A Final Report to inform a Regulation Impact Statement for the proposed new policy on illegally logged timber

Transcription

1 A Final Report to inform a Regulation Impact Statement for the proposed new policy on illegally logged timber Prepared for Department of Agriculture, Fisheries and Forestry FINAL REPORT Centre for International Economics Canberra & Sydney 29 January 2010

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. 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 FINAL REPORT TO INFORM A REGULATION IMPACT STATEMENT: PROPOSED NEW POLICY ON ILLEGALLY LOGGED TIMBER 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: the international context 14 Consultation 15 Recommendation 17 1 Background 18 Methodology 20 2 The problem 22 The size of the problem 22 Costs of illegal logging 26 Costs of removing illegal logging to consumers 30 Total costs of illegal logging 30 3 Regulatory and non-regulatory policy options 32 Context for the policy 32 Regulatory options for the restriction and disclosure elements 34 Factors to consider in designing the regulatory options 36 Illegal logging regulatory options examined in this RIS 42 4 Approach to modelling policy options 44 Impacts of compliance costs on willingness to supply 45 Factors affecting compliance costs 45 Modelling compliance costs of legal verification 46 Costs of disclosure measures and chain of custody costs 48 Government enforcement cost 49 Uncertainties about estimates of compliance cost 49 Summary of assumptions and implications of compliance costs 49 5 Economic costs of legality verification 51

4 4 FINAL REPORT TO INFORM A REGULATION IMPACT STATEMENT: PROPOSED NEW POLICY ON ILLEGALLY LOGGED TIMBER Costs of the regulatory options 57 6 Cost benefit analysis 60 Cost benefit analysis of a unilateral response by Australia 61 7 Sensitivity analysis and impacts of regulatory options 64 Sensitivity to key assumptions 65 Summary of sensitivity analysis 67 Other sensitivities 67 Summary of regulatory options 68 8 Consultation statement 74 Affected and consulted parties 74 The consultation process 74 Stakeholders response to the draft report 78 Policy options 93 Legal verification 95 Policy objectives 95 9 Conclusion 97 Restricting imports 97 Effectiveness of Australian initiatives international context 98 Product disclosure 99 Recommendation 100 References 102 APPENDICES 105 A GTAP model 107 B Methodology 110 C Various estimates of the non-market (social and environmental) costs of illegal logging 120 D Opportunity cost of complying with certification 128 E Cost of legality compliance 130 F Stakeholders consulted 141 G Stakeholders that sent public submissions on the Draft RIS 144 Boxes, charts and tables 1 Key elements of the regulatory options analysed in this RIS Our analytical approach Methodology Estimate of illegal logging in selected countries 23

5 FINAL REPORT TO INFORM A REGULATION IMPACT STATEMENT: PROPOSED NEW POLICY ON ILLEGALLY LOGGED TIMBER 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 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 Summary of submission responses Views of some stakeholders on policy options 93 A.1 Region classification 108 A.2 Sector classification 109 B.1 Logging supply and demand 111 B.2 Impact of eliminating illegal logging 112 B.3 Welfare change of eliminating illegal logging: sensitivity analysis 114 B.4 Social and environmental costs of illegal logging 115 B.5 Average shares of product categories in GTAP sectors 116 C.1 Social costs of logging 123 C.2 Estimating the benefits of eliminating greenhouse gas emissions associated illegal logging 125

6 6 FINAL REPORT TO INFORM A REGULATION IMPACT STATEMENT: PROPOSED NEW POLICY ON ILLEGALLY LOGGED TIMBER C.3 Ecosystem services included in the estimate of biodiversity loss in forestry 126 D.1 Supply and demand responses to lower resources availability 128 D.2 Changes of 1 per cent reduction in forestry resources 129 E.1 Estimated annual costs of certification for a 5-year period certificate. Medium size operation. Native forest 132 E.2 Composition of certification cost 132 E.3 Estimated annual costs of certification for a plantation with well developed systems for a 5-year period 133 E.4 Cost of compliance for various types and sizes of operation, diverse standards 134 E.5 Estimated unit cost of compliance under various standards 134 E.6 Cost of compliance for various types and sizes of operation, full certification 135 E.7 Estimated unit cost of certification 135 E.8 Legality Assurance System (LAS) costs under various scenarios 137 E.9 CoC certification components 139 E.10 Example of a supply chain with 2 steps (nodes) and 2 suppliers per step 140

