Regulatory Impact Statement

Transcription

1 Regulatory Impact Statement Proposed new policy on illegally logged timber Prepared for Department of Agriculture, Fisheries and Forestry D R A F T R I S Centre for International Economics Canberra & Sydney 13 October 2009

2 The Centre for International Economics is a private economic research agency that provides professional, independent and timely analysis of international and domestic events and policies. TheCIE s professional staff arrange, undertake and publish commissioned economic research and analysis for industry, corporations, governments, international agencies and individuals. Centre for International Economics 2009 This work is copyright. Persons wishing to reproduce this material should contact the Centre for International Economics at one of the following addresses. Canberra Centre for International Economics Ground Floor, 11 Lancaster Place Majura Park Canberra ACT 2609 GPO Box 2203 Canberra ACT Australia 2601 Telephone Facsimile cie@thecie.com.au Website Sydney Centre for International Economics Suite 1, Level 16, 1 York Street Sydney NSW 2000 GPO Box 397 Sydney NSW Australia 2001 Telephone Facsimile ciesyd@thecie.com.au Website Disclaimer While TheCIE endeavours to provide reliable analysis and believes the material it presents is accurate, it will not be liable for any party acting on such information.

3 REGULATORY IMPACT STATEMENT 3 Contents Glossary 7 Executive summary 9 Size of the problem: the global cost of illegal logging 9 Existing measures to address the problem 10 Australia s contribution to the problem 10 Options available to Australia 11 Compliance and enforcement costs 12 Benefits and costs of Australian measures 13 Effectiveness of Australian measures and the international context 14 Next steps 15 1 Background 17 Methodology 19 2 The problem 21 The size of the problem 21 Costs of illegal logging 25 Costs of removing illegal logging to consumers 28 Total costs of illegal logging 29 3 Regulatory and non-regulatory policy options 31 Context for the policy 31 Regulatory options for the restriction and disclosure elements 33 Factors to consider in designing the regulatory options 35 Illegal logging regulatory options examined in this RIS 41 4 Approach to modelling policy options 43 Impacts of compliance costs on willingness to supply 44 Factors affecting compliance costs 44 Modelling compliance costs of legal verification 45 Costs of disclosure measures and chain of custody costs 47 Government enforcement cost 48 Uncertainties about estimates of compliance cost 48 Summary of assumptions and implications of compliance costs 48 5 Economic costs of legality verification 50 Costs of the regulatory options 57

4 4 REGULATORY IMPACT STATEMENT 6 Cost benefit analysis 59 Cost benefit analysis of a unilateral response by Australia 60 7 Sensitivity analysis and impacts of regulatory options 63 Sensitivity to key assumptions 64 Summary of sensitivity analysis 66 Other sensitivities 66 Summary of regulatory options 67 8 Conclusion 73 Restricting imports 73 Effectiveness of and Australian initiative international context 74 Product disclosure 75 Questions for consideration 76 References 77 APPENDICES 81 A GTAP model 83 B Methodology 86 C Various estimates of the non-market (social and environmental) costs of illegal logging 96 D Opportunity cost of complying with certification 102 E Cost of legality compliance 104 Boxes, charts and tables 1.1 Our analytical approach Methodology Estimate of illegal logging in selected countries Estimated share of suspicious wood products in exports of wood products Impacts of illegal logging Estimates of costs of illegal logging Proposed product categories for regulation Key elements of the regulatory options analysed in this draft RIS Compliance requirements for SDL, VLO, VLC and FC schemes Simulations: Australian imports of wood products from risk countries Simulations: Australian imports of paper products, printing and publishing from risk countries Simulations: global reductions in logging in risk countries from unilateral action Simulations: changes in illegal logging in risk countries 52

5 REGULATORY IMPACT STATEMENT Change in production in Australia from unilateral action: all wood products Change in employment in Australia forestry and wood products sector Simulations: costs to the Australian economy if Australia acts unilaterally Simulations: costs to the world economy Welfare changes in Australia, risk countries and other countries: legality verified by full certification if Australia acts unilaterally Simulations: cost to Australia per cubic metre reduction in logged wood in risk countries if Australia acts unilaterally Simulations: benefits Simulations: ratio of total global benefits to Australian cost Simulations: ratio of total global benefits to total global cost Sensitivity results for full certification and high product coverage: unilateral action Sensitivity of costs and benefits for Australia under unilateral action Potential impacts of legality verification, regulatory and non-regulatory options 71 A.1 Region classification 84 A.2 Sector classification 85 B.1 Logging supply and demand 87 B.2 Impact of eliminating illegal logging 88 B.3 Welfare change of eliminating illegal logging: sensitivity analysis 90 B.4 Social and environmental costs of illegal logging 91 B.5 Average shares of product categories in GTAP sectors 92 C.1 Social costs of logging 98 C.2 Estimating the benefits of eliminating greenhouse gas emissions associated illegal logging 100 C.3 Ecosystem services included in the estimate of biodiversity loss in forestry 101 D.1 Supply and demand responses to lower resources availability 102 D.2 Changes of 1 per cent reduction in forestry resources 103 E.1 Estimated annual costs of certification for a 5-year period certificate. Medium size operation. Native forest 106 E.2 Composition of certification cost 106 E.3 Estimated annual costs of certification for a plantation with well developed systems for a 5-year period 107 E.4 Cost of compliance for various types and sizes of operation, diverse standards 108 E.5 Estimated unit cost of compliance under various standards 108 E.6 Cost of compliance for various types and sizes of operation, full certification 109 E.7 Estimated unit cost of certification 109

