Forest Land Conversion, 

Ecosystem Services, 

and Economic Issues 

for Policy: A Review

Robert A. Smail and David J. Lewis

United States 

Department of 

Agriculture

Forest Service

Pacific Northwest 

Research Station

General Technical Report

PNW-GTR-797

August 2009

DEPAR TMENT OF AGRICULT URE

A Forests on the Edge Report
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multiple use management of the Nation’s forest resources for sustained yields of wood, 

water, forage, wildlife, and recreation. Through forestry research, cooperation with the 

States and private forest owners, and management of the National Forests and National 

Grasslands, it strives—as directed by Congress—to provide increasingly greater service 

to a growing Nation.

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Authors

Robert A. Smail is a graduate student, Gaylord Nelson Institute for Environmental Studies, University of Wisconsin, Madison, WI 53706, rsmail@wisc.edu. 

David J. Lewis is an assistant professor, Department of Agricultural and Applied 

Economics, University of Wisconsin, Madison, WI 53706, Dlewis2@wisc.edu.

This is part of the Forests on the Edge project of the USDA Forest Service and 

was completed under a cooperative agreement 07-DG-11132544-230.

Cover photos: top, Larry Korhnak; bottom: bear cub, ©Tony Campbell, 

iStockphoto.com; waterfall, Ralph Alig; logs, ©Valentin Casarsa, iStockphoto.

com; hikers, Ralph Alig. Back cover, Larry Korhnak.
Abstract

Smail, Robert A.; Lewis, David J. 2009. Forest-land conversion, ecosystem 

services, and economic issues for policy: a review. PNW-GTR-797. Portland, 

OR: U.S. Department of Agriculture, Forest Service, Pacific Northwest Research 

Station. 40 p. 

The continued conversion and development of forest land pose a serious threat to 

the ecosystem services derived from forested landscapes. We argue that developing 

an understanding of the full range of consequences from forest conversion requires 

understanding the effects of such conversion on both components of ecosystem 

services: products and processes. However, there are unavoidable challenges 

involved in quantifying the threats from forest conversion and their related costs to 

human well-being. First, most attempts to quantify the costs of forest conversion on 

ecosystem services will necessarily rely on specific ecological science that is often 

emerging, changing, or simply nonexistent. For example, the role that many species 

play in ecosystem processes is poorly understood. Second, given the interconnected 

nature of ecosystem products and processes, any attempt to quantify the effects 

of forest conversion must grapple with jointness in production. For example, the 

cost of losing a species from forest conversion must account for that species’ role 

as both (1) a product that directly contributes to human well-being, and (2) as a 

component in an ecosystem process. Finally, the ecology and the human dimensions 

of ecosystems are highly specific to spatial-temporal circumstances. Consequently, 

the effects of forest conversion in one spatial-temporal context are likely to be quite 

different than effects elsewhere.

Keywords: Ecosystem services, economic analysis, forest conversion, habitat 

fragmentation.

Forest-Land Conversion, Ecosystem Services, and Economic Issues for Policy: A Review

1

Introduction

The worldwide conversion of forest land to commercial and residential use is 

increasingly affecting the ability of ecosystems to provide basic services to 

humankind (Foley et al. 2005). This is particularly true for private rural lands 

in the United States (Alig et al. 2004). Conversion of forest land affects both 

private and public forest ownerships; for example, Stein et al. (2005) documented 

pressures on U.S. national forests from development on neighboring private forest 

lands, especially in counties that have experienced significant population increases 

in recent years (Garber-Yonts 2004, Johnson and Stewart 2007, USDA FS 2006). 

Predicted increases in population growth over the coming decades are expected 

to result in steadily increasing fragmentation of currently cohesive forest lands 

(Plantinga et al. 2007, Stein et al. 2007). This development can potentially reduce 

the goods and services derived from both public and privately owned forests. 

However, the extent to which the goods and services produced by forests are 

compromised by development is difficult to predict because human impacts on 

natural systems are not fully understood and are rarely straightforward. 

In recent years, a multidisciplinary research tradition has emerged to address 

the complex dependence of humankind on services generated by functional ecosystems. In its broadest form, ecosystem service research focuses on what goods 

and services are produced by ecosystems, how they are valued, how human activities impact their production, and how to design policies to enhance their provision. 

Given this focus, ecosystem service research provides a useful conceptual framework for beginning to understand the effects of forest conversion in the United 

States on human well-being as derived from ecosystems. Furthermore, its multidisciplinary approach makes ecosystem service research well suited to understanding the potential for designing policies to conserve functional forest ecosystems.

The purpose of this report is to use the ecosystem service conceptual framework as a basis for understanding the ecological effects of forest-land conversion, 

and as a basis for understanding the economic issues that arise in designing policies 

to conserve forest ecosystems. Ecosystem services generally comprise two distinct 

attributes: (1) the direct products produced by ecosystems, and (2) the processes that 

produce the products. Rather than presenting a catalog treatment of the literature, 

our approach emphasizes an application of the ecosystem services framework that 

differentiates the effects of forest conversion on both ecosystem products and 

processes. We argue that such specificity is necessary for conceptually unpacking the various effects of forest conversion on human well-being, and we review 

the general state of knowledge in this area. Further, our analysis highlights the 

relevant state of knowledge associated with the economics of policy interventions 

Our approach 

emphasizes an 

application of the 

ecosystem services 

framework that 

differentiates the 

effects of forest 

conversion on both 

ecosystem products

and processes.
2

GENERAL TECHNICAL REPORT PNW-GTR-797 

to enhance ecosystem services provision. We emphasize future research needs that 

can improve our understanding of policy interventions.

The report begins with a short background on ecosystem service research as 

well as some of its conceptual challenges. The need for specificity when adopting 

the ecosystem services framework to examine forest conversion is highlighted. 

Context is provided by reviewing the projections of forest conversion rates 

generated by the Forests-on-the-Edge project of the USDA Forest Service. Next, 

we present a literature review of previous ecosystem service research relevant to 

four services provided by forests in the United States: timber production, water 

quality, wildlife, and carbon sequestration. This review is notable for explicitly 

differentiating the effects of forest conversion on ecosystem products and processes. 

Further, we discuss the various policy issues associated with ecosystem services 

provision and how economics research can help support policy analyses, and, 

finally, concluding thoughts.

Ecosystem Services as a Concept 

Broadly speaking, ecosystem services are the natural processes that sustain human 

life (Daily 1997). In this sense, understanding ecosystem services has been a cornerstone impulsion and justification for the study of ecology since George Perkins 

Marsh’s seminal 1864 Man and Nature. However, it was not until the 1970s that 

ecosystem services were identified as a formal topic of study (Mooney and Ehrlich 

1997). Drawing on many disciplines ranging from ecology to economics, the study 

of ecosystem services never gained prominence within any single field, although 

ecosystem services research gained significant academic traction in the late 1990s, 

resulting in the publication of several high-profile articles and books (Costanza et 

al. 1997, Daily 1997, Dissmeyer 2000). 

Since its recent emergence, the study of ecosystem services has been increasingly taken up by both governmental and nongovernmental agencies as well as 

many research institutions. For instance, there are scores of researchers devoted 

to the study of ecosystem services in many American agencies, such as the USDA 

Forest Service, U.S. Fish and Wildlife Service, and the Environmental Protection 

Agency. In addition, several far-reaching, collaborative projects such as the Millennium Ecosystem Assessment (MA) and the Natural Capital Project (NCP) have 

been organized to bring together researchers from different regions and academic 

backgrounds around the study of ecosystem services. The goal of the MA (2008) 

was to understand the effects of anthropogenic ecosystem change, and it produced 

several technical volumes and synthesis reports aimed at grasping the current state 
Forest-Land Conversion, Ecosystem Services, and Economic Issues for Policy: A Review

3

and trends in the production of ecosystem services. By comparison, the NCP (2008) 

is more focused on developing scientific and financial tools to “motivate and finance 

conservation.” Finally, research related to ecosystem services can be found in 

many academic journals dedicated to the natural or social aspects of environmental 

science. Taken together, these efforts have done much to advance the understanding 

of ecosystem services, particularly in the field of valuation (Kremen 2005). Consequently, ecosystem service research has provided a framework by which the consequences of ecosystem change for human welfare can be more fully understood.

