Industrial forest plantation subsidies: Impacts and implications

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Forest Policy and Econom

Industrial forest plantation subsidies: Impacts and implications

Gary Q. Bull a,T, Michael Bazett b, Olaf Schwab a, Sten Nilsson c,

Andy White d, Stewart Maginnis e

aFaculty of Forestry, University of British Columbia, 2045-2424 Main Mall, Vancouver, BC, Canada V6T 1Z4bBazett & Associates, #3-840 Fort Street Victoria, BC, Canada

cInternational Institute for Applied Systems Analysis, A-2361 Laxenburg, AustriadForest Trends, 1050 Potomac Street NW, Washington, DC 20007, USA

eIUCN – The World Conservation Union Rue Mauverney 28, Gland 1196, Switzerland

Received 12 August 2004; received in revised form 27 January 2005; accepted 31 January 2005

Abstract

This paper examines industrial plantation subsidies’ issues and begins to assess the impacts and implications of these

subsidies on the global forest. After reviewing the current status of industrial plantations and the types and levels of plantation

subsidies in use, key economic and social issues are assessed with the intent of improving the design and targeting of subsidies.

We also recommend steps for governments, industry and conservation organizations to better understand and agree on subsidy

regimes that support the conservation of the world’s forests and forestry’s contribution to social development.

D 2005 Elsevier B.V. All rights reserved.

Keywords: Industrial; Forest; Plantation; Subsidies; Economics; Finance; Policy; Analysis; Global

1. Introduction

While Europe had a long history of tree planting

as a component of forest management, tree planting

for industrial plantations did not begin in earnest

until the middle of the 20th century in countries

such as Australia, New Zealand and the United

States. By the 1960s, the launching of large-scale

1389-9341/$ - see front matter D 2005 Elsevier B.V. All rights reserved.

doi:10.1016/j.forpol.2005.01.004

T Corresponding author. Tel.: +1 604 822 1553; fax: +1 604 822

9106.

E-mail address: [email protected] (G.Q. Bull).

plantation programs began in many tropical and

subtropical countries and by 2000 there was a

significant increase in the area of plantations for

industrial purposes with global estimates of 4.5

million ha per year being reported (Cossalter and

Pye-Smith, 2003).

The enthusiasm for plantations has been partly

driven by: (1) Persistent government concerns with

stable domestic wood supply and job creation; (2)

Industrial desire to find lower cost raw material; and

(3) Intensifying production in some areas would

ddecrease pressureT on the natural forest thus making

them available for conservation or protection. Some

ics 9 (2006) 13–31

1 Cossalter and Pye-Smith (2003) report that there is no officia

definition to cover short rotation, high yield industrial plantations

found mainly in the southern hemisphere. In their study they made

an arbitrary delineation of plantation area based on minimum

average yield (i.e. 15 m3/ha/year) to describe dfast-woodT industriaforest plantation with the primary objective of producing large

volumes of small-diameter logs at competitive prices.

G.Q. Bull et al. / Forest Policy and Economics 9 (2006) 13–3114

researchers saw this as a win–win situation: lower

cost of wood to the mills and protection of

biodiversity (Sedjo and Botkin, 1997; Victor and

Ausubel, 2000). One group of researchers goes so far

as to call on the international diplomatic community

to rally behind plantations and provide new and

more vigorous support as a priority step towards

conserving the world’s forest (Victor and Ausubel,

2000).

Most of the world’s forest plantations have been

established with a subsidy of one sort or another at

some time, either directly or indirectly (Whiteman,

2003; Cossalter and Pye-Smith, 2003). For example,

in many parts of Latin America, Oceania and Asia,

plantation programs paid more than 75% of the

establishment cost with additional allowances made

for land, maintenance and many others costs

(Brown, 2000). These subsidies have undoubtedly

been key drivers in the rapid growth of plantations.

However, as White (2003) points out: bwhileplantations can play an important role in restoring

degraded landscapes, supplying demand and con-

tributing to rural development, to claim that higher

yielding plantations can save natural forest globally

is equivalent to arguing that the best path to solving

world hunger is to double the corn yields in Iowa.

