Environmental Impact Assessment Review 26 (2006) 139 – 155 www.elsevier.com/locate/eiar Accounting for social impacts and costs in the forest industry, British Columbia Robert Galea,T, Fred Galeb,1 a Institute of Environmental Studies, University of New South Wales, Sydney, NSW 2052, Australia b School of Government, University of Tasmania, Launceston, Tasmania 7250, Australia Received 1 August 2004; received in revised form 1 February 2005; accepted 1 February 2005 Available online 22 April 2005 Abstract Business reviews of the forest industry in British Colombia, Canada, typically portray an unequivocally positive picture of its financial and economic health. In doing so, they fail to consider the following six categories of social impacts and costs: (1) direct and indirect subsidies; (2) government support through investment; (3) community dependence; (4) the maintenance of public order; (5) aboriginal title; and (6) the overestimation of employment. Our findings show that conventional economic and financial accounting methods inflate the industry’s net contribution to the economy. We make a number of recommendations to address this shortcoming to improve future accounting and reporting procedures. D 2005 Elsevier Inc. All rights reserved. Keywords: Social impacts; Social costs; Industrial forestry; Sustainability accounting; British Columbia 1. Introduction Business and government reports frequently represent the forest sector in British Columbia, Canada, as economic activity without significant environmental and social impacts and costs. Such reports validate this perception by providing details of the sector’s T Corresponding author. Tel.: +61 2 9385 6998. E-mail addresses: rgale@web.net (R. Gale), fred.gale@utas.edu.au (F. Gale). 1 Tel.: +61 3 6324 3376. 0195-9255/$ - see front matter D 2005 Elsevier Inc. All rights reserved. doi:10.1016/j.eiar.2005.02.002 140 R. Gale, F. Gale / Environmental Impact Assessment Review 26 (2006) 139–155 contribution to employment, investment, revenues, and profits—without at the same time providing equivalent details about unemployment, resource depletion, pollution, subsidies, and social conflict (Confederation of Forest Industries (COFI), 1999; Price Waterhouse, 1998; Price WaterhouseCoopers, 1999). While many benefits that flow from forestry are of critical importance to the economy, there are ample grounds to question the relationship between total benefits reported and net benefits secured. We contribute to this debate via a comprehensive analysis (Gale et al., 1999) of an annual report entitled The Forest Industry in British Columbia 1997 prepared by Price Waterhouse (1998). Although our ambition to provide more up-to-date information has been curtailed by the cessation of this annual report series in 1999, our aim is to critically appraise the 1997 annual report from a social impact and cost perspective. In doing so, we raise more questions related to the methodology of obtaining costs than we can answer. We also present our findings as a case study account of a particular situation rather than a conceptual or theoretical account of social impact assessment and social cost accounting. Our purpose is to demonstrate that bstate-of-the-industryQ accounts need to be critically assessed according to a range of social impacts and costs to provide as much information as possible to a broader range of stakeholders. 2. Accounting for social impacts and costs In the 1990s Price Waterhouse produced a series of annual reports on the British Columbia forest industry that were based on confidential survey information from forest companies and forest associations as well as information from government officials and documents.2 At the time, the prestige of an annual Price Waterhouse forestry industry report exerted a major influence on politicians, the public sector, business executives, labour, community leaders, and the public at large. While the annual report contains a great deal of useful information, we confine our interest to the matter of social impacts and costs. We identify six key concerns. We note that there is no accounting of the social impacts and costs of government subsidies, investment, community dependence, the maintenance of public order, and to First Nations. We also question the employment estimates made in the report, a critical component of any evaluation of the state of the industry. Each of these concerns is explored in the following sections. 2.1. Direct and indirect subsidies At the federal level, the key agencies providing assistance to industrial forestry in British Columbia for the period in question were Natural Resources Canada (NRCan), Industry Canada, and Finance Canada. NRCan, via the Canadian Forest Service, provided grants and contributions in two sets of Forest Resource Development Agreements (FRDA) of $150 million (FRDA I) and $100 million (FRDA II) (Mascall and Campbell, 1997: 4).3 2 3 Following a corporate merger Price Waterhouse became PriceWaterhouseCoopers in 1998. All figures are in Canadian dollars. R. Gale, F. Gale / Environmental Impact Assessment Review 26 (2006) 139–155 141 The federal government also provided tax relief to the forest industry through a variety of schemes including preferential tax rates, tax deferral, and tax credits. Preferential tax rates are rates of tax lower than the prescribed rate. Tax deferral involves taxes being paid in future years rather than in the year they are due. Tax credits are amounts directly deducted from taxes otherwise owing. For the period 1988 to 1995, Mascall and Campbell (1997) estimated the foregone revenues attributable to preferential rates, tax deferrals, and tax credits at $1681 million, $1036 million, and $459 million, respectively. Total taxes foregone over this period amounted to some $3200 million. At the provincial level, the outstanding issues related to subsidies were those of stumpage fees and restrictions on raw log exports. Stumpage refers to the fees charged by the government to commercial forest companies for the extraction and sale of timber on Crown land and constitutes an effort to collect the economic rent that accrues from the sale of a public asset. However, problems arise when the stumpage rate does not capture the full value of the logs as estimated from sales in a competitive market. When this is the case, the revenue foregone by government represents a subsidy to the industry. Restrictions on raw log exports compound the problem of setting stumpage rates in line with actual market value. The policy goal is to increase manufacturing and employment in the province. The effect, however, is an increased domestic supply of raw logs and depressed raw log prices, in effect resulting in a subsidy to the industry in the form of reduced input costs. The lack of a competitively determined market price for British Columbia timber at the time created difficulties in assessing the degree to which the system of calculating