It is important to stress the utilitarian aspect of the ecosystem services framework as illustrated, for example, in the MA’s linkage of ecosystem services and 

human well-being. The MA differentiated ecosystem services into provisioning, 

regulating, cultural, and supporting services and emphasized that each service 

can affect multiple aspects of human well-being. As such, changes in ecosystems 

are considered to be of concern because of the impacts of such changes on human 

well-being. The utilitarian aspect of the ecosystem services framework provides the 

basis for integrating the discipline of economics with natural science disciplines.

Considering its broad applicability and interdisciplinary appeal, it should not be 

surprising that several challenges have been associated with the study of ecosystem 

services. First, the concept of ecosystem services has been defined with diverse and 

sometimes contradictory descriptions (DeGroot et al. 2002, Kline 2007). When the 

literature is considered as a whole, it is difficult to imagine what aspect of nature, 

if anything, might not be considered an ecosystem service. By defining ecosystem 

services too broadly, there is the danger of diminishing the meaning of the concept 

(Ghazoul 2007). Second, much work focusing on ecosystem service valuation relies 

on ecological metrics that are loosely defined, not universally accepted, or simply 

nonexistent (Kline 2007, Kremen 2005). As a consequence, ecosystem service 

research will only be as strong as the ecological metrics on which it is based. 

Finally, challenges of scale and complexity are difficult to overcome within ecology 

alone (Allen and Hoeskstra 1992, Shugart 2004), and are particularly problematic 

when considered within the context of human value systems (Kline 2007, Reid et al. 

2006, Tallis et al. 2008). As a result, the value and importance of ecosystem services is highly relative to the parameters of the individual study, leaving the absolute value and importance of ecosystem services as open questions (Costanza et al. 

1997, Daily 1997, Kline 2007, Limburg et al. 2002, Maler et al. 2008). Although 

these challenges are significant, they represent potentially fertile ground for future 

research as well as opportunities to surmount inherent difficulties in bridging 

natural and social sciences (Chan et al. 2007, Reid et al. 2006).
4

GENERAL TECHNICAL REPORT PNW-GTR-797 

The Need for Specificity With Ecosystem Services

The concept of ecosystem services is often used to simultaneously describe two 

interdependent yet discretely different things: the direct products produced by 

ecosystems and the processes that produce them (Boyd and Banzhaf 2006, Brown 

et al. 2007, de Groot et al. 2002, Kline 2007). By failing to distinguish between 

these two components, ecosystem service assessments run the risk of double 

counting services (Boyd and Banzhaf 2006) or ignoring important complexity 

(De Groot et al. 2002, Limburg et al. 2002). What then is the difference between 

ecosystem products and ecosystem processes? To de Groot and co-authors (2002), 

ecosystem products are end products produced by ecosystem processes. Kline 

(2007) considers the products as end services of ecosystems and the processes 

as intermediate services. Examples of ecosystem products include food, timber, 

fish, game, flood protection, and pollination. Conversely, examples of ecosystem 

processes are nutrient cycling, weathering of rock, population control, habitat 

provision, and conversion of solar energy into biomass. To stress this point, 

ecosystem processes produce ecosystem products (Boyd and Banzhaf 2006). In 

economic terms, ecosystem products are equivalent to output, whereas ecosystem 

processes are equivalent to the underlying technology that forms the production 

function. Nonmarket valuation studies quantify the effects of ecosystem products 

(not processes) on measures of human well-being, like the economic concept of 

willingness-to-pay.

At certain levels of analysis, the distinction between products and processes 

may be pedantic and unnecessary. However, when attempting to understand 

the long-term costs of land-use change on human well-being, this distinction is 

paramount because the danger of forest conversion is not only the one-time loss of 

an ecosystem product, but its presumed capacity to damage or disrupt ecosystem 

processes, thereby diminishing the capacity for the production of future products 

(Defries et al. 2004, Radeloff et al. 2005, Satake and Rudell 2007, Saunders et al. 

1991, Tchir et al. 2004, Tscharntke et al. 2005, Vitousek and Mooney 1997). In 

analogous words, it’s possible that the conversion of forest land to development 

reduces both the product coming off the assembly line, and the assembly line 

itself (fig. 1). 

In addition to difficulties arising from separating product from process, the 

ecosystem service construct is also complicated by the inability to completely 

separate different ecosystem products and processes from one another (Daily 

1997). For instance, sustainable human consumption of ecosystem products such 

as timber or wildlife is a major justification for ecosystem management. However, 

products such as wildlife and timber are key components in the production of other 

It is possible that the 

conversion of forest 

land to development 

reduces both the 

product coming off 

the assembly line, 

and the assembly 

line itself.
Forest-Land Conversion, Ecosystem Services, and Economic Issues for Policy: A Review

5

ecosystem products and the consumption of one may affect the production of the 

other (G. Nelson et al. 2006, E. Nelson et al. 2008). For instance, trees produce 

timber—an ecosystem product—while simultaneously serving as a component of 

the process that sequesters carbon. Although harvesting timber is the realization of 

one valuable ecosystem service, it can come at the expense of the amount of carbon 

sequestered in a forest. Similarly, Jackson et al. (2005) found that strategies for the 

promotion of carbon sequestration could negatively affect the amount of clean water 

produced by forests, and a variety of researchers have found that carbon sequestration strategies may not necessarily be compatible with biodiversity conservation 

among plant and bird populations (Huston and Marland 2003, Matthews et al. 2002, 

Nelson et al. 2008). 

Difficulties in differentiating ecosystem products and processes are conceptually unavoidable, necessitating the incorporation of complexity into the study of 

systems providing ecosystem services (Limburg et al. 2002). This means that any 

attempt to understand the effects of forest conversion on ecosystem services must 

clearly define the specific social, spatial, and temporal frames in which the study 

takes place (Pentilla et al. 2006, Symstad et al. 2003). As Defries et al. (2004: 252) 

indicated, “ecosystem responses to land use vary in space and time, and assessing 

Figure 1—Forest conversion can cause loss of ecosystem products but also can damage or disrupt 

ecosystem processes.

Ralph Alig
6

GENERAL TECHNICAL REPORT PNW-GTR-797 

trade-offs associated with land-use decisions requires explicit recognition of the 

scale of analysis.” Furthermore, embracing complexity requires explicit consideration of the tradeoffs involved when promoting any ecosystem service. As Ghazoul 

(2007) suggested, failing to transparently consider the complex tradeoffs between 

different ecosystem services seriously limits the conclusions of any research project, in addition to diminishing the credibility of ecosystem services as a concept. 

Although this may detract from the value of some ecosystem services, “a detailed 

understanding of the benefits of conservation will only guide policy in conjunction 

with an equally detailed understanding of the costs” (Chan et al. 2007: 62).

Current Projections of Forest Conversion in the 

United States

Over the last several decades, the demographic and ownership trends on and 

adjacent to U.S. forest lands have begun to change. For example, one recent study 

documents that in the Northeast and upper Great Lakes States, inmigration rates 

are significantly higher in counties with large amounts of public land—particularly 

national forests—than those counties with less public land (Lewis et al. 2002). 

Although changes in forest ownership have resulted from many different social 

and market forces, the end result has been the conversion of private forest land to 

smaller, more intensively used residential parcels (Johnson and Beale 2002, Johnson 

and Stewart 2007, Radeloff et al. 2005).

As a result of these changes, many efforts have been made to forecast where 

and to what extent forest conversion might occur. Some of these studies, such as 

those done for the Resource Planning Act (RPA) of 1974, have been undertaken 

to monitor the status of forest resources. Others, including Johnson and Stewart 

(2007), Hammer et al. (2004), and Radeloff et al. (2005) have used residential density patterns to demonstrate past and possible future increases in the development 

of rural forest land. Specifically, a recent study by Stein et al. (2005) demonstrated 

that if trends continue, substantial amounts of private forest land will shift from a 

low-density rural character to a more densely populated exurban categorization. 