Unfortunately, the relationship between plantations

and natural forests—like the relationship between

poverty and corn yields—are far more complex, and

while there are many positive [features] of planta-

tions, they can also threaten, and even undermine,

the conservation of natural forests.Q Indeed, in

contrast to the dwin–winT foreseen by plantation

enthusiasts, subsidies to plantation forests could also

lead to a dlose–loseT scenario: where natural forest

management is no longer affordable and plantation

forest products are underpriced.

In this paper, our purpose is to draw attention to

the issue of industrial plantation subsidies and to

begin to assess the impacts and implications of these

subsidies on the global forest. We first review the

current status of industrial plantations and the types

and levels of industrial plantation subsidies in use. We

then identify and assess some of the key economic

and social issues associated with them. Recognizing

that the forestry sector competes in a world where

most, if not all other sectors are subsidized, and the

unlikelihood of the total removal of all subsidies, we

next suggest ways in which governments could

improve the design and targeting of its subsidies.

We also recognize that subsidies are increasingly

inconsistent with global trading arrangements—and

for this reason we conclude by recommending a

process for governments, industry and conservation

organizations to better understand and agree on

subsidy regimes that support the conservation of the

world’s forests and forestry’s contribution to social

development.

2. Global context

In this report industrial forest plantations are

defined as those stands established by planting and/

or seeding in the process of afforestation or refor-

estation. They are either of introduced or indigenous

species and meet a minimum area requirement of 0.5

ha; tree crown cover of at least 10% of the land area;

and a total height of adult trees above 5 m (FAO,

2001). It is important for the reader to appreciate that

while the international community has agreed with

this definition there is still confusion in much of the

literature. As Kanoski (1997) notes, it is difficult to

define either dafforestationT or dplantation forestsTprecisely. Additionally, it is often not easy to

distinguish between afforestation and rehabilitation

of degraded forest ecosystems or enrichment planting;

or between plantation forests and various forms of

trees on farms. Finally, although industrial plantations

are established to provide wood for industry it is not

always possible to draw a rigid line between industrial

and non-industrial plantation areas.1

As mentioned, although industrial forest planta-

tion have a history dating to at least the 19th

century, industrial plantations entered a significantly

new phase in the 1960s, marked by substantial

improvements in silviculture and harvesting techni-

ques and the involvement of pulp companies

l

,

l

Table 1

Summary of plantation area in top 10 countries

Country Plantation

area [ha]

Percentage of

total forest area

in country [%]

China 54,083,000 33.1

India 32,578,000 50.8

United States 16,238,000 7.2

Indonesia 9,871,000 9.4

Brazil 4,982,000 0.9

Thailand 4,920,000 33.3

Chile 2,017,000 13.0

Malaysia 1,750,000 9.1

New Zealand 1,542,000 19.4

Australia 1,396,000 0.9

Source: (FAO, 2001).

Ecological. The most common ecological issues

include problems associated with loss of biodiver-

sity, soil erosion and fertility, excessive water

consumption, and the destruction of natural forests.

Notwithstanding the criticisms aimed at the eco-

logical impacts of industrial plantations, some

observers assert that well-managed plantations

can avoid many of these problems (Cossalter and

Pye-Smith, 2003).

Social. One often cited social issue is that

duntitledT farmers are allegedly evicted from

agricultural lands and as a consequence many rural

communities suffer. In addition, there is a claim

that the level of employment generated by indus-

trial plantations is low given the high degree of

automation. These issues remain despite the fact

that in several countries of the southern hemi-

sphere, there are extensive outgrower schemes and

forest companies are actively developing HIV/

AIDS programs, improving the quality of the

teachers in schools and providing job training for

poor people, etc. (Bull, 2004).

Economic. There has been a history of using

public funds to establish plantations which have

been grown on the wrong sites, have poor genetic

material, have been poorly maintained or have

been placed too far from markets. For plantation

investment these mistakes can lead to an erosion of

investment value over time, which, when coupled

with time-related uncertainty and risk creates new

challenges for raising capital for plantations

(Cossalter and Pye-Smith, 2003).