stumpage (the Comparative Value Pricing System, CVPS) actually captured the available economic rent. A number of estimates have been proposed of the likely income foregone by the province as a result of relatively low stumpage rates (Forest Resource Commission, 1991; M’Gonigle and Parfitt, 1994; Mascall and Campbell, 1997; Grafton et al., 1998). Our own estimates of foregone revenue in stumpage in 1997 as a consequence of calculating the stumpage rate according to the comparative value pricing system range from a low of $840 million to a high of $2620 million. The difference between the low and high figure depends on what assumptions are made and indicates that the Government of British Columbia needs to apply much more rigour to methodological considerations in revenue calculations as well as to data collection methods, monitoring, transparency, and reporting. Apart from subsidies related to stumpage fees, Forest Renewal BC (FRBC) and the Ministry of Environment, Lands and Parks also provided significant amounts of revenue to the British Columbia logging industry during the mid- to late 1990s. FRBC was created with the mandate to b. . . review the forest economy of British Columbia, enhance the productive capacity and environmental value of forest lands, create jobs, provide training for forest workers and strengthen communitiesQ (Government of British Columbia, 1995). FRBC expenditures in 1997 were just short of $400 million. However, since FRBC’s annual reports do not detail the beneficiaries of its expenditures, it remains impossible to quantify precisely what proportion of this figure constitutes a direct subsidy to the industry. Several of FRBC’s programs, however, were directly designed to establish partnerships with forest companies and workers. Only a small proportion of FRBC’s funds supported non-industrial forestry activities. In addition to the FRBC spending, the Ministry of Environment, Lands and Parks’ total spending for fiscal years 1996/1997 and 142 R. Gale, F. Gale / Environmental Impact Assessment Review 26 (2006) 139–155 1997/1998 was $225 million and $200 million, respectively (MELP, 1998: 5). Determining the proportion of MELP’s expenditures that are legitimately attributed to industrial forestry is difficult. Clearly, a considerable proportion of the Ministry’s spending is unrelated to the forest industry and addresses a range of environmental problems arising from other sectors. Determining a subsidy figure for this Ministry is thus a matter of conjecture. Overall, the subsidies provided to industrial forestry by FRBC and the provincial and federal governments, though difficult to estimate, are significant enough to require justification. However, neither the amount nor the benefits from subsidies are addressed in Price Waterhouse’s The Forest Industry in British Columbia 1997 report. 2.2. Government support through investment Modern governments play a key role in economic development by using a portion of their tax revenues to support industrial activities in their jurisdiction. Although many economists argue that such investment is not required if markets function efficiently, the existence of market failure justifies some level of public involvement in the economy. In British Columbia, state investment has occurred in almost every sector of the economy, particularly the natural resource sector. Examples of state intervention in the 1990s include the support of ailing forest enterprises in Golden and Prince Rupert. The Prince Rupert enterprise consisted of a pulp mill, three sawmills, and wood-chipping and logging operations, all of which played an important role in the local economy. The pulp mill was an outdated plant in need of approximately $200 million in capital improvements that owner Repap Enterprises had not made. Most analysts thus viewed future investments as uneconomic. The plunge in pulp prices in the mid-1990s made matters even worse. In 1996, Repap Enterprises negotiated a sale of its assets and decided to spin off its British Columbia operation, which was indebted for about $500 million. Once the company became independent, however, the British Columbia Repap subsidiary could not survive: it immediately applied for bankruptcy protection in an effort to work out a restructuring deal. The eventual deal involved a $329 million government-financing package to keep operations going, the creation of a new company called Skeena Cellulose, and holdings shared between the British Columbia government (52.5%), Toronto Dominion Bank (27.5%), and Skeena Cellulose workers (20%). Support from the British Columbia government to create Skeena Cellulose needs to be judged according to environmental sustainability and economic viability criteria. An evaluation of the first criterion suggests that the project is environmentally unsustainable because the pulp mill operation requires a significant harvest from the forest to support its operations while the timber supply in the region is declining in both volume and quality. The economic viability of Skeena Cellulose was also in doubt. While the sawmill operations and the associated tenures are valuable assets that could be sold to other investors, the pulp mill in Prince Rupert was in need of significant capital investment. In 1999 it was estimated that the plant lost between US$130 and US$250 on every tonne of pulp produced due to high costs and low pulp prices (Mertl, 1998). A recovery was considered unlikely to occur in the near future with the apparent risk that it might never occur at all. What many analysts viewed as a cyclical problem related to the business cycle R. Gale, F. Gale / Environmental Impact Assessment Review 26 (2006) 139–155 143 was more likely a structural problem related to the arrival of new, low-cost producers and technical innovation in countries such as Brazil, Chile, Indonesia, and New Zealand. Our concern with the accounting of forestry benefits is that there is no line item for government support in The Forest Industry in British Columbia 1997. This is despite the fact that the issue is implicitly in the financial results section where Price Waterhouse (1998: 4) states that, bthere were significant ownership changes in the B.C. forest industry in 1997. . . Repap Enterprises relinquished ownership of Repap BC to its creditor banks in 1997. A successor company under provincial government, union, and bank ownership has emerged from receivershipQ. Although attention is drawn to ownership changes in the industry, the report does not highlight the distinction between public and private investment involved in the government’s bailout of Repap Enterprises. The point we want to emphasize is that because direct government ownership is purchased by tax revenue there is a clear public interest in determining whether those funds have been well spent. 