fulfilling its functions without interference. Similarly, forested areas for the protection of soil erosion and water quality will also continue to play their roles. Hence, the value of this category of forest is more in its intangible values rather than its financial values.

Even though a higher percentage of protec- tion areas could be designated for production purposes, hilly areas are recognized nevertheless as the most suitable areas for protection of soil erosion and water quality. These areas are considered as less productive for the develop- ment of agriculture or for commercial logging. Furthermore, carrying out activities in these areas will risk the impact of soil erosion and the degradation of water quality. The damage to the environment as a result of the logging activities may be irreversible. Hence the roles of these areas in protection are the most appropriate.

Table 10 shows projection on scenarios for the implementation of protective forests in the three regions of Malaysia. The investment needed is high, especially in the demarcation of the areas. The projects also estimated the financial outlays required to complete the exercise within a 10, 20 or 30 year time frame. Areas under national parks, VJRs and recre- ation are already well demarcated. However,

Economic evaluation of carbon emission 287

protective areas within the PFE need to be urgently demarcated to prevent encroachment from logging activities. All these areas are expected to require a minimum of monitoring activities.

The estimated costs of demarcating and monitoring the protective areas in Malaysia range from RM69 million to RM200 million (Table 10).

4.15. Problems in the implementation. The main problem associated with constituting the protective areas is financial. As there is no provision for any taxes or revenue generated from these areas, the amount of financial resources for the implementation is difficult to meet. Possible avenues to generate income include non-destructive activities such as eco- tourism and a service charge on water generated from protected areas which is used for domestic as well as external consumption.

4.2. Production forest management

The main objective of selective logging is to ensure a sustainable supply of timber. The sustained yield management of timber will indirectly lead to the sustainable management of carbon. In contrast to protective forests, the management of sustainable carbon is geared towards generating revenue through logging activities. In addition, precautions taken during logging operations will reduce the amount of damage to the forest and consequently lower the amount of carbon released.

Logging produces logs and these are con- verted to end-products. The conversion of logs to a higher percentage of long-term products will extend the period of carbon locked in the products. This carbon is only released when the products are no longer in use. Hence there may be positive NPV when more carbon is being released in a much later period. In addition to end-products, wastes from logging and process- ing industries could also be converted to long-term products which further increase its life-span or could be used as biofuels to substitute for fossil fuels (very unlikely in Malaysia given the oil in the region).

Under current natural forest management, it is assumed that natural regeneration could take place with minimum silviculture treatments. Silvicultural treatments are prescribed especially to improve the species and stand composition (i.e. with more commercial species). In addition, the average log production per ha is about 40-50 m3 (this is the national average taking

into account that the log production per ha will affect the sustainability of timber resources (the damage residual stand has a strong relation to the intensity of logging).

4.2.1. Approach. Two scenarios are examined, and these are categorized as:

(a) Business as usual, where the rate of growth is based on existing systems. In this case, the results of many studies are used.6,7 An average figure of 2.2 m3 ha- ’ is used.

(b) Better supervision to reduce logging damage. In this case the result of studies by Thang and Yong6 are used. An average value of 2.85 is used.

The following assumptions are used:

(i) logging waste is utilized (ii) logs are converted to various end

products and the value added is included in the financial analysis.

4.2.2. Efict on carbonflow. The results of the analysis are shown in Table 11.

Results indicated that the production forests returned a relatively higher NPV compared to the protective forests. This is because revenue is generated immediately from old growth (virgin) forests. The situation is different in logged-over forests. Costs of establishment are incurred at the beginning of the rotation and revenue is only generated at the end through harvesting. As the revenue is generated at the end of the period, the NPV is lower compared with logging in the virgin areas.

The carbon flow analysis indicated some important characteristics. The net value of

Table Il. Carbon flow analyses for production forest areas

NPV CBAC NPVC at 8%

(a) Virgin forest (i) Business as usual

(growth 2.2 m3 ha - ‘) 0% 1% 3%

(ii) Improved supervision (growth 2.85 m3 ha- ‘) 0%

1% 3%

(b) Logged-over forest (i) Business as usual

(growth 2.2 m3 ha- ‘) 0% 1% 3%

(ii) Improved supervision (growth 2.85 m3 ha - ‘) 0%

1% 3%

-521.09 2.46 14,243 - 1489.42 0.86 14,243

867.30 - 1.48 14,243

- 128.68 10.26 14,669 - 174.40 7.57 14,669 -364.91 3.62 14,669

-25.05 2.46 688 -71.61 0.86 684

41.70 - 1.48 684

-9.75 10.26 - 13.22 7.57 -27.65 3.62

1111 1111 1111

288 ROSLAN ISMAIL

carbon is higher for logging operations that inflict less damage to residual stand. As logs are converted to short, medium and long-term products, carbon is released at various time periods. In this paper, it is assumed that end-products released their carbon in the following time frame: 1st year, 15th year and at the 30th year after logging.