Box 1

Summary of myths and controversies surrounding

industrial forest plantations

G.Q. Bull et al. / Forest Policy and Economics 9 (2006) 13–31 15

seeking inexpensive sources of fiber. In the new

phase many governments started providing subsidies

to develop industrial plantations, and economies of

scale and processing favored large blocks of single-

species plantations.

FAO estimated that of the 120 million ha of

global forest plantation area, between 70 and 100

million ha will be used for industrial supply

(Brown, 2000). The top ten industrial plantation

areas are indicated in Table 1 and there are

additional five countries with more than 1,000,000

ha of forest plantations. In China, India, and the

United States more than 80% of their industrial

roundwood supply originate from industrial and

non-industrial plantations and globally FAO esti-

mated under one scenario that up to 40% of

industrial roundwood could come from plantations

by 2050 (Brown, 2000).

Of the total plantation estate, the area of short-

rotation, high-yield (N15 m3/ha/yr) plantations is

estimated to be approximately 10 million ha. To this

a further 0.8–1.2 million ha are being added

annually and expansion is expected to continue

(Cossalter and Pye-Smith, 2003). Although rela-

tively small in land area compared to natural forests

[less that 5% of total exploitable forest area], the

plantation sector has the potential for contributing

significantly to industrial wood supply. The high

volume of industrial wood produced from planta-

tions per unit area indicates that higher yields are

achieved as compared to non-plantation forests.

Currently industrial plantations account for approx-

imately 17% of the total world output of pulpwood

and 4% of the sawlog volume (Cossalter and Pye-

Smith, 2003).

As indicated earlier there are many myths and

controversies surrounding industrial plantations.

They are reviewed and addressed in the recent

publication: dFast Wood ForestryT (Cossalter and

Pye-Smith, 2003). The main issues, which are

explained in greater detail later, are summarized in

Box 1.

Table 2

Estimates of world subsidies: 1994–1998

Sector OECD Non-OECD World Percentage of

world total (%)

US$ billions 1994–1998

Agriculture 335 65 400 37

Water 15 45 60 6

Forestry 5 30 35 3.3

Fisheries 10 10 20 2

Mining 25 5 30 3

Energy and

industry

335 185 520 49

Total 725 340 1,065 100

Source: van Beers and de Moor (2001).


3. Subsidies

Defining the term dsubsidyT2 is as challenging as

defining the term plantation. According to the World

Trade Organization (1994) subsidies are deemed to

exist if there is a financial contribution by government

or any public body where the government practice

involves:

o A direct transfer of funds (e.g. grants, loans, and

equity infusion);

o Potential direct transfers of liabilities (e.g. loan

guarantees);

o Government revenue that is otherwise due but is

foregone (e.g. tax exemptions);

o Government provision of goods or services other

than general infrastructure;

o Government payments to a funding mechanism or

direction to a private body to carry out any of the

foregoing functions.

Table 2 summarizes a set of estimates of annual

global subsidies, for all sectors. It is about US$ 1

trillion, equivalent to 4% of GDP. The OECD

countries account for approximately 66% of this total

and forestry subsidies account for only 3.3% of the

world total, or 0.1% of world GDP. Of the total

forestry subsidy of US$ 35 billion annually for the

period 1994–1998, 86%, or US$ 30 billion, was

attributed to non-OECD countries, which suggests

that the subsidies were mainly allocated to industrial

plantation forestry in the southern hemisphere and

China.3

As illustrated in Table 3 the methods of delivering

subsidies to the forest owner or forest operator can

vary significantly. Direct subsidies are provided using

a wide range of transfer methods but improving the

estimate of the amount would require access to

2 Significantly, a recent Enters et al. (2003) report notes that there

is no single definition for incentives (authorsT note: subsidies) whichis a source of much confusion. Similarly, de Moor (1997) observed

that there was and still is much debate over what should be

considered a subsidy. Many sources differentiate between

dincentivesT and dsubsidiesT; others do not. In this paper, the term

dsubsidyT is used to cover all forms of public sector assistance.3 These statistics, however, ignore the many more subtle subsidies

that are granted to the management of natural forest in the OECD

countries.

primary information [e.g. company or government

transaction records]. Indirect subsidies are also pro-

vided through various transfer methods and they

include: 1. subsidies that are government revenue that

is otherwise due but that is foregone; 2. government

provisions of good or services other than general

infrastructure; and 3. government payments to a

funding mechanism or direction to a private body to

carry out any of the foregoing functions.

