Subsidies to forest products: towards a conceptual framework

Barbara Fliess and Ronald Steenblik

Trade Directorate, OECD

Why do we need better information on forest-related subsidies?

• Government intervention is prevalent in the forestry sector, particularly through ownership of resource, but also in final markets through public procurement (e.g., on paper) and expenditure (e.g., on housing)

• Government regulations and subsidies are affecting markets for products of the forest industry (especially energy-related)

• Domestic policy makers need to know cost, effects (market and environmental), and cost-effectiveness of their policies.

• Countries that trade in the same or competing goods need to know how government interventions are affecting the markets for their products.

Non-energy forest productsLUMBER

CHARCOAL

BLACKLIQUOR

CARDBOARDPAPER

UTILITYPOLES

CELLULOSE CHEMICALS

Energy from the forestFIREWOOD

CHARCOAL

WOOD PELLETS

BLACKLIQUOR ETHANOL

METHANOL

SYNTHETICKEROSENE

Lumber

Seeds; saplings

Fuel

Labor

Capital

Irrigation water

Intermediate inputs

Land

Subs

idie

s to

valu

e-ad

ding

fact

ors

Subsidies to production of energy product• Production-linked payments;•Tax exemptions;•Market price support ( e.g. import tariffs)

Value-adding factors

Lumber

Wood for pulping

Sawmills

Subsidies for purchase of products derived from wood

Subsidies to sawmills

Pulp and paper mills,

cellulosic ethanol

plants, etc.

Subsidies to processing industry

Subs

idie

s to

inte

rmed

iate

inpu

tsPrimaryproduction

Intermediate Consumption

Lumber harvesting

Subsidy intervention points

Source: Adapted from Steenblik, 2007.

Final Con-sumption

Paper

Biofuels

Sawnwood

Fire-wood and

woodpellets

Compressed sawdust

Example of support benefitting a U.S. cellulosic-ethanol plant

State government:• $6.25 million grant (2007)•Sales-tax exemption on property used in construction of alternative fuel production facility (2007-12)

Federal government:$76 million grant (2007)$80 million loan guarantee (2010)

U.S. domestic ethanol market:•Import tariff of 2.5% + $0.14265/litre (since 1980)•Mandated use of cellulosic ethanol (law of 2007; regulation covers 2010-2022)

Federal government:$0.267 per litre production tax credit (since 2008)

State government:Exemption of sales tax on biomass for energy(since 2006)

Upstream subsidies — Direct

• Access to government-owned forest lands at below market rates

• Provision of inputs (seeds, saplings, fertilizer, irrigation water) at below market value

• Wage subsidies for forest workers

• Per-hectare subsidies for maintaining land as forest land (as exist through tax breaks in many countries)

• Government grants, loans and loan guarantees for capital investments in equipment used for forest harvesting

• Production bounties (e.g., per-tree subsidies)

Upstream subsidies — Indirect

• Transfers from consumers to producers created through tariffs onthe importation of logs or primary forest products

• Government expenditure on access roads and other infrastructure in forests

• Government expenditure on research and development

• Technical assistance at below the cost to the government

• Forest-protection (especially fire) services provided at below full-cost recovery (though there may be a public-good element justifying below-cost recovery)

Support to intermediate consumption

• Transfers created through the price-depressing effects of restrictions on exports of logs or sawn lumber

• Per-kg subsidies for the use of forest products to produce energy (e.g., for electricity or biomass production)

• Subsidies for the construction of plants (pulp & paper, wood products, biomass-based-electricity, cellulosic biofuels) that use forest products as inputs

• Subsidies to inputs or to the use of intermediate byproducts (e.g., “black-liquor subsidies” in Canada and the United States)

• Government support for R&D related to the processing of forest-derived raw materials into energy and other products

Support to final consumption

• Subsidies for the use of products derived from forests (e.g., high feed-in tariffs for biomass-generated electricity; subsidies and tax breaks for cellulosic ethanol).

• Subsidies to increase capacity to use forest-derived final products (e.g., government subsidies for flex-fuel vehicles).

• Regulations favouring the use of such products (e.g., consumption mandates for cellulosic ethanol in the United States; building codes requiring wood for certain uses).

• Government support for R&D related to the use of products derived from forest-produced raw materials.

Measurement issues: market transfers

• Identifying domestic prices

• Identifying (and getting agreement on) reference prices

– Adjusting for quality differences

– Adjusting for transport margins

• Accounting for illegal harvesting

• Obtaining information on affected volumes

Measurement issues: budgetary expenditures and risk transfers• Identifying programmes and actual

expenditure

• Estimating risk-related transfers

• Establishing market value of transfers related to use of government-owned assets

• Allocating transfers to upstream activities to downstream products (paper, sawn lumber, biofuels)

Analysis of market effectsDirect input or production subsidies: diverse forms but similar effects - domestic output increases and imports contract or exports expand. World price may change. Cost to taxpayer.

Subsidies paid over time but unrelated to output: can stimulate output if they permit a form or plant to stay in operation instead of closing down.

Need for analysis to consider externalities/market failures:

•Positive externalities can justify the use of certain subsidies because the output (forests) and externality (e.g. eco-system services) are jointly produced.

•Logging subsidies can be environmentally damaging

•Credit subsidies may be important in countries that have less mature capital markets

Modelling: partial equilibrium, general equilibrium.

www.oecd.org

Contacts

Modelling: Jean‐Marc.Burniaux@oecd.org

Tax expenditures: Stephen.Matthews@oecd.org

Non‐tariff barriers: Barbara.Fliess@oecd.org

Classification, measurement: Ronald.Steenblik@oecd.org

OECD Trade and AgricultureOECD Trade and Agriculture