6 6 REGULATORY IMPACT STATEMENT E.8 Legality Assurance System (LAS) costs under various scenarios 111 E.9 CoC certification components 113 E.10 Example of a supply chain with 2 steps (nodes) and 2 suppliers per step 114

7 REGULATORY IMPACT STATEMENT 7 Glossary APFSCB CBD CERFLOR CERTFOR CITES CoC CPRS DAFF EU FAO FLEG FLEGT FMU FSC GTAP IPPC ITTO LEI MDF MTCC NGO OBPR Asia-Pacific Forestry Skills and Capacity Building Program Convention on Biological Diversity Certificação Florestal (Brazilian Forest Certification System) Certificacion Forestal (Chilean system for Sustainable Forest Management) Convention of International Trade in Endangered Species Chain of custody Carbon Pollution Reduction Scheme Department of Agriculture Forestry and Fisheries European Union Food and Agriculture Organization of the United Nations Forest Law Enforcement and Governance Forest Law Enforcement governance and Trade Forest Management Unit Forest Stewardship Council Global Trade Analysis Project Intergovernmental Panel on Climate Change International Tropical Timber Organization Lembaga Ekolabel Indonesia Medium-density fibreboard Malaysian Timber Certification Council Non-government organisation Office of Best Practice Regulation

8 8 REGULATORY IMPACT STATEMENT OSB PEFC RIS SDL TheCIE TLAS TLTV UNCCPCJ UNFCCC UNFF UN REDD US VLC VLO VPA WTO Oriented strandboard Programme for Endorsement of Forest Certification Regulation Impact Statement Self-declared legal The Centre for International Economics Timber Legality Assurance System Timber Legality and Traceability Verification United Nations Commission on Crime Prevention and Criminal Justice United Nations Framework Convention on Climate Change United Nations Forum on Forests United Nations collaborative programme on Reduced Emissions from Deforestation and Degradation in Developing Countries United States of America Verified Legal Compliance Verified Legal Origin Voluntary Partnership Agreements World Trade Organization

9 REGULATORY IMPACT STATEMENT 9 Executive summary The Australian Government is considering introducing a policy to combat illegal logging and associated trade by establishing systems that will promote trade in legally logged timber and, in the long term, trade in timber and wood products from sustainably managed forests. The proposed policy includes restricting importation of illegally logged timber and thereby assisting in reducing the environmental, social and financial damage caused by it to Australia and other countries in the region. It also includes action to require disclosure of species, country of harvest and any certification at point of sale. The Office of Best Practice Regulation (OBPR) has informed the Department of Agriculture Forestry and Fisheries (DAFF) that a Regulation Impact Statement (RIS) is required in relation to those elements of the proposed policy dealing with restricting imports and product disclosure. A RIS is required to assess the potential economic, social and environmental impacts of a range of regulatory and non-regulatory options available to Government. This report, being a draft RIS, has been prepared for consultation with stakeholders, who are invited to make written submissions on its findings. It is designed to assist DAFF prepare a final RIS which will inform Government consideration of the options for combating illegal logging and associated trade in the most cost effective and efficient manner. It has drawn on initial consultations based on an issues paper circulated earlier in the process, and on interactions with government agencies with portfolio interests in combating illegal logging and associated trade. Size of the problem: the global cost of illegal logging The most thorough estimates of the extent of illegal logging by Seneca Creek Associates (2004) suggest that between 5 and 10 per cent of global industrial production may be associated with illegal activity and that similar percentages of global trade in wood products can be traced to origins suspected to be illegal. It is difficult to value many of the social and environmental costs resulting from illegal logging. However, estimates compiled for this report suggest the following: Non-market (environmental and social) costs associated with illegal logging are of the order of US$60.5 billion a year.