Table 3 also indicates that scant data are available

on a global scale, and national subsidies, if available,

are typically found as unit costs per hectare.4 It is

challenging to generalize about subsidies, as each

national program is unique, if not in concept, then

most certainly in detail. The information must be

treated with great care since the statistics can be very

misleading for the following reasons: (1) Each

country mentioned has used subsidies for planting in

differing circumstances and time periods. (2) Inflation

rates vary widely, particularly in Latin America, and

most of the unit subsidy rates are given in current

rather than real terms. (3) Most of the data obtained

refer to grants from the state to planters in terms of

dollars per hectare with no indication of overall costs.

(4) Many countries that had implemented major

subsidy programs for industrial plantation develop-

ment during the period 1965–1995 have discontinued

4 In the literature, subsidy levels are usually listed as a percentage

of establishment costs or invested amount; however, the net presen

value of the subsidy at the time of plantation establishment varies

substantially and depends on factors such as the loan re-paymen

schedule.

t

t

Table 3

Typology and examples of forest plantation subsidies

Types of subsidies Examples

Direct Direct transfer

of funds

Australia: Interest free loans (Gerrand et al., 2003).

Chile (1974–1994): Government grants covering 75% of reforestation costs. Total costs approx.

US$ 50 million (Brown, 2000).

Chile: Special line of credit for reforestation with the Central Bank (Brown, 2000).

Chile: Transfer of government funds for silvicultural activities (Brown, 2000).

Indonesia: Interest free loans [32.5% of establishment costs, payment term 7 years] for plantation

establishment (Williams, 2002).

Indonesia: Government-private joint venture HTI-Trans program to create employment

opportunities for transmigrants [Government investment volume 40%] (Williams, 2002).

Japan: Government subsidies available for all forest operations (Utsuki, 2002).

Japan: Long-term low-interest loans available to forest owners [1.9–2.05% interest rate,

redemption period 30–55 years] (Utsuki, 2002).

Indonesia: 0% interest loans available for the establishment of short-rotation pulpwood

plantations [covering 30% of investment volume, payment term 3 years] (Perley, 2001).

Promised direct

transfer of funds

Indonesia: Government backing for companies acquiring plantation establishment funds on the

capital market (Williams, 2002).

Indirect Government revenue

that is otherwise due

but that is foregone

Australia: Tax deductibility arrangements for forest plantation establishment, managed investment

schemes and reduction of company tax rates (Gerrand et al., 2003).

Chile: Exemptions on property and inheritance taxes on reforested land (Brown, 2000).

Panama: Reduced tax rates for income tax, real estate, and land transfer taxes (Brown, 2000).

Costa Rica: Reforestation costs qualify for tax refund certificates applicable to any national tax

(Brown, 2000).

Malaysia: Tax exemption from corporate tax of 100% for 10 years through granting of

Pioneer Status (Brown, 2000).

Malaysia: Investment tax allowance of 100% of all statutory income for 5 years (Brown, 2000).

Indonesia: Remnant vegetation on concession sites can be harvested and sold at no charge prior to

plantation establishment (Williams, 2002).

Malaysia: Infrastructure Allowance to offset expenditures on permanent structures against

company income (Kiam, 2002).

Malaysia: Schedule 4A of Income Tax Act, 1967 allowing the offset of expenditures in forest

plantation establishment from revenue derived from other activities (Kiam, 2002).

Papua New Guinea: 10 year tax exemption for enterprises settling in rural areas (Hammond,

2002).

Papua New Guinea: 7 year export sales incentive for enterprises producing goods for export

(Hammond, 2002).

Solomon Islands: Accelerated depreciation allowances (Hammond, 2002).

Solomon Islands: Exemption of some profits from taxes (Hammond, 2002).

Thailand: No royalty payments on industrial plantation grown wood. (Jintanugool, 2000).

Government provisions

of good or services

other than general

infrastructure

India: Provision of free seedlings under the 20 Points Program for Afforestation (Brown, 2000).