The results indicated that selective logging which inflicts less damage can be a good strategy for managing carbon sustainably in the PFE. It provides positive results for carbon sequestra- tion during its rotation period. Logging also generates a return on the investment.

4.2.3. Policy formulation and constraints. 4.2.3.1. Commitment for implementation. The most difficult aspect of enforcing good manage- ment practices of sustainability is ensuring commitment by key players in the logging operation. As the forestry sector is highly fragmented, loggers are not required to rehabil- itate the areas after logging. They will try as far as possible to maximise their benefit without taking into account the environmental impact of their logging activities.

Destructive logging will destroy the eco-sys- tern and make the forest less productive. As a result, forests are degraded. It is essential that adequate policies are developed to ensure adherence to logging guidelines. Incentives for loggers to adopt better logging practices should also be formulated. This includes the following:

(a) It requires the loggers to deposit a performance bond as a warranty for the good performance of their logging operation.

(b) Imposition of a heavy penalty if guide- lines are not strictly followed during the logging operation.

4.2.3.2. Improve technology. Logging technol- ogy in the tropics has not changed much over the last two decades. The use of the tractor has been acknowledged to cause damage to trees and soil. Helicopter logging is one of the potential new techniques which can reduce logging damage. However, the cost of extraction per m3 is still much higher than the traditional tractor felling. Furthermore, its viability es- pecially from a safety point of view is still under study. This technique of logging not only reduces damage to residual stands but also lessens the impact of logging on the environ- ment. This could be the best alternative available once the problems attributed to cost and safety are resolved.

4.3. Forest plantation 4.3.1. Role of forest plantation in carbon

sequestration. The role forest plantations play in the reduction of atmospheric COz concentration is well acknowledged by the international community. It is also acknowledged that the establishment of forest plantations solely for carbon sequestration purposes is costly. To make it effective, this activity should be integrated as part of the country’s forestry sector development. This requirement therefore will take into consideration the species to be planted as well as its end products to fulfil the needs of the timber industry in the country.

Although the forest plantation programme in Malaysia is primarily for the supply of timber, it has direct implications on carbon. The programme, launched in 1983, was to comp- lement the projected shortfall of timber at the end of the 1990s. The government set a target of 500,000 ha of forest plantation to be established by the year 2000. At the end of 1991, more than 100,000 ha of forest plantations have been established in Peninsular Malaysia and Sabah. Most of the species planted, so far, are confined to fast growing species. Acacia mangium is the most popular species planted.

In contrast to the heterogeneous number of species produced from natural forest, forest plantation is usually focused only on one species. Malaysia imports RM$l.8 billion worth of pulp and paper annually. Currently, the only pulp and paper mill in Sabah is not sufficient to satisfy the overall paper demand in the country. The increased domestic demand for timber and paper, coupled with the decreasing supply from natural forest, provided an opportunity for the establishment of large-scale forest plantation.

The establishment of forest plantations should meet the two major demands:

(i) fast growing species to meet the needs for pulp and paper consumption; and other fibre-based industries such as MDF;

(ii) quality timber species to meet the overall requirement of the wood-based industries which will cater to the domestic market as well as the export market.

Fast growing species are suitable for pulp and paper and other engineered products and can be managed on a short rotation. On the other hand, quality timber species require a much longer period before harvesting. Proper

Economic evaluation of carbon emission 289

selection of species is essential in order to meet the type of end products demanded. The return on investment in forest plantation is affected by the rotation period, the risk of diseases and a host of other biological and economic factors.

It is more appropriate that forest plantations should be established in State Land Forest (SLF) areas. This is because many of the SLF areas, especially in Peninsular Malaysia and Sabah have been repeatedly logged and the tree stockings are low. Similarly, many areas in Sarawak are affected by the shifting cultivation practices and the areas are left degraded. Although some of the areas could be naturally regenerated, the future supply of timber from such areas are limited due to low growth rate.

In addition, there are uncertainties as to the marketability of the timber species that are regenerated from these degraded forests. As areas under SLF are not managed silviculturally for timber production, there is a high possibility that future timber species will be from the non-commercial species. Intensive rehabilitation of degraded areas through a forest plantation programme could ensure that the value of forest in terms of economic productivity could be improved. In addition, the establishment of these plantations will enhance the net carbon sink of the country, taking into account that the areas have been degraded and the carbon stocking is low.