7 FINAL REPORT TO INFORM A REGULATION IMPACT STATEMENT: PROPOSED NEW POLICY ON ILLEGALLY LOGGED TIMBER 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 FINAL REPORT TO INFORM A REGULATION IMPACT STATEMENT: PROPOSED NEW POLICY ON ILLEGALLY LOGGED TIMBER 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 FINAL REPORT TO INFORM A REGULATION IMPACT STATEMENT: PROPOSED NEW POLICY ON ILLEGALLY LOGGED TIMBER 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 is the final report to DAFF on the RIS process. It is designed to assist DAFF to 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, a Consultation (Draft) RIS and stakeholder submissions responding to that 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 FINAL REPORT TO INFORM A REGULATION IMPACT STATEMENT: PROPOSED NEW POLICY ON ILLEGALLY LOGGED TIMBER 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 gains worth around US$92 billion a year. The net result of these costs and gains 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 arrangements 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. 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. There may also be initiatives to improve enforcement of existing laws but they have not solved the problem. Should they be successful in the future they will reduce the size of the problem and Australia s imports of illegally logged timber. 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

11 FINAL REPORT TO INFORM A REGULATION IMPACT STATEMENT: PROPOSED NEW POLICY ON ILLEGALLY LOGGED TIMBER 11 logged timber. So if Australia were able to stop its importation of such products, and 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 1. 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 most 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. 1 Quasi-regulation refers to rules or arrangements where governments influence businesses to comply, but which do not involve government regulation. Co-regulation is defined by the situation where industry develops and administers its own arrangements but government provides legislative backing to enable the arrangements to be enforced. Explicit government regulation is the most commonly used form of regulation to achieve the objectives of government and includes initiatives like the EU due diligence and US Amendment of the Lacey Act. How effective any of these might be will depend on codes of enforcement by government or the institutional arrangements.

12 12 FINAL REPORT TO INFORM A REGULATION IMPACT STATEMENT: PROPOSED NEW POLICY ON ILLEGALLY LOGGED TIMBER Table 1 summarises the main elements of the regulatory options that have been analysed. 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 in appendix E 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 FINAL REPORT TO INFORM A REGULATION IMPACT STATEMENT: PROPOSED NEW POLICY ON ILLEGALLY LOGGED TIMBER 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. If the United States and the European Union were also successful in restricting illegal timber imports, Australia s effectiveness improves but not by enough to materially change the results. 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, but also achieve high relative levels of effectiveness. 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 (escalate) 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

14 14 FINAL REPORT TO INFORM A REGULATION IMPACT STATEMENT: PROPOSED NEW POLICY ON ILLEGALLY LOGGED TIMBER disclosure measure is legislated, enforcement costs may fall on state governments. Require disclosure measures at point of sale will increase the cost of compliance but will not reduce further the imports of illegally logged timber. 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 document. Effectiveness of Australian measures: 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 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.) Despite there being numerous forestry-related multilateral processes, there is currently no universal mechanism or plan of action in place to meet a common objective of combating illegal logging or to address the multiple drivers (corruption and capacity to enforce forestry laws) which underpin illegal logging (page 32). However, to the extent that initiatives in risk countries may eventually lead to enforcement of existing forestry laws, it will reduce the size of the problem and the