2.3. Community dependence The dependence of a community on a single commodity can have negative political, economic, environmental, and social consequences for the community’s well-being. Bradbury (1980) highlights the social costs in stating that bhigh labour turnover, community instability, male dominance, and isolation have traditionally been features of many Canadian resource towns.Q Crenson, likewise, has drawn attention to the mechanisms through which local politics may be distorted in support of vested interest via non-decision-making (Crenson, 1971). And Rajala, among many others, documents the vulnerability of communities to the forest business cycle in an historical study of the forest industry at Cowichan Lake, B.C. (Rajala, 1993). Accordingly, one of the goals of forest policy in British Columbia has been to diversify the economic base of communities that depend on the continued operation of local pulp or saw mills. Efforts to achieve this goal exist in various government programs. For example, one FRBC program was aimed at stimulating value-added manufacturing. In 1997 FRBC allocated $5 million dollars to promote value-added activities in the province (FRBC, 1997: 38). FRBC also contributed about $23 million through its Communities Programs toward the mandate of providing bloans and business planning support to small businesses in the forest sectorQ to bhelp forest communities diversify, stabilize and expand their economic and employment opportunitiesQ (FRBC, 1997: 9). We agree with the argument that dependent communities need to diversify, especially when timber supplies are declining. However, the idea that a diverse economy is necessarily a good economy whereas an undiversified economy is a bad one is simplistic. Unsustainable diversification may be worse than no diversification at all. The key point is that the actual externalities that stem from the dominance of an industry in a community need to be considered in greater detail, together with the benefits and costs associated with any diversification plan. Several studies have documented the existence and effects of forest-industry dependence in B.C. In one study, for example, it was found that British Columbia 144 R. Gale, F. Gale / Environmental Impact Assessment Review 26 (2006) 139–155 forest-dependent communities had a disproportionate number of residents without a high school diploma, a higher unemployment rate than other rural communities, and a relatively lower proportion of homeowners compared to Canada as a whole (Pharand, 1998; see also the study of forestry and community stability by Pierce, 2000). The boomand-bust cycle of wood product commodity markets means that many communities find it difficult to maintain their population base. A study by Travers (1993) of population change in timber towns from 1981 to 1991 provides evidence of double-digit outmigration: Port Alice’s population declined by 19%; Sayward, 16%; Slocan, 25%; Tahsis, 39%; and Zeballos, 33%. Conventional accounting practice ignores the social costs of dependence. However, these costs are real and should be internalized within the company that is responsible for such dependence. In a study of the Newfoundland mining sector, Locke (1986: 73) states that ba significant portion of the current Newfoundland mining enterprises are implicitly subsidized through the fact that the social costs of their actions are borne by the residents of mining communities and not by [the companies] themselves.Q He argues, as we do, in favour of cost internalization, which could be achieved, for example, by designated contributions to an economic diversification fund and other company-based programs. In short, although difficult to quantify, significant social costs arise from the failure to appropriately diversify the economies of forest-dependent communities. These take the form of additional expenditures required to cover medical treatment for alcohol and drug abuse and depression, and the increased costs of policing domestic violence and vandalism. The high wages paid to unskilled forest workers represent another social cost. These wages act as a disincentive for youth, particularly young males, to complete or pursue further education. Because there are not enough jobs to employ all the youth seeking forestry employment, those who are employed are unlikely to have the same long forestry careers as forestry workers in previous generations. Unskilled workers used to higher than average wages and a sense of entitlement to higher hourly rates of pay often find career transition strategies difficult to accept. While recognising the methodological difficulties and implications of cost internalization, it is notable that Price Waterhouse’s report does not provide even basic information on either the degree of community forest dependence or the social costs that might be associated with it. The only proxy in the report for such dependence is employment in the industry. Employment is one possible indicator of community dependence, but the data presented in the report, indicating a decline of 4500 jobs in 1997, are aggregated across the entire industry and do not reflect the localized effects of employment dependence in key forestry communities in the province. 2.4. The maintenance of public order During the 1990s, the residents of British Columbia were acutely aware of the controversy and social turmoil created by the forest practices and land use policies of the day. There were dramatic protests against the extension of logging roads, including the first mass arrest of 83 protesters at Hasty Creek in 1991. Many First Nations’ peoples have also protested against the damage done by industrial forestry to their territories, the extraction of timber resources from their territories without their consent, the damage to R. Gale, F. Gale / Environmental Impact Assessment Review 26 (2006) 139–155 145 fish habitat, and the inequitable distribution of jobs and revenues from logging. Many demonstrations triggered counter-demonstrations, with forest workers and their families protesting to ensure that the logging activities that their jobs depended on were not curtailed. In some regions of British Columbia–for the period in question–there was concrete evidence that a high proportion of the public was dissatisfied with industrial forestry. In a 1996 survey of Slocan Valley residents, only 36% supported current government and industry forestry plans (Angus Reid, 1996). Two of the village councils in the valley wrote formal letters objecting to forest management plans (Village of New Denver, 1997; Village of Silverton, 1997), and many individuals sent letters. Despite such concerns, forestry plans for the valley were not significantly modified, and the summer of 1997 was characterized by logging road blockades, a large presence of the Royal Canadian Mounted Police (RCMP), and protracted criminal and civil proceedings. Clearly the state incurred many costs to maintain public order as opposition intensified. It is important to identify, and where possible quantify, such costs. However, the annual reports do not acknowledge or quantify any of the costs faced by government in maintaining public order (Price Waterhouse, 1998; Price WaterhouseCoopers, 1999). 