10 10 REGULATORY IMPACT STATEMENT The financial costs to legal producers around the world are estimated at US$46.0 billion a year. But consumers (through lower prices) and producers of illegal timber (through higher incomes) and products receive benefits worth around US$92 billion a year. The net result of these costs and benefits is a net cost of $15 billion a year, with a potential benefit to cost ratio of There is thus a potential benefit to the world from eliminating illegal logging. The key questions for this RIS concerns what additional costs would be incurred as a result of measures to reduce illegal logging, how much of the benefits might be achieved through actions that Australia can take, and how the measures being assessed might interact with other Australian and international initiatives. Existing measures to address the problem At the present time the Australian Government is using bilateral agreements on forestry with countries in the Asia-Pacific region such as existing bilateral forestry agreements with countries such as Indonesia and Papua New Guinea and multilateral processes, including the United Nations Forum on Forests (UNFF) nonbinding agreement on the management of all types of forests and the United Nations Commission on Crime Prevention and Criminal Justice (UNCCPCJ) resolution on illicit international timber trafficking, combined with capacity building to support efforts for combating illegal logging and associated trade. The Government is also engaged in regional processes, including the East Asia-Pacific Forest Law Enforcement and Governance. Other countries concerned with importation of illegally logged timber are also implementing or considering new initiatives to combat illegal logging and encourage enforcement of forestry laws in producer countries. These include the amendments to the Lacey Act recently introduced in the United States, and the due diligence regulation being considered by the European Union. Australia s contribution to the problem How much of the costs of illegal logging is likely to result from Australia s importation of timber products? Currently, only around 15 per cent of world production of timber products is internationally traded. Of this trade, Australia s imports account for around 2.5 per cent. This study has estimated that around 10 per cent of these imports may include illegally logged timber. Thus Australia s imports account for about per cent of global timber production, and 0.34 per cent of products incorporating illegally logged timber. So if Australia were able to stop its importation of such products, and

11 REGULATORY IMPACT STATEMENT 11 this led to a commensurate reduction in illegal logging (rather than a diversion of products to other markets), it could reduce the global costs of illegal logging by 0.34 per cent, or around US$51 million a year. But any available measures would impose compliance and other costs on Australia, and may not be fully effective in eliminating illegal logging. Assessing these costs and the potential effectiveness of measures is a key part of this RIS. Options available to Australia This RIS has considered a number of options for implementing the import restriction element of the Government s policy. They include self-regulation, quasi-regulation, co-regulation and explicit regulation. Each of these options would employ some kind of legality verification scheme, and decisions would be needed as to what range of timber products would be covered. This RIS has considered the use of four types of certification schemes (self-declaration of legality (SDL), verified legal origin (VLO), verified compliance with all forestry and trade laws in the country of harvest (VLC) and certification of sustainability (full certification, FC). These schemes cover an increasing range of elements of legal compliance (details are provided in table 4.1 of this report). Restrictions have been considered for different levels of coverage of imports defining three categories. Category I solid timber and wood products (covers about 12 per cent of imports); Category II category I plus partially processed/processed timber and wood products (covers about 39 per cent of imports); and Category III category II plus selected complex products, including paper manufactures and furniture (covers 70 per cent of imports). Options that the Australian Government might adopt could include phased introduction of more comprehensive verification requirements and phasing over a wider range of products, as well as introduction of any one of the potential combinations of schemes and product coverage. This RIS has considered the effects of introducing each of the options on a stand alone basis. Table 1 summarises the main elements of the regulatory options that have been analysed.

12 12 REGULATORY IMPACT STATEMENT 1 Key elements of the regulatory options analysed in this RIS Regulatory option Phasing product coverage Legality, verification compliance Phasing compliance options Enforcement regime Self - Current systems - Industry Quasi-regulation + Code of conduct - Industry Co-regulation + Legislate + Government Explicit regulation + Legislate + Government Note: The regulatory options could utilise the SDL, VLO, VLC or FC schemes. The pluses and minuses indicate whether it is likely that the regulatory approaches would involve phasing-in of the product coverage or the development of timeframes for requiring importers to shift from less to more onerous legality compliance schemes. Compliance and enforcement costs A key element of measures that Australia might adopt to restrict imports of illegal logging is that in order to demonstrate that imports do not contain illegally logged timber, traders will have to ensure that products are covered by the selected legality verification scheme. This will impose costs on producers in source countries, and on importers and other players up the value chain in Australia. In order to meet its international trade obligations, Australia would also have to impose the same requirements on products sourced in Australia. These compliance costs will have economic effects: they will lead to higher prices of timber product imports and higher costs to Australian producers. Consumers will face higher prices, and may reduce consumption of timber products and/or substitute products made from other raw materials such as aluminium or cement. Some Australian producers may expand their sales on the domestic market, but so might producers in other countries, such as New Zealand or the United States. For the purposes of this study, compliance costs have been modelled using information from a range of sources (including stakeholders consulted in the early stages of this RIS process). They have been estimated for producers in developing countries where the risk of illegal logging is considered to be high, and for producers in developed countries where risks are thought to be low, and for each of the legality verification schemes. The estimates also take account of how costs escalate the more complex and lengthy is the value chain. As with other key parameters, the sensitivity of results to alternative values for these costs has been carried out. The measures will also impose costs of enforcement. Because information has not been available on the extent of costs associated with the policy options, they have not been included in the benefit cost analyses carried out for this report.