15 FINAL REPORT TO INFORM A REGULATION IMPACT STATEMENT: PROPOSED NEW POLICY ON ILLEGALLY LOGGED TIMBER 15 quantity of illegal imports to Australia and therefore the need for Australia to restrict imports. 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. Consultation 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. An Issues Paper was prepared to introduce key issues/questions likely to influence the outcome of the RIS. One common view emerging from the initial consultation was that taking action to address illegal logging is a complex task, and that there were considerable uncertainties on what the timeframe, instruments and outcomes of the Australian policy approach would be. Another round of consultation was based on the Draft RIS. Twenty one submissions were received commenting on the findings and methodology of the Draft RIS. Most submissions sympathized with the initiative of the Australian government to take action on illegal logging or at least with the perception that illegal logging is an issue to be dealt with. More than half of the submissions support an Australian policy that contains elements of capacity building on forest management practices in high-risk countries, bilateral and/or plurilateral agreements to tackle illegal logging, self-regulation, quasi regulation and approaches other than regulatory ones. There is a strong expectation in industry submissions that whatever policy the Australian government eventually decides to pursue, it should be such that it must have little or no effect on the domestic forest and wood products industry. This is because the industry is already complying with strict standards on forest management and should not be further penalized. Some industry stakeholders insisted that should it penalize them they should be compensated by the Government.

16 16 FINAL REPORT TO INFORM A REGULATION IMPACT STATEMENT: PROPOSED NEW POLICY ON ILLEGALLY LOGGED TIMBER Generally, stakeholders appeared to understand the economic analysis the RIS provided and recognize the complexity of the issues dealt with in the exercise. Some stakeholders questioned the estimates of illegally logged timber imports and of compliance costs but none contested these with alternative data. There is concern about information not included in the analysis such as enforcement costs, value of intangible benefits and details on the government s policy proposal. Compliance costs Based on the evidence and concerns raised by stakeholders, TheCIE sees no reason to change any of the compliance costs used in the Draft Report. Although considerable uncertainty is acknowledged in the Draft Report and by stakeholders over the marginal compliance costs, the wide sensitivity band used in the Draft Report is adequate to cover this uncertainty. Moreover, the available evidence on price premiums from stakeholders points directly toward compliance costs at least as high as those used in the Draft Report. Representatives of small and medium businesses in the wood products sector indicated concern that it may be challenging for them having to comply with even softer policies than regulatory options; such as a Code of Conduct. The estimates of compliance costs presented in the Draft Report are consistent with this claim. Small firms unable to afford the costs of compliance may decrease production or be forced out of business. However, higher domestic prices that cover the low costs of compliance of large firms will induce them to expand. Large firms in Australia will be made more competitive at the cost of small firms. Intangible costs and benefits Although some stakeholder hold concerns about intangible costs and benefits, TheCIE sees no reason to believe that a closer examination of intangibles will change the conclusion that the benefit to cost ratio is very low and well below TheCIE can identify a number of reasons why: intangible benefits are likely to be small; estimates of tangible benefits are already generous; and several intangible and tangible costs have been omitted. 2 A benefit cost ratio below 1.0 indicates that the policy will cost the community more than it will provide in terms of environmental, social and financial gains. The policy will therefore reduce Australia s welfare. Economic benefit cost analysis is used to discriminate between policies/regulations/laws that will impose a net cost on Australia s welfare (B:C < 1.0) and which should not be pursued, and policies/regulations/laws that will generate net benefits and so increase Australia s welfare and which should be pursued (B:C > 1.0).