2.5. Aboriginal title On 11 December 1997, the Supreme Court of Canada handed down the Delgamuukw decision. This far-reaching decision acknowledged aboriginal title, clarified that aboriginal title includes the right to exploitation of the land and associated resources within certain limits, and set out the circumstances under which government can infringe on aboriginal title. Once aboriginal title is established, First Nations have a right to compensation both for resources extracted from their traditional territories without their consent or benefit, and for damages done to their interests by resource extracting sectors. The Delgamuukw decision did not, however, provide details on how compensation was to be determined. Unlike most other provinces, British Columbia did not sign treaties with First Nations to enable settlement and colonization. British Columbia First Nations have been in negotiations with governments to clarify aboriginal title, to decide upon areas to be held as aboriginal owned and managed lands, to set up co-management regimes, and to agree upon compensation for extraction of resources and damages to the land base. Thus, if and when the British Columbia forest industry does damage to aboriginal lands and resources, it creates a government liability by adding to the potential cost of compensation payable. As First Nations’ peoples have a (legally defined) special relationship with the land, and as they continue to harvest game and other resources, they are especially affected by timber extraction levels and methods. Furthermore, they have generally not participated in Canadian economic prosperity. A significant factor hindering the economic well-being of First Nations is that the Crown and industry have historically usurped access to resources in their traditional territories (RCAP, 1996). Regardless of whether the Delgamuukw decision confirmed aboriginal title and the right to compensation for infringements, 146 R. Gale, F. Gale / Environmental Impact Assessment Review 26 (2006) 139–155 accounting for the forest industry should take into account the industry’s impacts on First Nations and their economic opportunities. Where dollar figures have been estimated for costs imposed on First Nations the reports often rely on a variety of estimation techniques, cover different time frames, and are the subject of confidential negotiations. The fact that the costs can indeed be substantial means that neglecting them omits a significant liability from the forest industry’s contribution to the provincial economy. By way of example, in a separately commissioned study for the Nisga’a Tribal Council, Price Waterhouse has assessed restoration costs at $262 million over 50 years.4 This figure represents only the costs of restoration and does not include costs in terms of compensation for loss of resources extracted or for damages to aboriginal economic opportunities. The Forestry Industry in British Columbia 1997 report, however, does not take such considerations into account—even though Price Waterhouse possesses its own information on this issue. 2.6. Overestimating employment Public policy debates about appropriate economic development policies often refer to the number of jobs supported by a given industry. There is a tendency for each sector to assert its importance to overall employment levels in order to secure sympathetic treatment. One way to do this is to use multipliers to show that employment in a given sector supports many other jobs throughout the provincial economy. The implication is that if those primary industry jobs are not maintained, employment in other sectors will shrink in some proportion. It is important that such reporting be based on evidence and that employment levels and multipliers are not systematically overestimated. Reported employment levels often include direct employment figures and indirect and induced employment derived from a multiplier. In the case of agriculture, for example, direct employees are those who work as farmers, farm labourers, and workers involved in shipping agricultural outputs. Indirect employment includes those whose work depends on agriculture’s demand for goods and services, such as the employees of farm supply stores and equipment dealers. Finally, induced employment refers to jobs supported by the spending of those directly employed in agriculture and indirectly in related sectors. This would include a proportion of, for example, hairdressers and bakery workers. Employment multipliers, however, are often abused and have been subject to much criticism (Krikelas, 1992). In particular, they portray local economies as being dependent on exporting their goods to improve welfare. There is no acknowledgement that the substitution of exports with other economic activities, changes to quality of life, and innovation in economic development can all improve local welfare. The bcommodity exportQ perspective leads to a systematic tendency to overstate the importance of primary sectors (Niemi and Whitelaw, 1997). 4 Figure reported to the Select Standing Committee on Aboriginal Affairs, Hansard Issue No 6, October 3, 1996, pp: 187–188. R. Gale, F. Gale / Environmental Impact Assessment Review 26 (2006) 139–155 147 It is preferable, then, when reporting employment, to measure only direct employment. Those who work in a given sector, but whose wages depend on public expenditures, should not be included in direct employment. In addition, the higher a job is on the value-added chain the less it should be considered as part of direct employment. The greater the valueadded, the smaller the contribution to the final value provided by the raw materials. Thus, the high value realized by output from a cabinetmaker is due to that individual’s skills and good design, the amount of labour invested in a given product, the tools, and other inputs such as varnish and hinges. An important point to note is that not all value-added work is dependent on wood extracted in British Columbia. If British Columbia wood suddenly became unavailable, many cabinet workers would import wood to earn a living or find alternative work in other sectors and induce more diversified economic activity. Price Waterhouse’s definition of direct forest service employment differs significantly from that used by Horne and Charlotte (1995) and Statistics Canada. Price Waterhouse includes provincial government jobs whereas Statistics Canada and Horne et al. do not. Horne et al. note that the number of provincial employees within the Ministry of Forests is not dependent on the harvest level. Furthermore, if these employees were not needed to supervise industrial forestry operations, government staffing could be reassigned to meet other priorities or government expenditures could be reduced. By