13 REGULATORY IMPACT STATEMENT 13 Benefits and costs of Australian measures The benefit cost analyses carried out for this RIS indicate that, for Australia, there is an overall net cost from unilaterally implementing import restriction and product disclosure elements. The results also make it clear that any unilateral action taken by Australia is likely to be ineffective in reducing illegal logging because of the potential for timber products incorporating illegally logged timber to be diverted to less discerning markets and because Australia is such a small part of the global market. The analysis indicates that applying unilateral import restrictions would only stop production of about a tenth of the products incorporating illegally logged timber currently coming to Australia. The rest would be diverted to other markets and other products (export and domestic). Because so much timber is used domestically in the country of harvest, and because much of the trade in timber flows through countries with weak or no controls on the legality of imported timber, the scope for diversion is high. Further, although it is difficult to restrict all products, if the product coverage of measures is small, illegally logged timber will flow into the non-restricted trade. The bottom line is that because Australia s imports account for such a small share of illegally logged timber, and restricting imports has limited effect in reducing illegal logging, Australia incurs all the costs of restricting imports without achieving commensurate benefits of reducing the damaging effect of illegal logging. This reflects the inherent difficulty of constructing measures within Australia to affect behaviour in other countries. The analysis shows that the measures are likely to cause welfare losses in Australia and in those developing countries from which Australia may currently be importing products incorporating illegally logged timber. However, national welfare would be increased slightly in countries such as New Zealand and the United States, whose producers would expand export sales to Australia. The analysis also shows that options using the more comprehensive legality verification schemes, such as full certification, typically impose higher costs on Australia compared to the less extensive schemes such as verified legal origin or verified legal compliance. The analysis of the disclosure measure shows if it is introduced in parallel with the import restriction scheme, and only required at the point of entry into Australia, the additional compliance costs are very small. However, it is clear that the compliance costs increase the further along the supply chain that the disclosure of information is required. Enforcement of the measure will also be more expensive if disclosure is required at the wholesale or retail trade. Depending on how the disclosure measure is legislated, enforcement costs may fall on state governments.

14 14 REGULATORY IMPACT STATEMENT The sensitivity of the benefit and cost estimates to alternative values for key parameters, including the level of compliance costs, the extent of illegal logging, the responsiveness of producers to changing market opportunities has been tested and reported in this draft RIS. A number of intangible benefits associated with the policy have not been taken into account in the analysis. These intangibles include: Australia providing a role model to other trading partners; Australia sending a message to trading partners that they should also invest in measures to curb illegal logging, with the initiative could be seen as a step towards more effective national and multilateral moves to improve the sustainability of all logging, legal or illegal; a sense of morality for those Australians concerned about the issue; a stronger position for Australia to negotiate international actions if the country is not seen to be benefiting from illegal or unsustainable behaviour in other countries; and maintenance of existence values such as people gaining benefits from knowing the forests in other countries are not being illegally logged. If it were possible to place a value on these intangible benefits, their inclusion in the analysis could lead to a higher estimate of the net benefit of the restriction element. However, this value would have to be large to provide a positive net benefit, a possibility that is compromised by the low level of reductions in illegal logging caused by unilateral action. Further, the analysis has not taken account of all of the costs, since it was not, for example, able to gather estimates of the costs to government of enforcement. Effectiveness of Australian measures and the international context An important issue shaping the results of the cost-benefit analysis is that while Australian measures to restrict imports of products incorporating illegally logged timber can be reasonably although not completely effective in limiting such imports, they are much less effective in reducing the amount of illegal logging occurring in the world. A new Australian initiative would, however, be implemented in a context where some significant importers of timber products are also putting in place measure targeting importation of illegally logged timber. This could reduce the scope for diversion of illegally logged timber. This analysis has tested whether the actions being taken or considered in the United States and members of the European Union would increase the effectiveness of an Australian restriction measure in reducing the extent of illegal logging. The results show that the effectiveness of Australia s actions

15 REGULATORY IMPACT STATEMENT 15 would be increased, but not enough for the benefits to exceed the costs. This is because opportunities for leakage would remain. This is not entirely unexpected because trade in timber products is only about 15 per cent of global production so a significant share of illegally logged timber (85 per cent) is consumed within the country where it is harvested. So any action aimed at trade is only likely to directly target about 15 per cent of illegal logging. It may have other flow-on effects to domestically consumed products, however, that said, even action targeted at the 15 per cent of timber products that is traded is unlikely to be 100 per cent effective in its enforcement. (It is possible, of course, that actions taken by governments in countries which are major markets for timber products may encourage a more rapid adoption of a culture of legal compliance within countries where illegal logging occurs or extensive use is made of illegally logged timber. This study has not modelled this possibility.) If a full and effective multilateral agreement were in place that included the main sources and users of illegally logged timber the scope for diversion of illegally logged timber in response to an Australian measure to restrict imports would be substantially reduced. To be effective such an approach would need to target domestic consumption as well as trade. Similarly, agreements and cooperative arrangements with developing producer countries, such as Indonesia, Malaysia and Papua New Guinea, and consumer countries, such as China, that are designed to improve forest governance, achieve sustainable forest management, forest certification and verifying the legal origins of timber products would also complement a restriction measure and increase the probability that it would be effective. This might also be true for initiatives for regional capacity building through overseas development aid. This analysis has not assessed the likely impacts of such complementary measures. Next steps Initial consultations for this RIS were conducted in April with about 60 stakeholders in Australia directly involved in production and trade of wood products, or in efforts to reduce illegal logging and improve the sustainability of forestry activities. The aim of this preliminary process was to seek input on the relative importance of the many issues associated with developing measures to combat illegal logging. An Issues Paper was prepared to introduce key issues/questions likely to influence the outcome of the RIS. The broad topics for discussion relate to the motivation of the policy and the options for action, the problem of illegal logging and its size, and the dimension of potential costs (including compliance costs) and benefits of an Australian policy. Stakeholders comments on each of such issues varied considerably. However, there was a consensus that taking action to address illegal logging is a complex task, and that, despite the election commitment, there is still uncertainty on what the timeframe, instruments and outcomes of the Australian policy approach would be.