Using fourth-order watersheds1 as the scale of analysis, this research identified all 

lands in the contiguous United States with at least 10 percent forest cover and at 

least 50 percent private ownership. By applying population growth trends to these 

lands, the researchers found that many watersheds, particularly in the Northeast 

and Southeast could experience significant conversion from rural to exurban or 

1 The average size of fourth-order watersheds in the United States. is approximately 

1 million acres (404 686 hectares).
Forest-Land Conversion, Ecosystem Services, and Economic Issues for Policy: A Review

7

exurban to urban uses. In particular, the Stein et al. (2005) results show that 65 of 

the approximately 2,100 fourth-order watersheds in the United States will see 10 to 

20 percent of their forest area converted from a rural use to a more developed urban 

use by the year 2030. 

The large expected increase in the development of forested watersheds found in 

the Stein et al. (2005) analysis could have substantial implications for the ecosystem 

services provided by U.S. forests, both public and privately owned. Although public 

land agencies can manage their own lands toward ecological outcomes, they rarely 

have the capacity to affect the management on private lands. Although this is not a 

major problem when neighboring lands are managed for similar uses, it can become 

very problematic when the use of public lands and neighboring private lands 

diverge. The conversion of forest land to residential use represents such a challenge 

and can potentially hinder the ability of the public land agencies to provide critical 

ecosystem services. 

Forest-Based Ecosystem Services

The ecosystem services literature abounds with lists of products and processes that 

could be considered ecosystem services. Although many services are potentially 

provided for by U.S. forest ecosystems, four were chosen as illustrative of biotic 

and abiotic services typically found in the Nation’s forests: provision of timber, 

clean water, and wildlife, and carbon sequestration. Each of these will be briefly 

considered as an ecosystem product as well as a component in other ecosystem 

processes. Furthermore, previous research identifying the potential effects of forest 

conversion on each will be briefly presented. We provide multiple references for 

those interested in more detail. 

Timber

Of all ecosystem products and processes on forest lands, timber is one of the most 

integral to market economies. The term timber generally refers to the portion of 

trees that can be used to produce market goods like furniture or paper. Not only is 

timber the primary market product of many forests, but the trees used to produce 

timber also provide a critical component in the production of nearly every other 

ecosystem product generated by forest land. For example, standing trees form 

the primary habitat for many migratory songbirds, in addition to serving as a 

storehouse of carbon. Furthermore, timber stands often represent a critical part of 

forest ecosystems and the relation between timber and other components such as 

nontimber tree species, water quality, and wildlife is highly site specific. Consequently, the realization of timber as an ecosystem product through harvesting trees 

Timber stands often 

represent a critical part 

of forest ecosystems 

and the relation 

between timber and 

other components 

such as nontimber tree 

species, water quality, 

and wildlife is highly 

site specific.
8

GENERAL TECHNICAL REPORT PNW-GTR-797 

can potentially have dramatic positive or negative effects on ecosystem processes 

that produce other products. Recognition of the complex importance of timber 

both as a product and component in the production of other products was crucial to 

the establishment of the United States’ first forest reserves (Dombeck et al. 2003, 

Steen 1991). Although timber production may not always be directly impacted by 

neighboring forest conversion, there are many indirect effects that can diminish a 

forested region’s overall productivity.

Timber as an ecosystem service— 

The use of timber as a forest ecosystem product has been a source of conflict as 

well as a driving component of human geography (Cronon 1992). Timber is one 

of the few, if not the only, major forest ecosystem products for which there are 

fully functional markets. Although the body of literature on timber as a product is 

voluminous, the recent trend toward ecosystem management has moved away from 

viewing trees only as a source of timber, similar to other crops. Much recent work 

has emphasized the most obvious tradeoff in producing timber—the cutting of 

trees.

In addition to their importance in producing the ecosystem product of timber, 

trees are a critical component in the production of many other ecosystem services. 

In fact, the recognized importance of standing trees in producing water quality (an 

ecosystem product) was crucial in the earliest movements to preserve large areas of 

forest. Protection of New York City’s water supply was a major reason for the establishment of the Adirondack and Catskill Reserves in 1885 (Dombeck et al. 2003). 

Several years later, water protection and regulation were fundamental reasons for 

passage of the U.S. Forest Reserve Act of 1891, the precursor to the national forests 

(Steen 1991). 

Shortly after the establishment of the first forest reserves, many researchers 

began to recognize the importance of forest stands to the production of wildlife 

(Meine 1991). Trees, as the critical component of many plant communities, are 

often the determining factor in the composition of animal communities. Understanding this relationship was crucial to the development of ecological science, and 

the research regarding the role of standing trees in the production of wildlife is vast. 

However, interest in the roles that trees play in providing habitat for wildlife peaked 

in the 1990s in an effort to understand the role of old-growth forest habitat as it 

pertained to endangered species such as the spotted owl (Strix occidentalis caurina) 

(Diaz and Haynes 2002). From this, a fuller understanding of wildlife’s dependence 

on the quantity, age-class distribution, and spatial configuration of standing trees 

has emerged. 
Forest-Land Conversion, Ecosystem Services, and Economic Issues for Policy: A Review

9

Finally, standing trees play a pivotal role in carbon sequestration. By definition, 

carbon sequestration is dependent on the retention of carbon within some medium 

such as water, soil, or vegetation. As it relates to forest land, standing trees are often 

the primary means of storing carbon or transferring carbon to the soil in the form 

of dead plant matter. Therefore, the conversion of forest land to other uses may 

directly reduce the potential to sequester carbon (Seely et al. 2002).

Given the immense importance of standing trees to the production of other 

ecosystem services, the consumption of timber can directly result in the diminished 

production of other services. The extent of the tradeoff between timber production 

and other ecosystem services is an empirical question that has only recently been 

addressed (e.g., see Polasky et al. 2008 for a recent example). Recognition of this 

tradeoff has been at the center of a shift in management of the U.S. national forests 

(Dombeck et al. 2003) resulting in the emerging perspective that standing trees 

cannot only be valued as timber, but also for their role in the process of producing 

other ecosystem products. 

Effect of forest conversion on timber— 

Three indirect consequences of forest conversion stand out as particularly problematic for managing forests for timber: (1) changes in regional timber economies, 

(2) introduction of nonnative species, and (3) increased fire risk. In many rural 

and forested areas, local economies are based largely on timber production from 

both public and private forest land. Some studies have documented strong negative 

effects of urbanization and commercial forestry operations (Munn et al. 2002, Wear 

et al. 1999). Because scale economies may be present in the production of timber 

(Romm et al. 1987), parcelization and the development of forested lands may cause 

private timberlands to become less productive (Gobster and Rickenbach 2004). 

This is thought to occur because parcelization and development can result in (1) a 

reduced timber tract size, and (2) a change in land ownership objectives resulting 

in reduced reinvestment in forest land (Kline et al. 2004). Consequently, reduced 

private forest-land productivity can increase pressure on public forest land and 

diminish the profitability of timber extractive industries (Luloff et al. 2000, 

Mehmood and Zhang 2001). Because timber extraction often occurs with low 

marginal profits, even small losses in timberland can have an impact on timberdependent regional economies. Finally, increased residential development near 

public forests can bring increased opposition to any timber harvest that affects 

forest aesthetics (Ribe 2006). This loss of profitability and increased social conflict 

not only introduce new challenges to land mangers, but can potentially have broader 

effects on local economies dependent on timber as an ecosystem product.
10

GENERAL TECHNICAL REPORT PNW-GTR-797 

In addition to social effects, one of the most consequential effects of forest 

conversion is increased forest edge and decreased core area. Generally speaking, 

this can lead to changes in forest composition, which can affect the biodiversity, 

stability, and complexity of the forest ecosystem (Bodin and Wiman 2007, Chapin 

et al. 2000, Diaz et al. 2006, Eiswerth and Haney 2001, Hansen et al. 2005, Kinzig 

et al. 2002, Pentilla et al. 2006, Quetier et al. 2007, Tilman 1982, Tilman et al. 