The area of forest earmarked for conversion to agriculture under the Sixth Malaysian Plan (1991-1995) is 160,000 ha. It is targeted that no further forest conversion would be carried out thereafter. As such, the SLF could be used for the establishment of forest plantation.

Besides the SLF, degraded tin mining and bris soil areas are also potential sites for plantation establishment. It is estimated that there are 212,000 ha of ex-tin-mining and bris soil areas in Malaysia. A very small percentage of these areas is used for cash crops. Given the current concern in greening these degraded areas, the establishment of forest plantation on these areas not only provides a source of timber supply, but also directly contributes to the increase of carbon stock in the country.

4.3.2. Assessment on the eflectiveness of carbon sequestration. The types of species planted in forest plantations are dependent on the market demand. This in turn also influences the amount of carbon sequestrated. In this analysis, the following assumptions are made:

Table 12. Carbon flow analyses for plantation forest areas

CRAC NPVC NPV

(a) Quality timber 0% 0.12 120.12 -164 1% 0.16 92.07 -164 3% 0.25 58.67 -164

(b) Fast-growing species (3 x 10 years) 0% -2.68 234.36 6982 1% -3.31 190.00 6982 3% -4.73 132.89 6982

(a) Fast growing species:

(i) Rotation: 3 rotations of 10 years. Volume: 300 m3ha - ’ (iii) Price: short term products-RM 150/tori;;”

medium term products-RM275/ton (iv) Ratio of: short-50%; medium-30%;

waste-20% utilization

(b) Quality timber species:

(i) Rotation: 1 rotation of 30 years (ii) Volume: final-300 m3 ha- ‘; 1 st thin-

ning-50 m3 ha - ‘; 2nd thinning-50 m3ha - ’ (iii) Price: short tern-RM 150/tori;;” medium

term-RM275/ton; long term-RMSOO/ton (iv) Ratio: 1st thinning-short 50%, medium

25%; 2nd thinning-short 30%, medium 25%, long 10%; Final-short lo%, medium 12%, long 50%

Table 12 shows the summary of results. It shows that the plantation of fast growing species with 3 rotation of 10 years has consistently higher NPV and NPVC values than does plantation of quality timber. The reverse is true of the CRAC values. In general, the result shows that if the relative importance of carbon sequestration declines, the fast growing species will have an advantage with an equivalent time period. This is because the long-term effect of carbon release from harvesting of fast-growing species plantation will decline compared with plantation of quality timber which sequesters carbon for a longer period.

The potential areas for the establishment of forest plantation are indicated in Table 13. In this scenario, a total of 1.5 million ha of forest areas could be assigned for forest plantation of higher quality timber and another 1.15 million ha for fast-growing species. Taking into account that the plantation can yield about 200 m3 ha - ‘, the annual establishment of plantation for higher quality of timber will be able to produce at least 10 million m3 per year. Comparing the

290 ROSLAN ISMAIL

current rate of forest depletion due to logging, there is enough justification for the establish- ment of forest plantation to compensate for the shortfall of timber. This is based on the assumptions that higher quality timber has a rotation period of 30 years, while fast growing species have a rotation period of 10 years.

4.3.3. Yield. Forest plantation has many advantages over natural forest in terms of logs production. Logs production from high quality timber plantation forest, i.e. about 200 m3 ha- ‘, is much higher than the natural forest (50 m3 ha-‘). Hence, the revenue expected should be higher. In addition, an abundant supply of homogeneous logs from forest plantation improves productivity and recovery rate at the mills. Furthermore, there is the added advantage of intensive research and develop- ment (R&D) in support at both the national and global level.

4.3.4. Carbon benefit. As plantation establish- ment is focused on degraded SLF areas, the contribution to carbon benefit is very signifi- cant. This is because the degraded areas contain much less forest biomass, and hence carbon, compared to ordinary logged-over areas.