16 16 REGULATORY IMPACT STATEMENT The economic analysis presented in this report of the costs and benefits to industry and consumers of the restriction and disclosure elements has drawn on the insights and information arising from the initial consultations. This draft RIS is now being made available for stakeholders and interested parties to comment on the analysis and findings, and to make suggestions regarding regulatory and non-regulatory options for achieving the Government s objectives.

17 REGULATORY IMPACT STATEMENT 17 1 Background The Australian Government is considering ways to meet an election commitment concerned with combating illegal logging and associated trade by establishing systems that will promote trade in legally logged timber and, in the long term, trade in timber and wood products from sustainably managed forests. It is intended that the policy will have five main elements, in which the Australian Government would work with regional (international) governments to: build capacity within regional governments to prevent illegal timber harvesting; develop and support legal and sustainable certification schemes for timber products sold in Australia; identify illegally logged timber and restrict its import into Australia (the restriction element); require disclosure of species, country of origin 1 and any certification (the disclosure element); and argue that market-based incentives aimed at reducing emissions from deforestation and forest degradation should be included in a future international climate change agreement. This policy would complement other national government and industry initiatives aimed at combating illegal logging and associated trade, as well as initiatives being taken by other countries that play a significant role in trade and production of timber and timber products. Actions to regulate the importation into Australia of timber and associated products would have a range of impacts for Australia, including increased business compliance costs to meet legality and disclosure requirements, increased costs to consumers of imported and domestically-supplied timber products and a potential decrease in the supply of imported timber products. The Office of Best Practice Regulation (OBPR) accordingly informed the Department of Agriculture, Fisheries and Forestry (DAFF) that a Regulation Impact Statement (RIS) was required to assess the impacts and efficacy of potential measures to deliver the import restriction and product disclosure elements of the policy. 1 To avoid confusion, throughout this report, country of origin is referred to as country of harvest.

18 18 REGULATORY IMPACT STATEMENT 1.1 Our analytical approach 2 Specify world and domestic model to trace economic and/or market impacts 1 Assess problem, size, risk, objective, rationale, existing regulation and/or experiences 3 Assess literature on environmental, social, economic costs of illegal logging Identify Identify 10 variables variables 11 Define options and scope affecting affecting effectiveness of policy effectiveness of policy Assess and quantify economic and market impacts of options and conduct sensitivity tests Quantify 8 range of effectiveness 7 Write issues paper, conduct initial stakeholder consultation 12 Assess, quantify enforcement and compliance costs Assess and quantify range of likely potential benefits from options to reduce illegal logging 9 Quantify range of effectiveness 13 Build and use financial model to determine benefits costs of options and conduct sensitivity tests 14 Write draft RIS highlighting benefit cost analysis 15 Consult stakeholders/obpr 17 Write final RIS with recommendation 16 Write consultation statement Source: TheCIE. The Centre for International Economics (TheCIE) has been engaged by DAFF to prepare the RIS. As part of the RIS process, this draft Statement has been prepared for consultation with affected and interested parties. It presents an assessment of the costs and benefits of a range of regulatory options for delivering the import regulation and disclosure elements of the proposed policy. It also considers the potential for achieving the underlying objectives using non-regulatory means. Following the consultation process, a final RIS will be prepared: it will help DAFF determine the most effective and efficient options for meeting these objectives. Steps and timing for this draft Regulatory Impact Statement Chart 1.1 summarises the 17 step approach adopted by TheCIE for preparing the RIS. The approach involves four stages: clearly defining the rationale behind the policy and policy options;