reducing expenditures, the tax burden on firms and individuals could be reduced, which would likely create new jobs elsewhere in the economy (Power, 1996; Treasury Board, 1976). It is generally inappropriate to count forest service employees or any other employee whose wages are paid with government funds in the category of those directly employed by the industry. This can lead to significant differences in the base figure used for total employment estimates. For example, in 1992 Price Waterhouse reported 87,700 employees in forestry whereas Statistics Canada reported 75,238. Later, in its 1997 report, Price Waterhouse uses a multiplier of 3.0 to estimate the indirect and induced jobs supported by the forest sector.5 The 97,250 direct jobs identified by Price Waterhouse for that year are estimated to have supported approximately 195,000 jobs in other sectors, so a total of approximately 292,000 people are seen to rely on the forest industry for employment. The Price Waterhouse report does not explain how a multiplier of 3 was derived other than to suggest it is commonly used and to note that others have used even higher multipliers.6 The Ministry of Finance and Corporate Relations (Horne and Charlotte, 1995) reviewed previous research on multiplier estimates and concluded that many were too high. According to their analysis an employment multiplier of between 2.14 and 2.35 for an average of 2.24 was more appropriate. M’Gonigle and Parfitt (1994) considered a number of multipliers for a study on the economic impacts of wilderness preservation and settled on a multiplier of 1.9 as then recommended by the British Columbia Ministry of Finance and Corporate Relations. The multiplier of b3Q provided in The Forest Industry in British Columbia 1997 report thus represents a significant deviation from the B.C. government multipliers of either 1.9 or 2.24 and thus an overstatement of employment benefits attributed to forestry. 5 Multipliers are expressed as a ratio of total to direct employment. A multiplier of three implies that each direct job supported a total of two indirect and induced jobs. 6 See footnote 7 to Table 7 of The Forest Industry in British Columbia 1997 (Price Waterhouse, 1998). 148 R. Gale, F. Gale / Environmental Impact Assessment Review 26 (2006) 139–155 3. Assessing methods concerning impacts and costs Given the six shortcomings about conventional economic accounting of benefits from a natural resource activity such as forestry, a closer look at the methods used for assessing social impacts and costs is required. We suggest six specific recommendations to ensure a more transparent account of the overall costs and benefits. 3.1. Account for direct and indirect subsidies in assessing impacts and costs In the forest sector, a direct subsidy is a payment to producers to offset part of their production costs. This payment can take the form of cash grants, favourable tax allowances, transfer payments, interest-free or low-interest loans, preferential access to imported parts and materials, protection from international competition, reduced stumpage fees, and free or low-cost access to natural resources (Gale and Barg, 1995a; Myers and Kent, 2001). In addition to direct subsidies, the forest industry is also supported by a number of indirect subsidies, which include roads and related infrastructure to support the distribution of products, unpaid environmental costs, and the cost of environmental protection programs. Subsidies can be classified in many different ways (OECD, 1994; Gale and Barg, 1995b; Myers, 1998; Myers and Kent, 2001). We recommend that a methodology for identifying and characterizing subsidies be based on an analysis of economic, social, and environmental issues. Economic, social, and environmental subsidies could then be accounted for on a more comprehensive basis. The Forest Industry in British Columbia 1997 report includes information on corporate environmental expenditures for 1996 and 1997 but it does not mention government costs for environmental protection, training and education costs, and the costs of unemployment and welfare payments when forest workers are laid off either temporarily or indefinitely when mills are shut down. Since all these costs would be internalized in market transactions in a perfect market, they have to be treated as additional costs in an imperfect market. Hence, government costs for environmental protection, training, and welfare payments can be regarded as a subsidy. This means that the reported financial results, stated according to conventional cost accounting practices, are overestimated. Without government subsidies, corporations would bear a greater proportion of the costs and their return on assets would be less than typically calculated by Price Waterhouse in its accounting of forest industry benefits. But this is not the full story. In addition to the subsidies administered by the Ministry of Forests and FRBC, a large number of other ministries and programs are candidates for further investigation to determine the degree and perversity of the subsidies provided. 3.2. Identify impacts and costs (or benefits) of government investment There is no simple methodology for capturing the gains and losses that arise from government support of an industry. At a minimum, an account of the industry should report the past year’s investment and provide a breakdown of the ownership stake R. Gale, F. Gale / Environmental Impact Assessment Review 26 (2006) 139–155 149 acquired by government and its total cost. Any amounts written off by the government in the past year should be included and deducted from the forest industry’s contribution to government revenues. Given this approach, state-of-the industry reports should account for government investment and other transfers in the British Columbia forest industry. A new section would have to be inserted in the Price Waterhouse report to include the data on government investments and transfers. While no quick judgments can be made about the economic wisdom of investment decisions in any single year, identifying rates of return that are continuously below the cost of borrowing would clarify the net public cost of such investments. 