India: Government funded Seed Development Scheme to develop facilities for seed collection,

testing, certification, storage and distribution (Brown, 2000).

Indonesia: Cooperation agreements between private and state-owned forest companies to lower

plantation establishment costs for the private sector (Williams, 2002).

Thailand: Provision of free seedlings (Kijkar, 2002).

Thailand: Establishment of Teak and Pine Improvement Centres through the Royal Forest

Department to improve seedling quality (Kijkar, 2002).

Australia, New Zealand, USA: Removing structural constraints and creating an attractive

environment for plantation investment (Enters et al., 2003).

New Zealand: Research, development and extension initiatives reduced risk, increased yield, and

lowered the costs of plantation establishment for private investors (Enters et al., 2003; Perley,

2001).

Papua New Guinea: Inventory services for prospective plantation concessions (Hammond, 2002).

(continued on next page)


Types of subsidies Examples

Indirect Government payments

to a funding mechanism

or direction to a private

body to carry out any of

the foregoing functions.

No examples yet.

Table 3 (continued)


or radically modified their policies with respect to

state assistance.

As indicated in Table 4, based on the available

data, the top ten plantation countries provided a

very low minimum of approximately US$ 460

million annually in direct subsidies for plantation

establishment. However, the minimum estimate

provided in this paper is not an accurate indicator

of total subsidies since for example in Malaysia

alone there were at least 9 different subsidy

mechanisms for rubberwood plantations, rather that

the single amount of US$ 263 million reported here

(Suratman, 2003). In China, in addition to the US$

810 million reported in direct subsidies for the

period 1985–2000, loan interest and export credit

loan subsidies of approximately US$ 2.54 billion

were granted between 1998 and 2002. This level of

subsidies will most likely continue, since for the

period 2001–2015 China alone is budgeting an

additional US$ 1.67 billion in interest loan subsidies

to support the establishment of approximately 13.3

million ha of fast-growing high yield plantations

(AFPA, 2004).5

There is a trend, particularly in the southern

hemisphere, away from government ownership and

management of plantations to ownership by pro-

cessing companies, land-owners or individual

investors (ABARE, 1999). Private capital flows to

forest plantations have increased each year since

1991 (Crossley et al., 1997); for example, in

Australia and New Zealand, where governments

managed and paid for the initial plantation estab-

lishment, there is now a marked shift to private

sector ownership and management. This shift is also

true in Brazil and Chile, where most of the

5 It was not possible to calculate the actual costs of these subsidies

since the terms under which they were granted were unavailable.

plantation companies are shifting from government

incentives to private capital markets (Beattie, 1995;

Wunder, 1994). In an International Institute for

Environment and Development study of global

industrial plantations, Bass et al. (1996) observed

bin the past, governments have sometimes provided

a range of incentives such as tax breaks and easy

access to land, which has favored big companies

and encouraged large-scale planting of mono-

culturesQ. The authors claim that such projects

rarely involved any stakeholders other than industry

and government, and often did not prove to be

sustainable. They also conclude that there has been

a move away from such schemes.

The level of direct plantation subsidies may be

decreasing in some countries; for example in the

United States, Gaddis et al. (1995) report that the

average rate of subsidy has decreased from 75% to

50% of the investment volume; however, one notable

exception is China, which continues to use direct

subsidies to promote plantation establishment and

management (AFPA, 2004). The level of indirect

plantation subsidies may be increasing [see Table 3];

for example, subsidies can be cleverly hidden in

complex tax arrangements with the private sector such

as in Malaysia or Papua New Guinea.

4. Issues

In examining the issues attributed to plantation

subsidies, it is frequently difficult to distinguish

between those that are the direct result of subsidies

and those that have to do with the actual planning

and management of plantations. What follows is a

review of the more common and significant

economic, environmental and socio-political issues

that are attributed to subsidies for industrial

plantations.