2002). Such changes affect the ecosystem processes used to produce timber as an 

ecosystem product. More specifically, forest conversion can lead to the introduction 

of nonnative species and the favoring of species adapted to edge habitat (Dickens 

et al. 2005, Holway 2005, Yates et al. 2004). Nonnative pests can directly feed on 

or destroy valuable timber species. For example, in the Northeastern United States, 

hemlock woolly adelgid (Adelges tsugae Annaud), a small Asian, aphid-like insect 

that feeds on hemlock trees (Tsuga Carrière) has dispersed through the movement 

of infested nursery trees to woodland residences (USDA FS 2005). Similarly, 

the Great Lakes region of the United States has experienced the spread of the 

emerald ash borer (Agrilus planipennis Fairmaire), an invasive Asian beetle that 

feeds on and kills ash trees (Fraxinus L.) and (Sorbus L.). For this pest, a primary 

means of its long-range dispersion has been the movement of infested firewood to 

campgrounds and private woodlands (Bauer et al. 2003). A recent study in Ohio 

concludes that a widespread outbreak of emerald ash borer will result in economic 

damages between $1.8 billion and $7.6 billion (Sydnor et al. 2007).

In addition to tree-damaging pests, forest conversion can impact the ecosystem processes used to produce timber by helping to introduce and spread 

many nonnative plants that can outcompete and diminish native timber species. 

Introduction of these nonnative plants has occurred when ornamental plants such as 

English ivy (Hedera helix L.) and Japanese honeysuckle (Lonicera japonica Thunb.) 

escape domestic gardens and plantings. Alternatively, seeds of nonnative species 

such as leafy spurge (Euphorbia esula L.) and garlic mustard (Alliaria petiolata

(M. Bieb.) Cavara & Grande) can be spread by contaminated roadside mowers that 

are more prevalent near residential and commercial developments (Czarpata 2005). 

Last, forest conversion can have significant effects on timber production 

through changing forest fire regimes. The construction of housing and commercial 

development, along with the requisite road and utility construction, generally introduces more fire threats such as automobiles, campfires, and construction equipment. 

Consequently, the risk of forest fire is generally expected to increase with increased 

forest conversion (Haight et al. 2004). Alternatively, increased development in 

the wildland-urban interface can complicate efforts to reincorporate fire into the 

ecology of ecosystems that have adapted to frequent fires. For example, residents 
Forest-Land Conversion, Ecosystem Services, and Economic Issues for Policy: A Review

11

often oppose the use of prescribed fire for fear that it will escape control (Winter 

and Fried 2000). In addition, many residents oppose the use of fire as a management 

tool because they do not trust the agencies, appreciate the outcomes, or perceive a 

personal benefit of nearby fire (Winter et al. 2002). Therefore, homeowner opposition often limits the use of fire as a timber management tool. 

Clean Water

Water is a basic requirement for life, and there is a strong relationship between 

forest land and the filtration and provision of clean water. However, the availability 

of clean water has been poorly understood or taken for granted throughout much 

of human history (Dombeck et al. 2003, US EPA 2000). In fact, it was not until the 

19th century that water treatment emerged as a field of scientific study. This early 

research, coupled with deforestation in the Eastern United States, ultimately led 

to an understanding of clean water as a product of forest ecosystems and provided 

justification for early attempts to conserve natural areas (Steen 1991). Along with 

developing an understanding of its role as an ecosystem product, research has long 

shown that water is also of great importance in the 

process that produces other ecosystem products such as 

timber and wildlife. Given its pivotal role as a product 

and process component, any changes to water cycling 

in an ecosystem can potentially have important effects 

on the production of other ecosystem products.

Clean water as an ecosystem service—

Clean water used for drinking or irrigation is an 

ecosystem product. Ecosystems provide clean water by 

holding and filtering water while regulating its flow to 

downstream locations (Dissmeyer 2000). Two-thirds 

of the clean water supply in the United States is found 

in stream water from precipitation that is filtered 

through forests (National Research Council 2000) (fig. 

2). The holding and filtering of water is a particularly 

important function of private forests as 60 percent of 

the Nation’s runoff flows from private lands (Stein et 

al. 2006). Ecology has long recognized that the quality, amount, timing, and regularity of water flows are 

fundamental parameters to which ecosystems adapt. 

Therefore, disruptions of these parameters can have 

potentially large effects on the processes that produce 

Figure 2—The majority of clean water supply in the United States 

is found in stream water from precipitation that is filtered through 

forest ecosystems. 

Ralph Alig

Two-thirds of the 

clean water supply in 

the United States is 

found in stream water 

from precipitation 

that is filtered through 

forests.
12

GENERAL TECHNICAL REPORT PNW-GTR-797 

other products. Although, some plants and animals are well adapted to a wide range 

of hydrological conditions, others can only survive in a very narrow range of conditions. This makes assessing the role of water as a process component highly dependent on the specific characteristics of particular ecosystems. Generally speaking, 

enhancing the stability of hydrological conditions is the critical role water plays as a 

process used to produce other ecosystem products (Graham and Smith 2004, Postel 

and Carpenter 1997, Sweeney et al. 2004). 

Given its importance for human well-being, the value of water provided by 

ecosystems has been estimated by many studies. For example, the direct value of 

national forest water to humans has been estimated to exceed $27 billion per year 

(Brown 1992, Krieger 2001), although few studies have measured the value of clean 

water as it relates to the process of producing other ecosystem services. 

Effect of forest conversion on clean water—

Conversion of forests to other uses, especially to developed uses with impervious 

surfaces, can have detrimental effects on water supplies (National Research Council 

2000). Water quality can be degraded through increased water temperatures and 

sedimentation, and the risk of flooding in downstream areas can be increased with 

forest conversion. Other impacts can include the potential loss of aquatic habitat 

and related ecosystem services provided by streams and rivers. Because water’s role 

in an ecosystem is highly specific to the characteristics of the particular ecosystem, 

the relationship between forest conversion and clean water is likewise spatially and 

temporally specific. Conceivably, some commercial and residential developments 

could have little effect on the production of clean water from neighboring forests. 

However, the construction of buildings, roads, and utilities can substantially 

increase surface runoff and add pollutants to hydrological systems. A large 

literature on this is summarized by several reviews (Forman and Alexander 1998, 

Trombulak and Frissell 2001). 

The construction of impervious surfaces, channelization of streams, draining 

of wetlands, and installation of culverts can dramatically change the hydrology of 

a forest (Dissmeyer 2000, Zipperer 2002). For instance, the construction of roads, 

parking lots, and large buildings can speed the runoff of rainfall to local waterways, 

thereby intensifying the effects of storm events. This is particularly problematic 

in steep or mountainous areas, where even rudimentary logging roads can serve 

as drainage courses during heavy rains (Havlick 2002). Another hydrological 

challenge associated with development and road construction is the installation 

and maintenance of culverts. Roads in forested areas often cross numerous small 

streams, in which culverts are used to facilitate stream flow. Over time, these 
Forest-Land Conversion, Ecosystem Services, and Economic Issues for Policy: A Review

13

culverts often become clogged or eroded so that water cannot flow through them, 

effectively creating small impoundments upstream and decreasing downstream 

flow (Tague and Band 2000). 

In addition to the proliferation of roads, the conversion of forest land to residential and commercial development often involves disruption of wetlands, which 

provide many ecosystem processes used to produce other products. Although many 

regulations are in place to protect these valuable areas, development at their edge 

can remove protective buffers and interfere with the structural capacity of wetlands 

to store, clean, and cool water, especially in flood or drought periods (Burns et 

al. 2005). Consequently, these changes can alter the stability of the ecosystem by 

favoring certain species and marginalizing others. This is exemplified by the warming of riverine systems to favor warm-water species of fish at the expense of native 

cold-water fish such as trout (Havlick 2002). 