3.3. Capture community dependence impacts and costs As noted above, community dependence on a single industry is a real phenomenon with costs to individuals, families, communities, and society. It is, however, difficult to place a quantitative value on the social cost without carrying out expensive, time-consuming, and intrusive annual surveys. Instead of trying to determine the full social costs of community dependence, we recommend that a composite community economic diversification index (CEDI) be included in any accounting exercise. In B.C., such a community economic diversification index could be developed and tested with the participation of the province’s forest-dependent communities. Data from each forest-dependent community could be aggregated into a provincial community economic diversification index and publicly reported. Numerous possible indicators could be used to develop an index of community economic diversity. These could include (1) the ratio of forest-sector employment to total employment; (2) the forest industry contribution to municipal taxes versus total municipal taxes collected; (3) the ratio of forest-sector investment to total investment; and (4) the contributions and performance of a community diversification fund. A larger problem in the development of the index is the decision on whether the various indicators should be weighted and, if so, what the relative weightings should be. Finally, any index developed must be carefully monitored and re-calibrated if necessary to ensure its validity. CEDI would have several purposes. It would provide factual information on the degree of community dependence in the province, enabling better targeting of government diversification expenditures. More importantly, it could be used to promote the internalization of the dependence externality if companies working in and with forestdependent communities were held to have a special responsibility to contribute to local economic diversification programs. Finally, regular annual reporting would enable information to be collected on the direction of community dependence, signalling the need for decreased resources in those communities that are, in fact, becoming more diversified (and vice versa). While CEDI constitutes a practical approach to understanding and measuring community dependence, it is only a first step in addressing concerns about social impacts and costs. As already noted, inappropriate diversification may result in higher net costs to the community, and we do not endorse a simplistic argument that a 150 R. Gale, F. Gale / Environmental Impact Assessment Review 26 (2006) 139–155 diversified economy is necessarily superior to an undiversified economy. It is essential to uncover the actual externalities that stem from economic activity, regardless of whether these result from one or more than one industry. This is likely achievable only, however, through detailed social surveys of affected communities, which may not be practical in an annual, full-cost accounting exercise. Hence, CEDI should be supplemented by periodic surveys (for example, every 3 to 5 years) of high-risk communities to assess the current and future costs of dependence and diversification. 3.4. Identify public order impacts and costs Given the controversy over forestry issues in British Columbia, some forestmanagement decisions entail more public order costs than others. Public order costs can be defined as the costs to government of enforcing laws and processing, trying, and incarcerating demonstrators. The costs incurred would not arise if alternative forestry practices that commanded social consent were in place. It is certainly possible, for example, to obtain social consent to forestry–even in environmentally sensitive areas–when the forestry practices are based on environmentally sound principles. For instance, the Harrop-Procter Watershed Protection Society (1998) submitted an application for community forest tenure within the Community Forest Pilot Project based on ecoforestry principles and practices. Despite the fact that the plan includes logging in domestic watersheds and that much of the population was initially opposed to any policy but preservation, this proposal has achieved a remarkable level of community endorsement. Similarly, the Forest Stewardship Council certification scheme aims at generating a community consensus around sustainable forest management that substantially reduces forest conflict and, hence, public order costs (Cashore et al., 2004; Gale, 2002). Estimating the cost of maintaining public order presents a number of difficulties although none appear insurmountable. The costs are spread across various ministries. For instance, the Premier’s Office of B.C. may be involved in damage control to offset negative publicity. The Ministry of Forests (MoF) may pay for a range of expenses including public relations, the preparation of expert testimony for use in court, staff time spent in court, and staff time monitoring blockades. The costs of policing, arrests, prosecution, and incarceration are incurred by the Attorney General. In addressing public order impacts and costs, we have not made a specific case that the forest industry should be tagged with the costs. The industry’s perspective, for example, is that if they are not breaking the law, they should not be penalized by the actions of lawbreakers. On the other hand, governments may choose to implement policies that encourage dissent, being influenced in their decision by the very industries that they nominally have the power to regulate. Regulatory capture, especially in the field of natural resources, is a common phenomenon, suggesting that there is considerable scope for divergence between what is required for an environmentally and socially sustainable forestry and existing laws. To the extent that the forest industry lobbies for and achieves laws that meet their interests at the expense of relevant others, it may not be unfair to tag them with the costs of the resulting civil disobedience. Clearly, the boundaries for R. Gale, F. Gale / Environmental Impact Assessment Review 26 (2006) 139–155 151 determining public order costs represent a new field of inquiry for which further study is required. We are thus left with the view that industrial forestry practices that do not have support from mainstream environmental and social constituencies may cause governments to incur the costs of maintaining public order and, if so, should be accountable for these costs in financial terms. Failing this, the range of costs that have not been quantified should at least be noted. If it is impractical to account for public order costs, or if estimates are unreliable, indicators should be adopted that would allow readers to assess the extent to which the costs of maintaining public order are changing from year to year. Another approach would be to report the number of conflicts, their cause, duration, fines, and sentences. This approach would provide information similar to data on strikes and temporary layoffs included in the employment and compensation sections of the forestry annual report (Price Waterhouse, 1998). 