Table 13. Estimated cost for establishing forest plantations

PM Sabah Sarawak Total

Areas for plantation (1000s ha) Fast-growing sp. 200 250 500 Quality timber 500 500 500

Tin-mining areas Fast-growing sp. 200 - -

Total areas Fast-growing sp. 400 250 500 Quality timber 500 500 500

Implementarion Over 10 years (areas in 1000s ha)

Fast-growing sp. 40 25 50 Quality timber 50 50 50

Cost: RM2400/ha (RM million) Fast-growing sp. 96 60 120 Quality timber 120 120 120 Total cost (annually) 216 180 240

Over 20 years (area in 1000s ha) Fast-growing sp. 20 12.5 25 Quality timber 25 25 25

Cost: RM24OO/ha (RM million)

950 1500

200

1150 1500

115 150

216 360 636

57.5 75

Fast-growing sp.‘ 48 30 60 138 Quality timber 60 60 60 180

Total cost (annually) 108 90 120 318 Over 30 ye&s (are& in 1000s ha)

Fast-growing SD. 13.33 8.33 16.67 38.33 I _

Quality timber 16.67 16.67 16.61 50.00 Cost: RM240/ha (RM million)

Fast-growing sp. 32 20 40 92 - _ Quality timber 40 40 40 120

Total cost (annuallv) 72 60 80 212

4.3.5. Barrier and constraints. 4.3.5.1. Financial. Establishment of forest plantations incurs a huge capital cost as shown in Table 13. Bankers are reluctant to finance forest plantation projects as their gestation period is much longer than other available investments. The economic viability of the project is further eroded by the associated higher risk of diseases, pests, and heart rot. As there are a lot of other viable investment alternatives available in the country, the private sectors shy away from investing in forest plantations. The Government too has limited financial resources to implement the forest plantation programme effectively. There is a need to encourage the private sector to participate in the forest plantation programme. Incentives such as lower rent for land, appropriate subsidies, longer and more secure land tenure, better infrastructural support and other tax incentives should be provided. 4.3.5.2. Areas and land tenureship. The establish- ment of large forest plantations is only feasible if the land tenure (longer period) is ensured. Otherwise the private sector may not want to invest in such a project. Unfortunately, in the case of Peninsular Malaysia, land tenure is still a major constraint. The State Governments of Sabah and Sarawak, on the other hand, are still working on the problem of local customary rights to the land for forest plantation establishment. 4.3.5.3. Inadequate research. The establishment of a forest plantation programme requires a large number of seedlings. Large-scale pro- duction of seedlings, especially those of indigenous species, at a cost-effective rate is currently unavailable. This is due to the irregular and unpredictable flowering and fruiting season of most of the indigenous species. Most of them only fruit once in several years. Furthermore, there is also a problem of consistent supply of quality planting material. Seed technologies for various species to be used for plantation are still in their developmental stages. More intensive R&D activities are urgently needed to ensure the adequate supply of seedlings.

4.3.6. Policy formulation and constraint. Table 14 shows the indicators for forestry activities which have a direct impact on the issue of global climate change. The plantation option gives the highest positive NPVC values, and between 5 and 50 times the carbon sequestering capacity over the productive and protective

Economic evaluation of carbon emission 291

Table 14. Cost of reduction of atmospheric carbon dioxide by various forest management options (discount rate for

carbon = 0%)

Management options

Protective forests Hilly areas

NPVC at NPV at CRAC 0% at 8%

Full logging Partial logging

Less-hilly areas

- 749.45 -2.19 - 18,236.OO -5478.91 -0.19 - 11,870.OO

Full logging Partial logging

Productive forests Virgin forests

1184.77 2.46 - 32,383.W 160.64 11.01 - 19,652.OO

(growth 2.2 m3 ha - ‘) - 521.09 (growth 2.85 m’ ha- ‘) - 128.68 (growth 4.0 m3 ha - ‘) - 57.70

Logged-over forests

2.46 14,243.OO 10.26 14,669.OO 24.06 15,425.OO

(growth 2.2 m3 ha ‘) - 25.05 2.46 684.00 (growth 2.85 m’ ha ‘) -9.75 10.26 1111.00 (growth 4.0 m3 ha - ‘) -6.98 24.06 1866.00

Plantation forests Quality timber 0.12 120.12 - 164.00 Fast-growing sp. -2.68 234.36 6982.00

forests. The financial returns (NPV) are negative for protective forest management and positive for productive forest management. However, for quality timber plantation, the NPV is negative. This is due to the longer rotation required before the timber can be harvested and also the high initial establishment cost incurred. It is also due to a very high discount rate (8%) for such a long duration project.

If we ignore the negative sign of the CRAC values, then the criterion is to select options that return the lowest CRAC value. Clearly, the plantation option gives the lowest CRAC value. In terms of ranking by CRAC, the quality timber plantation option is first and followed by fast growing plantation species. Under normal growth rate, i.e. 2.2 m3 ha-‘, the logged-over productive forest management option is ranked third and this is followed by the virgin productive forest management option.