17 FINAL REPORT TO INFORM A REGULATION IMPACT STATEMENT: PROPOSED NEW POLICY ON ILLEGALLY LOGGED TIMBER 17 On closer consideration of all tangible and omitted benefits and costs, TheCIE believes that, in all probability, it has underestimated costs and overstated benefits. This strengthens the conclusion that the benefit cost ratio is well below 1.0. Recommendation The analysis presented in this RIS shows that Australia faces many constraints in trying to reducing illegal logging in foreign countries by restricting imports of illegally logged timber into Australia. The main reason any Australian initiative focussed on imports will be so ineffective is due to two main facts: world trade in timber products is only around 15 per cent of world timber product production and Australia s share of that is tiny, so Australia s influence is equally tiny. Any action Australia takes to restrict imports will impose costs on all products consumed in Australia. However, benefits will only relate to the tiny influence Australia has in foreign markets. In assessing the effectiveness and efficiency of any regulatory policy aimed only at restricting imports, the mathematics of the market is stacked convincingly against success. Moreover, there is no evidence that the balance of intangible costs and benefits could change this. Indeed, because the effectiveness of the policy is so small, intangible benefits will be commensurately low. For this reason, TheCIE recommends that Australia consider only non-regulatory policy options to combat illegal logging. Capacity building is one possibility. This has not been assessed here as this was not of concern to the OBPR. Nonetheless, an advantage of capacity building options is that they are designed to tackle the problem of illegal logging at its source. That is, they are designed to change ambiguous laws and/or to see enforcement of laws closer to the source of the problem. They also act directly on domestic production, not just part of trade. At this level, Australia is likely to provide more direct leadership and to establish influence without creating reasons for retaliation or non-cooperation. It can also limit and contain costs by targeting action toward initiatives where it has a reasonable chance of success. Bilateral and/or plurilateral agreements designed to tackle illegal logging by directly influencing the reform and enforcement of forestry laws in the country of origin of the problem may also hold promise. They too are targeting all levels of production in risk countries, not just a small amount of exports.

18 18 FINAL REPORT TO INFORM A REGULATION IMPACT STATEMENT: PROPOSED NEW POLICY ON ILLEGALLY LOGGED TIMBER 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 3 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. 3 To avoid confusion, throughout this report, country of origin is referred to as country of harvest.

19 FINAL REPORT TO INFORM A REGULATION IMPACT STATEMENT: PROPOSED NEW POLICY ON ILLEGALLY LOGGED TIMBER 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 a RIS. As part of the RIS process, a Draft Statement was prepared for consultation with affected and interested parties. The paper was sent to 88 stakeholders. Only twenty-one submissions were received in response to the Draft. Sixty-seven stakeholders did not respond. This document is TheCIE s final report to DAFF. It builds on the Draft by including a Consultation Report which summarises stakeholder views and offers a response to these. This report 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. The RIS is designed to help DAFF determine the most effective and efficient options for meeting these objectives.

20 20 FINAL REPORT TO INFORM A REGULATION IMPACT STATEMENT: PROPOSED NEW POLICY ON ILLEGALLY LOGGED TIMBER 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; 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. 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 closely infer 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.

21 FINAL REPORT TO INFORM A REGULATION IMPACT STATEMENT: PROPOSED NEW POLICY ON ILLEGALLY LOGGED TIMBER 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.

22 22 FINAL REPORT TO INFORM A REGULATION IMPACT STATEMENT: PROPOSED NEW POLICY ON ILLEGALLY LOGGED TIMBER 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 financial 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. 4 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 4 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. See also Bennett 2001)

23 FINAL REPORT TO INFORM A REGULATION IMPACT STATEMENT: PROPOSED NEW POLICY ON ILLEGALLY LOGGED TIMBER 23 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) 147 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). 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).

24 24 FINAL REPORT TO INFORM A REGULATION IMPACT STATEMENT: PROPOSED NEW POLICY ON ILLEGALLY LOGGED TIMBER 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. 5 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. 5 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 modelling, importers and exporters were separated into the 22 regions shown in table A.1.

25 FINAL REPORT TO INFORM A REGULATION IMPACT STATEMENT: PROPOSED NEW POLICY ON ILLEGALLY LOGGED TIMBER 25 Australia s imports of wood products In 2007 Australia imported A$8.4 billion of timber and wood products (including wooden furniture).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), wood (HS44) at A$1.2 billion (14.8 per cent), and cork (HS45), straw (HS46), pulp (HS48) and publication (HS49) at A$1.4 billion (17 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