Finally, the construction of residential and commercial developments in forest 

land can add pollutants to local watersheds with wide-ranging effects (Zedler 2003, 

Zipperer 2002). A primary source of residential pollution is the runoff of lawn 

fertilizer, which can promote aquatic plant growth in streams and lakes, thereby 

speeding eutrophication (Carpenter et al. 1998). Along with increased lawn fertilization, lawn pesticides associated with residential and commercial development 

can run off into neighboring streams and waterways, thereby upsetting ecological 

processes used to produce products such as sport fisheries (Overmyer et al. 2005). 

Of particular importance is the fact that the effects of nonpoint sources of pollution 

may not be clear until the sources have been in place for a number of years.

By speeding, slowing, or redirecting waterflow, forest conversion can potentially alter the hydrological conditions that regulate ecosystem functioning, and 

hence, impact important ecological processes. Not only can this alter the supply of 

clean water to humans (an ecosystem product), but it can destabilize the ecological 

processes that produce other products (e.g., sport fisheries) important to human 

well-being. Although many laws and policies for protecting water quality have been 

enacted over the last several decades, significant forest-land development is still 

generally allowed, along with the potential for a variety of effects on the production 

of clean water as an ecosystem service. 

Wildlife

Prior to the last years of the 19th century, the concept of animal extinction was foreign to many people. However, firsthand experience demonstrated that overhunting 

and loss of habitat could devastate wildlife populations to the point of annihilation. 

In recent years, wildlife production has been seen as an ecological function, not 
14

GENERAL TECHNICAL REPORT PNW-GTR-797 

just a result of reproduction (Allen and Hoekstra 1992). In this sense, wildlife has 

been considered an ecosystem product for some time (fig. 3). However, we are just 

beginning to understand the role wildlife plays in maintaining ecological processes. 

As with timber and clean water, certain aspects of wildlife as an ecosystem service 

are particularly susceptible to forest conversion.

Figure 3—Observation of wildlife is a popular recreational activity for many people and can be 

affected by land management and open space conservation that influences multiple ecosystem 

services.

Ralph Alig

Wildlife as an ecosystem service—

Much work in ecology has derived from the fact that wildlife is highly dependent 

on, and responsive to, ecological interactions and the structure of the plant and 

animal community (Allen and Hoeskstra 1992, Askins 2002, Herrmann et al. 2005, 

Tilman et al. 2002). Therefore, our understanding of wildlife as a product of ecosystem function is perhaps richer than any other ecosystem service. As a product, 

wildlife can be “consumed” by many different means, including hunting, observation, or simply knowledge of its existence. Apart from the occasional user fee, there 

are few if any markets available to capture the value of these products. Therefore, 

wildlife, as an ecosystem product, has initiated much work in nonmarket valuation. 

These valuations have included charismatic species such as the bald eagle (Haliaeetus leucocephalus) and timber wolf (Canis lupus lycaon), endangered species 

such as the whooping crane (Grus americana) and spotted owl, and popular game 
Forest-Land Conversion, Ecosystem Services, and Economic Issues for Policy: A Review

15

species such as trout (Salvelinus and Oncorhynchus sp.) and big-horned sheep (Ovis 

canadensis) (Loomis and White 1996). Estimated nonmarket values for wildlife are 

highly variable across species.

Although wildlife represents a highly important ecosystem product, it is also a 

critical component of other ecosystem processes. For instance, wildlife often serve 

to pollinate plants, disperse seeds, and control pest populations for timber species 

(Allan et al. 2003, Kremen et al. 2004, Pentilla et al. 2006, Straub and Snyder 

2006). Often these relationships are such that plant and animal species are mutually 

adapted to each other through predator-prey relationships, competitive hierarchies, 

food webs, and trophic cascades. Given these often complicated interactions, evaluating the importance of wildlife in the process of producing other products—like 

timber—can be highly specific to species and locations. In addition to its role in 

grooming the plant community, wildlife often plays a role in maintaining hydrology 

by foraging on shoreline vegetation, wallowing in streams, or building dams (Dissmeyer 2000). This can result in extremely complex relationships, whereby aquatic 

species rely on the interaction between terrestrial species to maintain plants, which 

maintain hydrology that provide aquatic habitat. An examplar of this is the observation that wolves (Canis sp.), reintroduced to Yellowstone National Park, reduced the 

time elk (Cervus sp.) spend wallowing in streams, thereby improving trout habitat 

(Robbins 2004). Although fascinating, these complex relationships highlight the 

difficulty involved in evaluating the role of wildlife in the processes that produce 

other ecosystem products.

Effects of forest conversion on wildlife—

The effects of forest conversion on wildlife arise from the reduction and fragmentation of formerly contiguous habitat. In many circumstances, the areas bordering 

large sections of public and private forest lands serve as buffers, increasing the 

amount of core habitat available within the forest (Riitters et al. 2002). These 

buffers act as the forest edge and shelter core areas from edge effects that can 

arise from predators and nest parasites associated with nonforest habitat. A major 

concern is that the conversion of forests to residential and commercial use brings 

more roads and utilities, which effectively shrink or eliminate forest buffers. 

Consequently, forest conversion increases the proportion of edge and decreases the 

amount of core habitat within forested landscapes (Butler et al. 2004, Havlick 2002, 

Riitters et al. 2002). As with timber, much research has shown that an increased 

proportion of edge to core habitat can promote edge species and introduce nonnative wildlife, often at the expense of native species (Danielson et al. 1997, 

Deem et al. 2001, Lepczyk et al. 2003, Manolis et al. 2002, Radeloff et al. 2005, 

Riitters et al. 2002, Singleton et al. 2002).

Although wildlife 

represents a highly 

important ecosystem 

product, it is also a 

critical component 

of other ecosystem 

processes. 
16

GENERAL TECHNICAL REPORT PNW-GTR-797 

Many species are negatively affected by the loss and fragmentation of forest 

habitat, including large mammals (Costa et al. 2005, Noss 1994) and Neotropical 

migratory songbirds (Askins 2002, Faaborg 2002). Songbirds have received particular interest in ecological science and are often considered indicators of ecosystem 

quality. Edge effects arise in conjunction with the boundary between natural 

environments and are particularly important for many songbird species (Askins 

2002, Faaborg 2002). The breeding success of many bird species is affected by 

edge because of the increased proximity of nesting habitat to predators (e.g., house 

cats) and nest parasites (e.g., the brown-headed cowbird [Molothrus ater]). For 

forest-nesting birds, the ecological literature has shown that edge effects can extend 

from 50 m (160 ft) (Paton 1994) to 300 m (984 ft) (Van Horn et al. 1995) into forest 

patches. For many birds, breeding success is higher in core forest, defined as the 

interior area of a forest patch beyond the reach of edge effects (Askins 2002).

In addition to terrestrial species, forest conversion along lake shorelines can 

yield numerous effects on aquatic species associated with lakes. Converting forested shoreline to development can result in new residents clearing sunken logs 

along their shoreline property. Such sunken logs serve as habitat for a variety of 

aquatic species (Christensen et al. 1996). Shoreline forest conversion has also been 

shown to lead to a reduction in the growth rates of sport fish such as bluegills 

(Lepomis macrochirus) (Schindler et al. 2000) and potentially result in localized 

extinctions of amphibian species such as green frogs (Rana clamitans melanota) 

(Woodford and Meyer 2003). Other amphibians have also been shown to be affected 

by non-shoreline forest conversion (Kolozsvary and Swihart 1999, Lehtinen et al. 

2003). Last, forested shoreline that is converted to development has been shown 

to coincide with an increase in aquatic species invasions arising from increased 

recreational use of lakes (Hrabik and Magnuson 1999). 