19 REGULATORY IMPACT STATEMENT 19 economic modelling of the forestry sector; assessing the costs (economic, environmental and social) of illegal logging and benefits of reducing it; and bringing the first three streams together to assess the benefits and costs on a consistent basis and logically argue through the findings via a transparent reporting process to stakeholders, the OBPR and DAFF. This draft RIS incorporates the results of all the steps leading up to and including step 14 in chart 1.1, including initial consultation with stakeholders. Its purpose is to provide a benefit cost analysis of the range of options for stakeholders to comment on. Methodology The methodology for undertaking the cost benefit analysis and the main elements considered in this process are set out in chart 1.2. The analysis relies on existing global estimates of illegal logging. These have been used together with current trade data to estimate the volume and value of illegal timber imports to Australia. As there is considerable uncertainty surrounding these estimates, sensitivity testing has been conducted on parameters derived from these estimates. The analysis also uses existing literature to identify the non-market costs of illegal logging and a variety of secondary sources to estimate these costs globally. Various regulatory and non-regulatory options for delivering the restriction and disclosure elements of the proposed policy are assessed. To assess benefits to Australia we use a global general equilibrium model of trade to estimate the global financial costs of eliminating illegal logging and compare these costs to the global non-market benefits of eliminating illegal logging. From this we can determine Australia s potential share of these global benefits. To estimate costs to Australia we use a model of compliance costs and the global general equilibrium model to estimate the global and Australian impacts of Australia s options to restrict imports of illegal logging. This also enables us to estimate the reduction in illegal logging caused by Australia s actions and the net cost to Australia and to other countries. We use the estimates of reductions in illegal logging from Australia s options to estimate what proportion of the global benefits of reducing illegal logging might be attributed to Australia s policy approach. We are then able to assess costs to Australia against benefits achieved to determine the net benefits or costs from the policy.

20 20 REGULATORY IMPACT STATEMENT 1.2 Methodology Literature review on illegal logging Estimates of global non-market benefits* of eliminating illegal logging* Estimates of illegal logging globally* Estimates of Australian illegal imports* Options for Australia to combat illegal logging* Model of costs of complying with options* Global general equilibrium model (GTAP) Most countries Most products including: Forest products Wood products Paper/pulp Production/ consumption/ trade/prices Baseline includes current levels of illegal logging Estimates of global financial costs of eliminating illegal logging Estimate of decline in global illegal logging due to Aust. options Net financial cost to Aust/world from Australian options Estimate of net global benefit of elimination Benefits from Australian options Net global & Aust benefit from options *indicates key uncertain variables for sensitivity testing Source: TheCIE.

21 REGULATORY IMPACT STATEMENT 21 2 The problem The motivation and rationale for the proposed policy stems from the proposition that illegal logging and resulting trade is a significant global problem causing environmental, social and economic harm. Forest laws (in theory) are designed to overcome economic problems relating to the public good characteristics of forests. They aim to limit access to forest resources in order to ensure that users take account of the full social costs of exploitation. In the absence of laws and well defined and enforced property rights, logging can lead to sub-optimal environmental, social and economic outcomes. 2 And so logging that occurs in breach of these laws can also have negative impacts, not only for the localities and countries where the logging occurs, but also, in the case of losses of some environmental functions of forests, such as carbon sequestration and maintenance of bio-diversity, for the whole world. Unclear forest tenure, weak political institutions, poverty, corruption, poor enforcement, and large financial incentives involved in avoiding the full costs of obtaining timber legally lie at the heart of most illegal logging (Seneca Creek Associates (2004)). Preventing illegal logging is an important part of realising the full benefits to society provided by forests (along with ensuring that forestry laws are well-designed to achieve these broader benefits.) Restricting imports of products derived from illegal logging is seen as one way of reducing illegal logging and associated trade, and in effect to help enforcement of forest laws. However assessing the impact of such restrictions on reducing environmental, social and financial damage caused by illegal logging involves dealing with some complex issues. The size of the problem Estimates of the extent of the global level of illegal logging vary substantially, depending on the definition of illegal logging used and the methodology and 2 See the issues paper ( %20RIS%20illegal%20logging.pdf) prepared for this RIS for a discussion of the public good characteristics of forests, and how forest laws attempt to reduce the social, economic and environmental harm that absence of laws and the property rights they create or support can lead to.

22 22 REGULATORY IMPACT STATEMENT assumptions employed. At the lower end, the American Forest and Paper Association (2009), estimates that illegal logging accounts for around 10 per cent of the total global harvest, whereas Greenpeace (2009) estimates that the proportion may be up to 80 per cent in some countries. The wide range in the estimates of the extent and associated cost of illegal logging raises the issue of the reliability and accuracy of underlying data and methodologies used to generate them. For example, the most widely cited study, Seneca Creek Associates (2004), uses data which is 6 years old and therefore may be out-of-date. It is important to take into account the relative uncertainty of such estimates when considering the impacts of illegal logging in a particular country. Many of the estimates of illegal logging are also constructed using anecdotal evidence or limited research (due to the difficulty with obtaining up-to-date empirical data). A common approach has been to assess the overall governance of a country based on a corruption index to infer some level of illegality: the resulting proportion (percentage estimate) is then applied to all of the country s timber harvest (Curtin 2007). A briefing prepared for Chatham House asserts that half of the logging occurring in countries judged to be at high risk of illegal logging is illegal (Brack, 2007). The brief further estimates that illegal logging accounts for about 10 per cent of the total global timber trade, or around US$15 billion per year. A snapshot of illegal logging in some countries Table 2.1 presents some published data for key countries such as their share in world production of roundwood, estimated size of illegal logging, and perceived corruption. 2.1 Estimate of illegal logging in selected countries Country Share in world production of roundwood (per cent)(a) Proportion of illegal production of timber (per cent) (b) Corruption index (of 180 countries (c) Brazil China Indonesia Papua New Guinea Russian Federation (northwest) 50 (far west) Solomon Islands United States 12.4 < 1 18 Sources: (a) FAO (2009, data for 2007). (b) World Bank (2006) and Seneca Creek Associates (2004). (c) Transparency International (2008). 147 Estimation of illegal logging exports The most comprehensive and widely cited estimates of illegal logging production and trade are those in Seneca Creek Associates (2004) and Turner et al (2007).