Table 4

Direct subsidy levels for industrial plantations

Country Subsidy [million US$]

Not adjusted Adjusted for

InflationTPeriod reported Average annual

subsidy [million US$]

Source

China 759.0 809.3 1985–2000 53.95 (Sun, 2000)

India – – – –

United States 200.0 241.0 1974–1994 12.05 (Gaddis et al., 1995)

Indonesia 425.0 440.6 1984–2001 25.90 (Bazett, 2001)

Brazil 7.0 7.3 2001 7.30 (USDA Foreign Agricultural

Service, 2001a)

Thailand – 2001 – (USDA Foreign Agricultural

Service, 2001b)

Chile 174.6 196.7 1974–1997 78.60 (Freese, 1998)

Malaysia 263.0 263.0 2002 263.00 (Suratman, 2003)

New Zealand 3.0–4.2 3.1–4.4 1908–2001 0.03–0.05 (Rhodes and Novis, 2002)

30.4 192.0 1950–1959 19.20

Australia – – – – –

T Historic inflation rates provided by the Federal Reserve Bank of Minneapolis (2003) were used.

7 Neilson and Manners (1997) and Evans (1998) identified basic

criteria for successful industrial plantation development. Neither autho

mentions subsidies as a determining factor of success or failure. There


4.1. Economic distortions

4.1.1. Inefficient allocation of public resources

Proponents of subsidies claim that spending public

funds on private sector plantations is sometimes justified

by claims that the output will result in taxable revenues,

thus offsetting—at least in part—the initial subsidy.

However, this self-financing process has yet to be clearly

demonstrated. A long period elapses between expense

and return, and any taxation income will be affected by

the tax regime in place when the trees are harvested.

As de Moor (1997) notes, subsidization can lead to

prices that reflect neither true scarcity nor the costs of

production. This can result in economic inefficiency,

squandering of resources and the creation of even

bigger obstacles to reaching the most efficient

solution. Hyde and Newman (1991) concluded that

the impact of subsidies and regulations used to

promote better forest management by private owners

had been bless than encouragingQ.6

In a review of large-scale commercial plantations by

private companies and individuals in Latin America,

Pandey (1995) noted that fiscal incentives, such as

subsidizing the cost of plantation establishment, tax

6 They cited three examples: Boyd and Hyde (1989) found no

statistically significant impacts for seed tree laws in Virginia; de

Steiguer (1984) found that regeneration subsidies in the southern

United States caused capital substitution rather than stimulating

planting; and Carlen and Lofgren (1986) found no statistically

significant supply impacts from thinning subsidies in Sweden.

exemption and grants, were extended by governments

to encourage plantations in several countries. Although

these subsidies were initially successful, they were later

misused. Planters tried to make money by raising poor

quality plantations, or by claiming for non-existent

plantations. This resulted in some countries stopping

their incentive programs (Uruguay 1978, Paraguay

1984 and Brazil 1987).

In their examination of the impact of incentives on

the development of New Zealand’s forest resource,

Rhodes and Novis (2002) observed: bThe failures of

government policy and incentives are when they

continue to directly support industries that have

reached a stage of self-sustained growth. That is not

only a wasteful use of taxpayers’ money, but also

leads to inefficiency in the industryQ.

4.1.2. Distorting markets and prices

Market distortions7 create significant challenges,

whether alleged or real, and if they are real, clearly a

is, however, a strong consensus in the current literature that policy

reforms that remove market distortions and provide appropriate

research and extension services are more effective than financial sub

sidies in industrial plantation development. For example, Stewart and

Gibson (1994) recommend the removal of forest product export bans

and tariff barriers, the elimination of export subsidies, and the remova

of all forest product consumption taxes other than general sales tax.

r

-

l


case could be made for the use of subsidies to

plantation owners. However, many economists claim

that subsidies shift costs from producers to consumers

and taxpayers, and in so doing, provide the wrong

signals and distort efficient production and consump-

tion decisions. There is said to be a market failure

when full costs and benefits of production are not

reflected in prices. Government interventions such as

subsidies and taxation policies can make existing

market distortions even worse.

Land-related subsidies, whether for agriculture or

forestry, tend to increase the average price of land and

divert land use towards the subsidized activity. This

has been particularly noticeable in Chile, where in

some regions land prices increased many times over

[far outstripping general inflationary increases] after

the introduction of subsidies in the mid-1970s until

the early 1990s (Beattie, 1995). Increases in land

prices benefit those who invest early in the expan-

sionary period of plantation development. Companies

and individuals who invest later may have signifi-

cantly lower investment returns; this in turn tends to

diminish their competitive position relative to early

entrants.