4.3.7. Financial investment required. Table 10 and Table 13 summarize the amount of financial outlay required to implement the various forest management options within the 10, 20 and 30 year time period. The amount of investment required for plantation forest establishment is very large, RM636 million, RM318 million and RM212 million over time periods of 10, 20 and 30 years, respectively. In comparison, the protective forests option is at least two-thirds cheaper than the plantation option. No estimate was made for the productive forest management options as the size of the areas for the various

JBB 815-B

intensities of management is very difficult to derive.

The Government has limited financial and manpower resources to implement such activi- ties. Although the private sector has vast experience in managing plantations (especially rubber and oil palm), their participation in these activities is limited. This is due to the long gestation periods and other associated risks inherent in forestry activities. To offset these higher risks, incentives such as longer land tenure, subsidies for planting material and other fiscal incentives should be provided. There is a need to formulate a package of such incentives to encourage greater private-sector partici- pation. Revenues generated from forestry activities such as logging cess and royalties could also be used to refinance forest rehabilita- tion activities.

This could be done in two ways:

(a) The government could increase taxes and use the revenue for a forest rehabilitation programme;

(b) The Government could increase the taxes moderately and use that revenue for forest protection purposes. A comprehensive package of financial incentives and technical assistance could be developed to encourage private-sector participation in forest plantation projects.

5. CONCLUSION

5.1. Integrated with economic development of the country

Response options to the issue of global climate change encompass the protection of forest areas from activities which release carbon dioxide to the atmosphere, reforestation and rehabilitation of logged-over areas, and planting of trees as part of forest plantation establish- ment. These activities are basically intended to produce high-value timber which takes into account the marketable species and the end- products. As carbon sequestration is one of the services provided by forest, it is important that the good management of forest will not only generate revenue and protect the eco-system, but will also contribute to global benefit through the management of carbon in the vegetation which will contribute towards the mitigation of global climate change.

5.2. Cost eflectiveness of various options

Production forests managed for timber are

292 RCAXAN ISMML

still the most cost effective system after taking into account the initial amount of investment required. Although the investment required was not estimated, it should be lower than the other two options as the cost involved is already accounted for in current forest management systems. However, the value of carbon se- questered is smaller compared with plantation within an equivalent rotation period. The protective forest on the other hand has an insignificant role in generating revenues. The role of protective forest lies in the protection of a host of services such as sustainable supply of water, water quality, soil erosion, bio-diversity and carbon. Returns from this investment are not apparent in monetary terms. However, the impact of not protecting these areas is reflected by the increased cost of water treatment, less water for irrigation, flood and other expenses.

5.3. Financial implications

The financial resources needed to implement the various options are substantially large. However, such investment will generate econ- omic growth and also provide benefits directly through the management of the forests. Revenue generated from the forest industries, especially through logging, should be reinvested for the establishment of forest plantation. The approach of using internal financing (reinvest- ing revenues generated from the forestry sector) is probably the most appropriate approach.

5.4. Manpower

As is peculiar to many developing countries,

manpower development is essential for the success of the project. Although Malaysia has been successful in developing agricultural crop plantations, forest plantations are new. In fact, the management of forest plantations them- selves is not well developed in Malaysia. Hence, manpower development in the field of forest plantation and natural forest management is an essential criterion to ensure the success of this project.

Acknowledgemenrs-This project is part of the F-7 Network project, coordinated by the Lawrence Berkeley Laboratory of the University of California, Berkeley. This project is funded by the U.S. EPA.

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REFERENCES

TFAP, Tropical Forest Action Plan, Malaysia. Ministry of Primary Industries, Malaysia, unpublished (1991). Anon., Economic Report 1990/91, Ministry of Finance, Malaysia (1990). Anon., Statistics on Commodities 1992, Ministry of Primary Industries, Malaysia (1992). KPU, Statistics on Commodities 1993. Ministry of Primary Industries, Malaysia (1993). FRIM, Strategies for Development of Forest Re- sources, FRIM’s Task Force Report. Forest Research Institute Malaysia, unpublished (1993). H. C. Thang and T. K. Yong, Status of growth and yield studies in Peninsular Malaysia. In Proceedings of the Seminar on Growth and Yield in Tropical Mixed/Moist Forests, 20-24 June 1989, pp. 137-141. H. Azman, W. M. Wan Razali, I. Shahrul Zaman and K. Abdul Rahman, Growth performance of indigenous species under enrichment planting in logged over forest. Malayan Forestry and Forest Products Research, 30-40 (1990).