IMPACT OF TIMBER-FEE INCREASES ON BRITISH-COLUMBIA FOREST PRODUCTS COMPANIES - AN ECONOMIC AND POLICY ANALYSIS

On 14 April 1994, the British Columbia government announced a new stum page formula that, at then-expected product prices, increased the aver age charge by about $12/m(3) and more than doubled the rate at which s tumpage fees change when lumber prices change. Most of the increased r evenues are reinvested in the forest sector by a new organization, For est Renewal British Columbia (FRBC), created specifically for that pur pose. Using standard event-study methodologies, this paper documents t he net effect of the fee increases and new policy direction on British Columbia forest products companies. After controlling for firm-specif ic risk and the decline in the Toronto Stock Exchange that occurred at about the same time, the new stumpage policy extracted about $1.0 bil lion from shareholders of the firms studied, and perhaps $2.4 billion from all licencees (an amount roughly equal to the capitalized after-t ax cost of the higher fees). The impact on individual firms is highly correlated with the allowable annual cut (AAC) in replaceable licenses each holds, with an average impact of about $33.3/m(3) of AAC. The ma rket appears to have discounted both the good news about offsets in im pending timber-supply reductions that the creation of FRBC implies and the reductions in earnings risk that the new stumpage system provides . When added to the increased regulatory costs associated with the new provincial Forest Practice Code, the timber-fee increases appear to h ave fully depleted the value of holding British Columbia timber quotas .