23 REGULATORY IMPACT STATEMENT 23 Turner et al (2007) estimated the illegal share of roundwood harvested in 2005 with three estimates for each exporting country or country group high, low and most likely (table 2.2). Seneca Creek Associates (2004) estimated the shares of products from suspicious sources for softwood roundwood, lumber and plywood, and hardwood roundwood, lumber and plywood in 2002, which are between the high and most likely estimates by Turner et al (2007). The data from these sources have been used to generate the starting estimates of the proportion of illegally logged timber and products from the countries and regions used in the modeling undertaken for this study. 3 These estimates are presented in table Estimated share of suspicious wood products in exports of wood products 2002 share from 2005 share from Turner et al (2007) b Seneca Creek (2004) a Low Most likely High Australia New Zealand Other Oceania China Japan Korea Hong Kong and Singapore Indonesia Malaysia Thailand Vietnam Rest of Asia Russia EU Acceding EU Rest of Europe North America Brazil Other Latin America West and Central Africa Rest of Africa Rest of the world a Applying Australia s import share of hardwood and softwood roundwood, lumber and plywood. b Turner et al (2007) estimates the suspicious roundwood harvest. 3 The estimates assume that the share of softwood and hardwood roundwood, lumber and plywood in the exports of wood products of these countries is the same as the share of these products in Australia s imports. For the purposes of the trade flow modeling, importers and exporters were separated into the 22 regions shown in table 3.2.

24 24 REGULATORY IMPACT STATEMENT Australia s imports of wood products from high risk countries In 2007 Australia imported A$8.4 billion of timber and wood products. Furniture(imports classified to chapter 94 of the Harmonized System (HS) of trade nomenclature HS94, which also includes non-wood products) is the biggest component, valued at almost A$3 billion (35.5 per cent), followed by paper and paperboard (HS48) at A$2.8 billion (33 per cent), and wood (HS44) at A$1.2 billion (14.8 per cent). Sources of imports In 2007, 26.7 per cent of Australian imports of timber and timber products were from China, with 22.3 per cent coming from EU-15 group of countries, 10.3 per cent from New Zealand, and 7.9 per cent from the United States. China s share has grown from just 4.7 per cent in 1994 to 26.7 per cent in The ten countries/regions with the largest shares of Australian imports accounted for 86.3 per cent of total imports in The commodity structure of Australia s imports varies considerably across the source regions. For example, in 2007 over two thirds of timber imports from China were furniture, while over 90 per cent of imports from South Korea were paper and paperboard. Proportion of Australia s timber product imports might incorporate illegally logged timber Turner et al s low and most likely estimates suggest that around 8-12 per cent of Australia s imports of timber products could contain illegally logged timber. These are consistent with direct estimates for Australia of approximately 9 per cent or A$400 of imported forest products and wooden furniture (Jaakko Poyry, 2005). Australia s influence in world trade World trade in timber and wood products appears to be around 15 per cent of world output by value. Australia s imports of timber products account for a very small share of world exports, and an even smaller share of world output. Consequently, its importation of products incorporating illegally logged timber is also small, as the following summary shows: World production of timber products (excluding furniture) is estimated to be around US$1 trillion a year. World exports of timber products (excluding furniture) is around 15 per cent of this: this is valued at around US$150 billion (approximately 10 per cent of this, worth US$ 15 billion, incorporates illegally logged timber).

25 REGULATORY IMPACT STATEMENT 25 Australia s imports of these products is estimated at: A$4.4 billion; equivalent to around US$ 3.75 billion or per cent of global output and 2.5 per cent of global trade. Australia s imports of product incorporating illegally logged timber is estimated at A$400 million which is equivalent to around US$340 million, or per cent of global production and 0.34 per cent of estimated global production of timber products incorporating illegally logged timber. Costs of illegal logging There is a range of economic, social and environmental costs associated with illegal logging. Illegal logging involves waste and reduction in aggregate national welfare in the source countries, and imposes global costs. Table 2.3 summarises the main financial, social and environmental effects associated with illegal logging. Financial effects are generally market related while social and environmental effects can be considered as intangible or non-market effects. The OBPR guidelines require that both market and non-market effects and impacts be taken into account when a RIS is being prepared. 2.3 Impacts of illegal logging Financial Social Environmental Loss of revenue for governments and legal producers of timber Distortion of global prices of timber Losses of non-wood forest products Illegal logging also results in a number of economic transfers associated with: lower prices of timber and timber products income from logging and transport operations non-payment of taxes by illegal loggers. Source: TheCIE. Displacement of forestdependent communities from their livelihoods, cultural identity and spiritual values Challenges to law and order and encouraging arbitrary (corrupt) exercise of power from government officers In some countries illegal harvesting practices have been linked to funding of armed conflicts. Waste of resources in pursuing gains from illegal logging. Illegal logging that leads to a net loss of forest resources causes a number of environmental problems: Loss of biodiversity Removal of important carbon sinks which also compounds global warming Soil and water degradation which could lead to erosion, reduced water quality, landslides and avalanches Loss of future resource Financial costs of illegal logging The literature offers estimates of the extent of the main financial effects attributed to illegal logging.