3.5. Identify impacts and costs imposed on first nations As the forest industry is increasingly pressured (albeit inconsistently) to internalize costs and so modify practices, First Nations will have improved economic prospects and a better chance of participating in Canadian economic prosperity. Costs to First Nations must include a range of considerations, including: 1. A summary, in physical terms, of damages caused by the forest industry during the past year(s) to aboriginal lands and resources; 2. An assessment of any additions during the past year to the potential liability faced by government for the costs of restoring First Nations’ lands and for compensation payments for damages to lands and resources; 3. Any reductions in outstanding requirements for restoration of aboriginal lands or any compensation settlements during the past year; and 4. Cumulative totals for damages, projected restoration costs, and potential liability. Government intervention is required to ensure that costs are internalized. Such intervention makes sense because it reduces the potential liability faced by government for careless forestry practices. 3.6. Provide realistic employment estimates The reporting of direct employment with the addition of a multiplier to estimate the forest sector’s contribution to total employment is open to manipulation. In this regard, employment figures can be overstated due to deficiencies in both the initial estimate and definition of direct employment and the multiplier. By way of example, Price Waterhouse included in its calculation of direct employment all employees of valueadded firms, yielding an employment estimate of 97,250. This is a questionable practice for several reasons. First, the higher one moves up the value-added chain, the less appropriate it is to include employees in direct employment in the primary sector. 152 R. Gale, F. Gale / Environmental Impact Assessment Review 26 (2006) 139–155 Rather these employees should be counted as employed in the value-added sector. Furthermore, the calculated employment levels need to be adjusted to take into account temporary unemployment that occurs as a result of strikes and periodic operational layoffs. We suggest a revised methodology in which only direct employment is reported, that is, net of provincial government employees (5000 jobs). In addition, the proportion of the value-added workforce to be included (13,000 jobs) would not exceed 50% of the value-added employment (a topic requiring further study), and temporary layoffs and strikes would be included in the accounting (about 5400 jobs). This approach would result in direct employment of 80,350 rather than Price Waterhouse’s estimate of 97,250. An estimate of total forestry sector employment in 1997 using the multiplier of 2.24 as advocated by the Ministry of Finance and Corporate Relations and using the direct employment level derived above (80,350) would result in a total employment level of approximately 180,000. By using a multiplier of 3, however, Price Waterhouse reports total employment in the same year as approximately 292,000, and therefore appears to inflate the real contribution of the forest sector to provincial employment by about 112,000 jobs. In the first estimate, the forest sector would account for about 10% of the provincial workforce instead of the 17% reported. 4. Conclusion We found the assertion in The Forest Industry in British Columbia 1997 report that bthe data presents a comprehensive picture of the financial and economic health and significance of the industryQ to be misleading. To substantiate our claim, we critically appraised a range of impacts and costs that we argue have not been considered. Our findings show that the full social costs of industrial forestry are not reported. More specifically, we report on shortcomings and recommendations in six particular areas: direct and indirect subsidies, government support through investment, community dependence, the maintenance of public order, costs imposed on First Nations, and the over-estimation of employment. Given the reach of global accounting firms and their interest in preparing state-of-the-industry reports, we believe that our case study investigation, which presents a snapshot of the forestry industry at a particular time, may be of interest to a broader range of stakeholders in both developed and developing countries. Our findings may assist others to determine what to look for in evaluating estimates of the bstate-of-the-industryQ in their own countries. Economic activity has social consequences that are both positive and negative. The tendency to overstate the benefits and ignore the costs is a key deficiency in the annual forest industry surveys produced by Price Waterhouse (1998) and Price WaterhouseCoopers (1999). It is clear that their accounts omit a great deal of pertinent information on the state of the industry. Because the surveys are conducted in close consultation with the industry, forest corporations, and the Government of British Columbia, these parties must also accept responsibility for the bias and inaccuracy of the distorted portrayal. R. Gale, F. Gale / Environmental Impact Assessment Review 26 (2006) 139–155 153 Annual state-of-the-industry surveys should incorporate triple bottom line reporting. The codicil to this requirement is that forest companies must develop the capacity to report accurately on environmental and social performance. Many companies have already taken steps to build such reporting into their management structures to meet the expressed desires of their shareholders. Recent initiatives in Sustainability Reporting Guidelines provide opportunities for vastly improved corporate reporting (Global Reporting Initiative, 2002). A wider group of forest stakeholders with an economic stake in the forest sector in British Columbia must also be considered. Obvious candidates for inclusion are forestdependent communities, non-timber forest products industries, First Nations, and ministries–other than the Ministry of Forests–with programs relevant to the forest sector. It is only by consulting a much broader group of forest users in the preparation of a stateof-the-industry report that companies such as Price WaterhouseCoopers will be able to obtain the information required for sustainability accounting. Since costs would undoubtedly be incurred in extending the reporting requirements, the new stakeholders must also shoulder a share of the additional costs. It is clear from this study that a great deal of further work is required on the theoretical, methodological, and practical aspects of accounting for social impacts and costs. The requirement for further study is not an excuse for inaction now, however. Incorporating our six relatively straightforward points about the analysis of forest industry benefits would go a long way to addressing currently excluded social impacts and costs. Acknowledgements Our thanks to Tom Green for his participation in the original project, to Lisa Matthaus for comments on the initial manuscript, and to Sarah Bellinger for extracting the social cost information from the original 113-page report (Gale et al., 1999). References Angus Reid Group. Slocan Valley watershed survey. Vancouver (BC)7 Angus Reid Group; 1996. Bradbury J. Instant resource towns policy in British Columbia: 1965–1972. Plan Canada 1980;20(3):19 – 38. Cashore B, Auld G, Newsom D. Governing through markets: forest certification and the emergence of non-state authority. New Haven, CT7 Yale University Press; 2004. Confederation of Forest Industries of British Columbia (COFI). A blueprint for competitiveness. Vancouver (BC)7 COFI; 1999. Crenson M. The un-politics of air pollution: a study of non-decision making in the cities. Baltimore7 Johns Hopkins University Press; 1971. Forest Renewal British Columbia (FRBC). Forest Renewal BC 1996/97 Annual Report. FRBC, Victoria, British Columbia; 1997. Forest Resource Commission. The future of our forests. Victoria (BC)7 Government of British Columbia; 1991. Gale F. Caveat certificatum: the case of forest certification. In: Conca K, Maniates M, Princen T, editors. Confronting consumption. New York7 MIT Press; 2002. p. 275 – 99. Gale R, Barg S, editors. Green budget reform: a casebook of leading practices. London7 Earthscan; 1995a. Gale R, Barg S. The greening of budgets: the choice of government instrument. In: Gale R, Barg S, editors. Green budget reform: a casebook of leading practices. London7 Earthscan; 1995b. p. 1 – 26. 