Unlike plants, many animals are highly mobile and often rely on much larger 

areas of habitat, which can be broken up or eliminated by the construction of 

buildings and roads (Debinksi and Holt 2000, Rochelle et al. 1999). Requiring 

contiguous areas of habitat across both private and national forest land, many species populations are directly impacted by the conversion of forest to residential or 

commercial development. The research in this area is very extensive, showing that, 

in addition to nest parasites and increased predation by edge species, forest conversion can lead to potential population reductions through the direct loss of forage and 

breeding areas and increased roadside mortality (Debinksi and Holt 2002, Spellerberg 1998, Stephens et al. 2003). In addition, even limited fragmentation can act 

as a spatial barrier to species dispersion, thus isolating populations and threatening 

their long-term species viability (Askins 2002, Opdam et al. 1993). 
Forest-Land Conversion, Ecosystem Services, and Economic Issues for Policy: A Review

17

As noted above, species can play multiple roles within animal communities, 

including predator-prey, pest suppression, and parasite-host. In this manner, species 

are often adapted to fit the unique geophysical characteristics of an area as well as 

adapted to fit within its unique collection of plant and animal species. Therefore, 

the decrease or loss of any one species in an area as a result of forest conversion 

to development can critically alter the stability, biodiversity, and complexity of 

the community as well as the relevant ecosystem (Aksins 2002, Armsworth and 

Roughgarden 2003, Luck et al. 2003). What is more troubling is that community 

roles are often complex, interdependent, and not intuitively obvious (Allen and 

Hoeskstra 1992). Therefore, the effects of forest conversion and development are 

rarely apparent or predictable and may not be observed or understood until population declines become irreversible. 

By diminishing wildlife habitat, forest conversion can result in an immediate 

loss of certain species (an ecosystem product) and perhaps more consequentially, 

severely alter community relationships, thus constraining the ecosystem processes 

used to produce other critical services. The literature on the loss and fragmentation 

of forest habitat is voluminous and demonstrates a wide array of manners in which 

forest conversion can affect traditional ecological metrics such as biodiversity. This 

has been shown in several literature reviews (Saunders et al. 1991, Spellerberg 

1998, Stephens et al. 2003). However, connections between land development and 

losses to particular ecosystem services associated with wildlife have rarely been 

made (Naidoo et al. 2008).

Carbon Sequestration

Because trees generally sequester carbon, and because carbon is a primary component in climate change, the possibility of using forests to reduce the consequences 

of climate change is a major recent policy objective (Alig 2003). Forestry mitigation 

alternatives to offset greenhouse gas emissions are appealing because they are often 

more cost-effective than many current options in other sectors (Lubowski et al. 

2006). 

Carbon sequestration as an ecosystem service—

Carbon sequestration is most clearly an ecosystem product. The basic process 

behind biological carbon sequestration is that carbon dioxide (CO2) is taken up 

by plants through photosynthesis and the carbon is then stored in both living 

and recently dead plant biomass. Therefore, by increasing the production of 

plant biomass, it may be possible to mitigate some CO2 emissions through tree 

planting, thus reducing the potential for catastrophic climate change (IPCC 2001). 
18

GENERAL TECHNICAL REPORT PNW-GTR-797 

For example, a recent study found that approximately one-third of the U.S. CO2

reduction target under the Kyoto Protocol could be cost-effectively achieved with 

carbon sequestration policies in forests (Lubowski et al. 2006).

Despite the climate-control advantages, there are significant opportunity costs 

involved in sequestering carbon. Many studies have measured the economic costs 

of carbon sequestration, with results ranging from $25 to $90 per ton ($22.75 to 

$81.90/tonne) of carbon (Stavins and Richards 2005). In addition, carbon sequestration is an example of the opportunity costs that must be considered when promoting 

any ecosystem services. For example, fire is becoming increasingly recognized as a 

critical component of many healthy forest ecosystems, yet allowing forests to burn 

will result in the release of large amounts of carbon, thereby reversing the benefits 

of the sequestered carbon. Similarly, promoting carbon sequestration by encouraging afforestation can potentially reduce biological diversity and complexity, as well 

as impact hydrological stability (Bunker et al. 2005, Catovsky et al. 2002, Huston 

and Marland 2003, IPCC 2001, Jackson et al. 2005, Matthews et al. 2002, Nelson 

et al. 2008). 

Effects of forest conversion on carbon sequestration—

The effects of forest conversion on carbon sequestration are similar to the effects 

on timber production discussed earlier (fig. 4). For example, reduction in total forest 

productivity could result in a net loss in biomass, thus reducing the amount of 

carbon stored in a forest. However, the effects of forest conversion and development 

on carbon sequestration are extremely site specific. For instance, in mesic forests, 

human development might reduce total biomass through tree cutting, removal of 

leaf litter, and clearing and burning of brush. However, it is possible that forest 

conversion in more arid environments could actually increase total biomass 

as lawns and ornamental trees are planted and irrigated (Pouyat et al. 2006). 

Further, Cathcart et al. (2007) found cases where conversion of agricultural land 

to development can result in net increases in carbon sequestration owing to an 

increase in forest cover. In any case, the scale, scope, permanence, and persistence 

of anthropogenic change will strongly influence the effects of forest conversion on 

carbon sequestration. 

Economic Issues for Ecosystem Service Policy 

Research that quantifies the effects of forest conversion on ecosystem services has 

motivated an important environmental management challenge focused on how to 

improve the provision of ecosystem services from private forest land. Given that 

forest conversion is driven by the decisions of private landowners, the design of 

policy aimed at ecosystem services provision requires an improved understanding 
Forest-Land Conversion, Ecosystem Services, and Economic Issues for Policy: A Review

19

of private landowner decisionmaking. Because land is actively traded in markets 

and is subject to a variety of policy constraints, landowner decisionmaking must 

be examined within the context of local, regional, and national markets. As shown 

repeatedly in the economics literature of nonindustrial private forest owners, 

market drivers (e.g., commodity prices, tree planting costs, interest rates) are key 

determinants of private landowner behavior—e.g., Beach et al. (2005) provided a 

comprehensive review of the relevant econometric evidence. Further, examining the 

role of any potential land policy must account for the incentive structure that arises 

from the interaction of a particular policy mechanism with the relevant market 

where private land is traded. 

Policies for Ecosystem Services

Decisions regarding the use and development of private forest land are generally 

driven by the private benefits and costs associated with a landowner’s action. 

Ecosystem services produced by land are generally not considered as part of the 

private benefits and costs of a landowner’s decision because the property rights to 

such services are not well-defined (fig. 5). For example, if a privately owned tract of 

forest provides habitat for wildlife species such as migratory birds, the landowner 

Figure 4—Timber harvesting and forest replanting can be important activities affecting the temporal 

provision of an ecosystem service such as carbon sequestration.

Ralph Alig

Ecosystem services 

produced by land 

are generally not 

considered as part of 

the private benefits and 

costs of a landowner’s 

decision because the 

property rights to 

such services are 

not well-defined.
20

GENERAL TECHNICAL REPORT PNW-GTR-797 

cannot generally exclude others from the benefits derived by viewing the birds 

or from the benefits derived by simply knowing they exist. Without the ability to 

exclude others from deriving the benefits of ecosystem services, the provision of 

such services by private landowners will be inefficient because the benefits are 

external to the landowner—i.e., they are public goods. In the presence of externalities and public goods, land-use policies can be used to modify landowner incentives 

to achieve the provision of ecosystem services from private lands. 

Three common approaches are used in land-use policy design. First, voluntary incentives can be offered to landowners in return for a defined change in the 

management of land—these approaches are now often referred to as “payments for 

ecosystem services” (Jack et al. 2008). A principal example of voluntary incentives 

is the U.S. Conservation Reserve Program, which provides payments to farmers for 

altering their agricultural production practices for a set amount of time (typically 

15 years). Second, government agencies and nonprofit organizations can directly 

purchase land for conservation, or purchase the development rights of land as part 

of a conservation easement. Widespread purchase of conservation easements by 

local land trusts is a prominent example. Third, regulatory approaches such as zoning can be set to exploit the police power authority of local government agencies. 

Figure 5—Some ecosystem services, such as scenic views, are public goods, and market failure 

can result if parties working in their own self interest are unable to provide these services in 

desired quantities.