26 26 REGULATORY IMPACT STATEMENT Seneca Creek Associates (2004) estimate that illegal logging depresses global prices of timber. Turner et al (2007) estimate that world wood product 4 prices would increase if illegal product were eliminated. Their estimates show that production in Asia, South America and Russia would decline but it would increase for countries and regions such as the USA, the EU, Australia, New Zealand and Finland, where the occurrence of illegal logging is considered to be small. That is, there would be a switching from illegal to legal logging (switching would also occur in countries where illegal logging is prevalent). Overall, Turner et al (2007) estimate that global production of wood and wood products would decline in the short term if illegal logging were eliminated. The World Bank (2006) estimates that illegal logging in developing countries causes losses in assets, and industry and community revenue streams, in excess of US$10 billion per year. The World Bank also estimates that some US$5 billion of logging tax and royalties is evaded each year. 5 However these estimates do not capture all of the financial consequences of illegal logging, as they ignore the wider economic impacts on downstream users and consumers and some other trade-offs. 6 Modelling undertaken for this study, of the financial consequences of illegal logging at current levels using a comprehensive general equilibrium global trade model (details of the modelling are presented in appendices B and C) gives the following results: Producers of legal forest products in non-risk (high cost) countries like the United States, Europe and New Zealand are around US$15 billion a year worse off due to reduced production, lower prices and lost trade opportunities caused by illegal logging; High cost legal producers in risk countries 7 such as China, Indonesia, Russia and Malaysia receive profits and income that are around US$31 billion lower than they would be without illegal logging. On average, total production of wood products is about 3 per cent higher than it would be without illegal logging, and consumption of timber substitutes is lower than it would otherwise be (without illegal logging, consumers would switch to substitute such as steel, concrete and aluminium). 4 Refers to industrial roundwood, sawn wood, wood panels and wood pulp. 5 Strictly speaking these are transfers of wealth rather than losses of wealth. 6 Only partial equilibrium models were used. 7 The risk countries and regions include Oceania (excluding Australia and New Zealand), China*, Korea, Hong Kong, Singapore* (Not a big forested country may be a source versus origin issue), Indonesia, Malaysia, Thailand, Vietnam, the rest of Asia, Russia, the 10 acceding members of the European Union, Brazil, Other Latin America, West and Central Africa. (* Indicates countries with significant transhipment.)

27 REGULATORY IMPACT STATEMENT 27 The implication of this analysis is that illegal logging imposes financial costs on those involved in legal logging of around US$46 billion a year. Prices to consumers and down-stream users of wood products are about 3 per cent lower than they would otherwise be, and average prices in developing countries are more than 8 per cent lower than they would otherwise be. Social and environmental (non-market) costs of illegal logging Various international organisations have estimated some of the social and environmental costs of illegal logging (see, for example, World Bank 2006 and FAO 2005). The European Commission has commissioned studies that have tried to quantify the costs of biodiversity loss. Other estimates in the literature provide a basis for homing in on the possible magnitude of social and environmental costs borne by the world as a result of illegal logging. Drawing on these sources, it has been possible to construct estimates of the costs of six types of non-market social and environmental impact of illegal logging (see appendix C for the methodology and assumptions employed): Loss of non-wood forest products Illegal logging can result in the loss of non-wood forest products such as animals, food, fruit, and plants. It is estimated that the loss of non-wood forest products due to illegal logging could be around US$0.86 billion annually. Resources wasted in pursuit of gains from illegal logging Although much of the impact of illegal logging may be the illegal transfer of assets and income from the legal owners to loggers, real economic costs may be imposed from the waste of resources used to effect the illegal transfer. For illegal logging, this benefit includes the value derived from the timber that is illegally logged, and the taxes and other payments that should have been made to the government. We estimate the value of resources wasted to be around US$7.5 billion annually. Displacement of forest communities Deforestation can potentially displace subsistence communities from their livelihoods, cultural identity and spiritual values. About 60 million indigenous people are fully dependent on forests for their livelihoods (FAO 2007c). Quantifying the costs of displacement of forest-dependent communities caused by illegal logging requires that some consideration be given to the extent to which these groups forests would have been at risk from legal logging or land clearing activities anyway, which might be occurring due to the land pressures associated with broader demographic pressures and economic development. One way of placing a value on these costs is to estimate how many people may be displaced each year by illegal logging, and use estimates of expenditure on relocation outlays made in donor supported relocation programs designed to compensate communities for the loss of amenities associated with their move. Using a relocation cost estimate drawing on actual experience in donor-funded projects,