154 R. Gale, F. Gale / Environmental Impact Assessment Review 26 (2006) 139–155 Gale, R, Gale, F, Green, T. Accounting for the Forests: a Methodological Critique of Price Waterhouse’s Report The Forest Industry in British Columbia 1997. Victoria, British Columbia, Prepared for Sierra Club of British Columbia; 1999. Global Reporting Initiative. Sustainability reporting guidelines. Amsterdam7 GRI; 2002. Government of British Columbia. British Columbia public accounts 1994/95. Victoria (BC)7 Government of British Columbia; 1995. Grafton R, Quentin R, Nelson H. British Columbia’s stumpage system: economic and trade policy implications. Supplementary edition. Canadian Public Policy, vol. 24; 1998. May. Harrop-Procter Watershed Protection Society. Application for a Community Forest Pilot Agreement. Submitted to Ministry of Forests, Harrop-Procter Watershed Protection Society, Harrop, British Columbia; 1998. Horne G, Charlotte P. British Columbia local area economic dependencies and impact ratios. Madeira Park (BC)7 Ministry of Finance and Corporate Relations; 1995. February. Krikelas AC. Why regions grow: a review of research on the economic base model. Federal Reserve Bank of Atlanta Economic Review 1992;77(4):16 – 29. Locke W. Let’s recycle our throwaway communities and disposable workers: policies for dealing with mining communities. Background Report for the Royal Commission on Employment and Unemployment, Newfoundland and Labrador; 1986. Mascall M, Campbell B. Public investment by governments in the BC forest industry 1988/89 to 1995/96 BC. Victoria (BC)7 Wild; 1997. Mertl S. BC forest sector faces long-term pain, says analyst. Burnaby (BC)7 Canadian Press Newswire; 1998. 4 October. M’Gonigle M, Parfitt B. Forestopia: a practical guide to the new forest economy. Madeira Park (BC)7 Harbour Publishing; 1994. Ministry of Environment, Lands and Parks (MELP). Annual report, 1998. Ministry of Environment, Lands and Parks, Government of British Columbia, Victoria, British Columbia; 1998. Myers N. Lifting the veil on perverse subsidies. Nature 1998;392(26):327 – 8. Myers N, Kent J. Perverse subsidies: how tax dollars can undercut the environment and the economy. Washington, DC7 Island Press; 2001. Niemi E, Whitelaw E. Assessing economic tradeoffs in forest management, General technical report PNW-GTR403. US Department of Agriculture Forest Service, Portland, Oregon; 1997. Organisation for Economic Cooperation and Development (OECD). Managing the environment: the role of economic instruments. Paris7 OECD; 1994. Pharand N. Forest sector-dependent communities in Canada: a demographic profile. Information Report DPC-X23. Labour Market Development Branch, Canadian Forestry Service, Government of Canada, Ottawa, Canada; 1998. Pierce J. Forestry-based communities and community stability in British Columbia. Burnaby (BC)7 Community Economic Development Centre, Simon Fraser University; 2000. Power T. Lost landscapes and failed economies: the search for a value of place. Colorado7 Island Press; 1996. Price Waterhouse. The forest industry in British Columbia 1997. Vancouver (BC)7 Confederation of Forest Industries of British Columbia; 1998. Price WaterhouseCoopers. The forest industry in British Columbia 1998. Vancouver (BC)7 Confederation of Forest Industries of British Columbia; 1999. Rajala R. The legacy and the challenge: a century of the forest industry at Cowichan Lake. Lake Cowichan (BC)7 Lake Cowichan Heritage Advisory Committee; 1993. Royal Commission on Aboriginal Peoples (RCAP). Report of the Royal Commission. Royal Commission on Aboriginal Peoples, Ottawa, Canada; 1996. Travers R. An analysis of the economic transition issues driving the development of a new forest policy for British Columbia. Victoria (BC)7 Sierra Club of Western Canada; 1993. Treasury Board. Cost-benefit analysis. Treasury Board, Government of Canada, Ottawa, Canada; 1976. Village of New Denver. Letter from Carol Weiss, Acting Clerk, to the Slocan Valley Watershed Alliance, August 28, 1997. Village of Silverton. Letter from R. Carlson, Mayor, to Brandon Improvement District, July 10, 1997. R. Gale, F. Gale / Environmental Impact Assessment Review 26 (2006) 139–155 155 Robert Gale has written on environmental tools (Global Green Standards, IISD) and economic instruments (Green Budget Reform, Earthscan). His research interests include forestry (see bOld-Growth Logging: Does It Matter if Environmental Protection Costs Jobs?Q, Int. J. Environment, Workplace and Employment (2005)); sustainable development in China (see bSustainable Tourism: The Environmental Dimensions of Trade Liberalization in ChinaQ in D. Shrubsole and N. Watson (Eds.), Sustaining our Futures: Perspectives on Environment, Economy and Society, University of Waterloo, Ontario (forthcoming 2005)), and corporate environmental management (see Robert Gale and Warwick Gullett (2004) bLegislated Environmental Reporting Requirements: Compliance Issues at the Great Barrier Reef Marine Park AuthorityQ, The Australasian Journal of Natural Resources Law and Policy, Vol. 9, No. 1. pp. 33–58). Fred Gale is with the School of Government, University of Tasmania, Australia. His research focuses on the political economy of forest certification. With C. Tollefson and D. Haley, he is completing Setting the Standard: Certification Design and Governance in British Columbia, Canada (forthcoming 2005); and with B. Cashore, E. Meidinger and D. Newsom, he is co-editing Confronting Sustainability: Forest Certification in Developing and Transitioning Countries, Yale Forestry and Environmental Studies Press (forthcoming 2005). He is also researching state responses to forestry and fisheries certification in Canada, Australia and United Kingdom (with M. Haward, University of Tasmania, and funded by the Australian Research Council). A graduate of Trinity College, Dublin University, Ireland, he earned his PhD in Political Science from Carleton University, Canada.