The need for access to a market or markets

compatible with the scale and type of a given

plantation is both self-evident and critically important.

Fig. 1. Industrial roundwood production and shar

Nevertheless, the lack of financially sound market

access has been a major contributor to the failure of

several large industrial plantations. The extent to

which this can be traced to subsidies is a moot point;

however, poorly designed and overly generous sub-

sidies can lead to sloppy and superficial planning and

opportunistic land acquisition decisions.

As indicated in Fig. 1, the top ten plantation wood

producing countries’ share of global exports has

declined, which could mean that although the volume

of wood harvested from natural forests and plantations

is increasing, there is a decline in industrial round-

wood export from those countries. It could also mean

that other countries have increased their export levels

and this has led to a declining share by the top ten

countries. If the first line of reasoning is the case, the

top ten countries have placed more emphasis on using

domestic industrial roundwood to manufacture wood

products within the country.

Figs. 2–4 indicate that the same top ten plantation

countries have increased their share of markets in

plywood (from 3% to 70%), in wood based panels

(from 5% to 34%), in wood pulp (from 10% to 34%)

with the total product volumes in all three types of

wood product increasing and ranging from 200% to

over 400% from 1960–2002. This indicates a dramatic

increase in the amount of forest resources harvested

e of global exports (FAOSTAT data, 2004).

Fig. 2. Plywood production and share of global exports (FAOSTAT data, 2004).


and a significant influence on international markets

for these three product categories. Given their market

share this will naturally have a significant impact on

product prices in the end.

Fig. 5 indicates that the one major forest product

category without this dramatic change is sawnwood.

Fig. 3. Wood based panel production and share

The percentage change of the global export market

has remained fairly constant at around 15% with the

volume of sawnwood produced doubling. This could

be the result of two factors: first, that higher quality

logs command a better price in the plywood and

panels market, and second, that the plantations

of global exports (FAOSTAT data, 2004).

Fig. 4. Wood pulp production and share of global exports (FAOSTAT data, 2004).


themselves which have replaced the natural forest as a

source of wood supply produce more pulp quality

wood than sawlog/veneer grade material.

There is also an impact of industrial plantation

forestry on the incentives to invest and manage natural

forest. Nilsson (2004) illustrates in Fig. 6, with data

from Jaakko Pfyry, the real price development for

Fig. 5. Sawnwood production and share of g

pulpwood for the period 1980–2003 for regions

representing production in natural/semi-natural forests

and industrial plantations, respectively. In 1980, there

was a substantial difference in the delivered prices at

mill between wood from natural/semi-natural forests

and plantations, respectively, but over time this price

gap has clearly been reduced. The real delivered

lobal exports (FAOSTAT data, 2004).

Fig. 6. Recent trends in softwood pulpwood costs.


pulpwood prices during the studied period have

increased slightly for wood from plantation forestry

but there has been a substantial decrease in the real

pulpwood prices coming from natural/semi-natural

forests [of the magnitude of 15–20 o/m3].

If the increased production of pulpwood from

plantations has been dependent on subsidies it is

reasonable to assume that the subsidies have con-

tributed to a change in the global price formation for

pulpwood. This change has resulted in substantially

lower real prices for pulpwood in the traditional

natural/semi-natural forest regions where commercial

thinning or insect and disease control contribute a

significant portion of the pulpwood supply. The

decline in real prices is making it more difficult to

undertake the required forest management activities to

maintain forest health in those regions.

Fig. 7 shows that the recent trends in global forest

products export prices are also downward. Again, the

exception is sawnwood, which as indicated in Fig. 5,

does not seem to be affected by the increasing volume

from plantation countries. These statistics, which are

from another independent source, are consistent with

the data present in Fig. 6.