Ralph Alig
Forest-Land Conversion, Ecosystem Services, and Economic Issues for Policy: A Review

21

Although zoning is most commonly set by town governments, there are examples of 

statewide land-use planning programs. In particular, Oregon has a widely discussed 

program that emphasizes urban growth boundaries in an attempt to cluster residential development close to major areas of population.

Efficient Versus Cost-Effective Policies for Ecosystem Services

A policy is efficient in providing forest ecosystem services when the social net 

benefits from allocating land to forest and other uses are maximized. Although this 

principle is simple to state, it is extremely difficult to implement for at least two 

reasons. First, the social value of many relevant ecosystem services is composed of 

nonmarket values that are not readily observable as market prices. Second, the costs 

of providing ecosystem services will be heterogeneous across landowners owing to 

factors such as variation in the location of land relative to urban areas, soil quality, 

non-pecuniary values to landowners, and management skills. 

If an ecosystem product is a marketable commodity, the social value of a 

change in the product can be obtained by calculating the sum of the changes in 

consumers’ and producers’ surplus in the related market (e.g., see Freeman 2003). If 

the ecosystem product is not a marketable commodity, obtaining information on the 

social values of the product is the domain of nonmarket valuation techniques. The 

concept of willingness to pay is the conceptual foundation for defining economic 

benefits of ecosystem services. Nonmarket valuation techniques generally comprise 

surveys that directly ask individuals’ willingness to pay for hypothetical changes 

in ecosystem services (i.e., stated preference), and methods that use behavior from 

related markets to infer willingness to pay (i.e., revealed preference). Kline (2007) 

provided a survey of nonmarket valuation methods applied to forest ecosystem 

services. Estimating the economic value of an ecosystem process requires explict 

quantification of the link between the process and an end product that contributes 

to human well-being, including the potential for jointness in producing multiple 

ecosystem products. Freeman (2003) provided an example of a bird species that is 

valued both for pollination of a commercial fruit species and its role in controlling 

insects that damage other commerically valuable plants or tree species. The value 

of a species that assists in producing multiple ecosystem products is the sum of the 

value of the end products (Freeman 2003).

A policy can be designed to yield the efficient allocation of an ecosystem 

service if the marginal benefit and marginal cost curves associated with that service 

are explicitly quantified. However, a common informational constraint for most 

ecosystem services is the fact that the marginal benefit curve is typically unknown. 

Therefore, many economic analyses of ecosystem services emphasize cost-effective 

A policy can be 

designed to yield the 

efficient allocation of 

an ecosystem service 

if the marginal benefit 

and marginal cost 

curves associated 

with that service are 

explicitly quantified. 

However, the marginal 

benefit curve is 

typically unknown. 
22

GENERAL TECHNICAL REPORT PNW-GTR-797 

conservation, whereby a policy is designed to achieve a predefined ecosystem 

service goal at minimum cost. Designing policy to account for heterogeneity in 

conservation costs across landowners is a defining feature of cost-effectiveness 

analysis. Example policy goals can include specifying tons of carbon sequestered by 

a policy, or specifying the number of species conserved. Importantly, the marginal 

benefits of ecosystem services do not need to be known to perform an analysis 

of cost-effective conservation, as the goal is taken as given. However, ecological 

research can be particularly useful in assisting policymakers with the definition of 

policy goals.

Challenges With Designing Cost-Effective Policies for 

Ecosystem Services

Although many challenges affect the design of cost-effective policies for ecosystem 

service provision, three deserve particular research attention. First, in addition to 

the aggregate amount of forest in a region, the spatial pattern of forest blocks can 

be critically important for ecosystem service provision because of the effects of 

habitat fragmentation (Armsworth et al. 2004, Askins 2002). Therefore, policy 

design must explicitly account for any effects of the policy on landscape pattern. 

Second, because the willingness of landowners to accept conservation payments 

is generally private information, policies that focus on voluntary decisions (e.g., 

incentives, land purchases, and conservation easements) will be unable to directly 

determine the spatial pattern of conservation (Lewis and Plantinga 2007, Nelson 

et al. 2008). Third, although it is generally cheaper to buy land that is more remote 

from population centers, such remote land is also generally less threatened by 

development. Therefore, there is a tradeoff that arises in conserving threatened 

parcels with high land costs, or conserving cheap parcels that have little likelihood 

of being converted to development (Costello and Polasky 2004, Newburn et al. 

2006). Such a tradeoff is unaviodable when budgets are limited.

The body of literature on how to allocate the spatial pattern of conservation 

is quite large and dominated by reserve-site selection (systematic conservation 

planning) studies that arose in the conservation biology literature. Reserve-site 

selection studies examine how to optimally allocate conserved land—typically for 

species conservation—subject to an area or budget constraint (e.g., Camm et al. 

1996, Church et al. 1996, Csuti et al. 1997, Margules and Pressey 2000). A common theme in most analyses is the importance of considering the spatial pattern of 

conservation efforts. A notable strength of this literature is the detailed modeling 

of the relationship between species distributions and landscape composition and 

configuration. The primary weakness of these studies is that the approach includes 
Forest-Land Conversion, Ecosystem Services, and Economic Issues for Policy: A Review

23

an unrealistic policy mechanism, characterized by a regulator with the power to 

dictate land-use decisions, and hence, landscape pattern. Such approaches are 

generally untenable in societies dominated by private property rights, and relaxing 

this assumption is important for future research.

The literature that examines the use of voluntary incentive policies for ecosystem service provision has received far less attention than the reserve-site selection 

literature, and is generally found in studies by resource economists. Theoretical 

work has focused on mechanism design in the presence of landowners’ private 

information (Smith and Shogren 2002), whereas experimental work has examined 

the potential for offering bonus payments to conserve clustered habitat (Parkhurst et 

al. 2002). Empirical work has examined the role of voluntary incentives in reducing 

forest fragmentation (Lewis and Plantinga 2007, Lewis et al., in press) and in jointly 

providing carbon sequestration and species conservation (Nelson et al. 2008). A 

common theme from these studies is that although voluntary incentives can be used 

to improve the provision of ecosystem services, the private information regarding 

the costs of landowner conservation limits the cost-effectiveness of using incentives 

compared to what is theoretically possible if agencies had full information. The primary problem is that policymakers cannot directly control the spatial configuration 

of conserved land with incentive policies (Lewis and Plantinga 2007) despite the 

importance of spatial pattern on ecological outcomes. Many policy designs considered in the voluntary incentives literature are relatively simple, and much work 

remains in developing a fuller understanding of how to design voluntary incentives to achieve particular patterns of conservation. Further research on auction 

mechanisms aimed at eliciting landowner costs of conservation would be extremely 

helpful in solving the relevant information problems (Lewis et al. 2009).

The literature that examines the tradeoff between land costs and development 

threats is even less extensive than the literature on voluntary incentives. In a theoretical analysis, Costello and Polasky (2004) showed that the timing of conservation 

decisions is critical in the presence of heterogeneous land costs and development 

threats. In an empirical implementation that combines models of land cost and the 

threat of land-use conversion, Newburn et al. (2006) showed how optimal consideration of the tradeoff between land costs and development threats alters the spatial 

conservation decision relative to the typical example from the reserve-site selection 

literature. Although this literature is sparse, improvements can be made by continuing the refinement of spatial econometric and simulation methods to improve the 

spatial forecasts of development threats and ecosystem change (Lewis 2009). As 

documented elsewhere, the literature developing spatial models of parcel-scale 

development decisions is extremely limited (Nilsson et al. 2003), and much work 
24

GENERAL TECHNICAL REPORT PNW-GTR-797 

remains to be done to develop accurate land-use forecasting models capable of 

incorporating realistic policy constraints and uncertainty associated with future 

market conditions.

Quantifying Interactions Among Policy, Markets, and 

Ecosystem Services

The research that explicitly quantifies the effects of market conditions or specific 

policies on current or future ecosystem services is limited, and provides another 

good avenue for research. Two specific research problems are relevant. First, how is 

the supply of ecosystem services expected to change in the future, given a range of 

uncertain market conditions? Second, how have ecosystem services been affected 

by past market conditions and policy decisions?

Forecasting the provision of ecosystem services has been generally labeled as 

“ecological forecasting” in the literature (e.g., see Clark et al. 2001). Some relevant 

research from ecology has focused on extrapolating past land-use trends as a means 

for forecasting changes in ecosystem services (e.g., Pimm and Raven 2000, Tilman 

et al. 2001). However, such approaches have generally been conducted at an aggregate scale and are unable to account for either the spatial pattern of land-use change, 

or the role of market conditions or policy in altering forecasts. Research using 

economic methods to generate ecological forecasts—although promising—has been 

minimal. Lewis (2009) developed an integrated econometric-simulation framework 

to forecast distributions of the spatial pattern of parcel-scale land-use change. The 

integrated framework is estimated from actual landowner decisions and is used to 

forecast extinction probabilities of an amphibian species across a large set of lake 

shorelines in the forested region of northern Wisconsin. In particular, the method 

can explicitly quantify the effects of alternative market conditions or zoning rules 

on changes in the extinction probabilities, providing an important quantitative link 

between policy, private landowner decisions, and expected changes in a specific 

ecosystem product.

Research documenting the effects of prior policy decisions on ecosystem 

services is also fairly limited, yet would provide important information in assessing the performance of past policies. A notable example is that of Stavins and Jaffe 

(1990), who developed an economic land-use change model to conclude that 30 

percent of the forested wetlands depleted in the lower Mississippi waterway in the 

mid 20th century resulted from federal flood control projects. A second example 

is the analysis of Chomitz and Gray (1996), who developed an economic land-use 

change model of deforestation in Belize, and found that road construction (much of 

which was induced by policy) contributed substantially to tropical deforestation. A 

Research documenting 

the effects of prior 

policy decisions on 

ecosystem services 

is also fairly limited, 

yet would provide 

important information 

in assessing the 

performance of 

past policies. 
Forest-Land Conversion, Ecosystem Services, and Economic Issues for Policy: A Review

25

third example is by Andam et al. (2008), who used statistical matching methods to 

show that government-established protected areas had minimal effects on tropical 

deforestation rates in Costa Rica.

Conclusion

The continued conversion and development of forest land pose a serious threat 

to the provision of ecosystem services derived from forested landscapes. In this 

report, we argue that developing an understanding of the full range of consequences 

from forest conversion requires understanding the effects of such conversion on 

both components of ecosystem services: products and processes. However, there 

are unavoidable challenges involved in quantifying the threats from forest conversion and their related costs to human well-being. First, most attempts to quantify 

the costs of forest conversion on ecosystem services will necessarily rely on 

specific ecological science that is often emerging, changing, or simply nonexistent. 

For example, the role that many species play in ecosystem processes is poorly 

understood. Second, given the interconnected nature of ecosystem products and 

processes, any attempt to quantify the effects of forest conversion must grapple 

with jointness in production. For example, the cost of losing a species from forest 

conversion must account for that species’ role as both (1) a product that directly 

contributes to human well-being, and (2) as a component in an ecosystem process. 

Finally, the ecology and the human dimensions of ecosystems are highly specific 

to spatial-temporal circumstances. Consequently, the effects of forest conversion in 

one spatial-temporal context are likely to be quite different than effects elsewhere.

Although challenges exist in quantifying the effects of forest conversion on 

ecosystem services, it is nevertheless clear that private land development in forested 

ecosystems can have numerous adverse effects on ecosystem services. Projections 

based on geographical methods (e.g., Theobald 2005) have been quite useful in 

forecasting aggregate (e.g., county or census-tract scale) changes in land development—a necessary step in projecting changes in ecosystem services. However, 

these approaches are generally not suited for policy analysis because the models 

are typically not related to either economic returns or policy constraints such as 

zoning. As such, there is significant potential for economists to collaborate with 

geographers and ecologists to improve our analyses and understanding of potential 

policies to provide ecosystem services. 

In general, the optimal design and spatial allocation of policy tools to conserve 

forest ecosystem services is not well-understood. Empirical analysis that improves 

our understanding of conservation policy toward ecosystem services can be 
26

GENERAL TECHNICAL REPORT PNW-GTR-797 

enhanced in two ways. First, further research on the nonmarket values of ecological products is necessary to better understand the public’s demand for ecosystem 

services. Second, the supply side of ecosystem services can be better understood 

by continued development of spatially explicit land conversion models capable of 

linking landowner behavior and policy variables (e.g., Lewis and Plantinga 2007, 

Newburn et al. 2006, Stavins and Jaffe 1990). Such models are useful in documenting the costs of providing ecosystem services, as well as providing a platform for 

examining the cost-effectiveness of alternative policy design. Additional research 

should emphasize how ecosystem services are expected to change in the future 

under a range of uncertain market conditions, and how ecosystem services have 

been affected by past policy decisions (fig. 6).

Figure 6—Future research could usefully emphasize how ecosystem services, such as open space, 

are expected to change in the future under a range of uncertain land market conditions. 

Ralph Alig

Throughout this report we have emphasized the conceptual framework of 

delineating ecosystem services into products and processes. Such a distinction is 

important when considering the consequences of forest conversion because of the 

interconnectedness of products and processes, and the fact that a loss of a particular 

ecosystem component today implies not just a one-time loss of an ecosystem 

product, but also the potential for disrupting ecosystem processes that will limit 

Further research on 

the nonmarket values 

of ecological products 

is necessary to better 

understand the public’s 

demand for ecosystem 

services.
Forest-Land Conversion, Ecosystem Services, and Economic Issues for Policy: A Review

27

the potential production of other products. For example, losing a particular bird 

species means losing an ecosystem product valued by bird watchers today in 

addition to losing that bird’s contribution in, say, pollinating commercially valuable 

fruit species. Nonmarket valuation techniques can be used to value ecosystem 

products, but information is needed on the relationship between products and 

processes to properly value all relevant services. Therefore, future research that 

quantifies the relationship between products and processes is a necessary step 

in fully accounting for the full range of consequences that arise from forest 

conversion. Further, policy design can be greatly aided by ecological research 

that quantifies the products and processes most affected by forest conversion.

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Pacific Northwest Research Station

Web site http://www.fs.fed.us/pnw/

Telephone (503) 808-2592

Publication requests (503) 808-2138

FAX (503) 808-2130

E-mail pnw_pnwpubs@fs.fed.us

Mailing address Publications Distribution

Pacific Northwest Research Station

P.O. Box 3890

Portland, OR 97208-3890
Forests on the Edge 

Forests on the Edge is a project of 

the U.S. Department of Agriculture, 

Forest Service, State and Private 

Forestry, Cooperative Forestry 

staff, in conjunction with Forest Service Research and Development. 

The project aims to increase public 

understanding of the contributions 

of and pressures on America’s 

forests, and to create new tools for 

strategic planning. 

The first report, Forests on the 

Edge: Housing Development 

on America’s Private Forests

(Stein et al. 2005), identified 

private forested watersheds in 

the conterminous United States 

most likely to experience housing 

development. The second, National 

Forests on the Edge: Development 

Pressures on America’s National 

Forests and Grasslands (Stein 

et al. 2007), identified national 

forests and grasslands most 

likely to experience increased 

housing density on rural private 

lands on their borders. A third 

report, A Closer Look at Forests 

on the Edge (White and Mazza 

2008), examined projected future 

development on private forests in 

Georgia, Washington, and Maine. 

A fourth report, A Sensitivity 

Analysis of “Forests on the Edge: 

Housing Development on America’s 

Private Forests” (White et al. 2009), 

examined sensitivity of earlier 

results in the first report to four 

factors.

For further information on Forests 

on the Edge, contact Susan Stein, 

U.S. Department of Agriculture, 

Forest Service, Cooperative 

Forestry staff, 1400 Independence 

Avenue, SW, Mailstop 1123, 

Washington, DC 20250-1123. 

Phone: (202) 205-0837. E-mail: 

sstein@fs.fed.us. Web page: http://

www.fs.fed.us/openspace/fote/.