4.1.3. Creating inequity

In distributing public funds, equity is frequently a

central concern of government. Proponents of subsi-

dies often argue that public funds can help create new

industries which will generate employment, reduce

rural poverty and increase economic activity that

benefits many, including those who may have pre-

viously been economically marginalized. Brown and

Durst (2003) conceded that there is a broad agreement

that social benefits, coupled with insufficient or even

negative returns, are a rational justification for offering

subsidies. Critics such as Dargavel (1980), in a study of

plantation development in Tasmania, maintain that

subsidies bbenefit most those that are worth most, and

represent a redistribution of taxes levied from ordinary

people to the wealthy—that is why there are econom-

ically regressive measuresQ. Vaughan (1995) maintains

that the claims that subsidies help rural populations and

relieve urban population pressure are bhighly dubiousQ;and, Brown and Durst (2003) stated that the social

benefit are frequently not obvious. Beattie (1995),

commenting on the Chilean plantation development

program, claims that the main beneficiaries were those

with an initial capital base that enabled them to engage

50

60

70

80

90

100

110

120

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Year

Ave

rage

glo

bal e

xpor

t pri

ce (1

990

= 10

0)

Industrial Roundwood Sawnwood Wood-Based Panels

Wood Pulp Paper and Paperboard

Fig. 7. Recent trends in global forest products export prices (FAOSTAT data, 2004).


in tree planting. It was difficult for smaller, poorly

capitalized firms or individuals to participate in the

program. He noted that 80% of the subsidy payments

went to Chile’s three largest forest companies.

Finally, Haltia and Keipi (1999) suggest that tax-

based incentives, which are often provided to large

industrial landowners who may not need them, may

not be equitable. Small land-holders may not benefit

from fiscal incentives, either because they do not

know about them, they don’t pay income or property

taxes, or they are simply unable to cope with the

complexities of the application process. This applies

in developed as well as undeveloped economies.

4.2. Environmental degradation

According to Taylor (1998) there is growing

evidence that subsidies also play a significant role in

the deterioration of the environment. Indeed, Taylor

(1998) suggests that—when aggregated on a global

scale—government subsidies are now the primary

cause of environmental deterioration.8 de Moor

8 Morell (1997) concluded from examining planting subsidies in

Costa Rica and Nicaragua, that the moderate success was

significantly diluted by allegations of inequity, economic ineffi-

ciency and negative environmental effects. One indicator of both

inefficiency and environmental impacts were the achieved planting

target: in Costa Rica it was only 50% and in Nicaragua 27%.

(1997) concluded in a report for the Earth Council

focusing on perverse incentives (authors’ note: sub-

sidies), that when prices do not reflect the full costs

and benefits of production and consumption, infor-

mation on scarce resources and environmental values

is not properly conveyed, and people will act

according to this erroneous information. A non-

market price and incentives structure leads to over-

supply or overuse which may cause environmental

degradation.9

On the other hand, Bass et al. (1996) suggested that

there may be circumstances under which subsidies are

acceptable to protect environmental benefits such as:

replanting of degraded land, providing buffer zones

around natural forests, and stabilizing watersheds. It

was noted that the circumstances under which such

subsidies might be acceptable are likely to be site-

specific. Plantations can also provide additional

environmental services such as enhancing biodiver-

sity, reducing salinity and the sequestering carbon.

These tangible environmental benefits should be

considered in any analysis and could justify some

subsidization (Pagiola and Bishop, 2002).

9 Heuth’s (1995) work supports this assertion. He examined the

use of subsidies in watershed development projects in a number of

Latin American countries and the United States and concluded that

there is an increasing recognition of the importance of ecological

impacts as negative externalities.

10 Therefore, the stumpage system used by the Canadian provinces

was found to provide a subsidy to private forest companies tha

were harvesting timber on Crown land. The USDC argued that a

true measure of the benefit derived from a government policy o

program can be derived from what the recipient would have had to

pay for a good or service in the absence of government involve

ment. From the perspective of the Canadian provincial governments

it can be argued that the stumpage rates are badequateQ as long as

they cover the costs of providing a particular good or service

However, since the prices paid for comparable timber resources in

the open market were considerably higher than the stumpage rates

the United States Department of Commerce concluded that a

subsidy of approximately 19% of the value of softwood lumber did

exist. The strategic gamesmanship continues.11 Brazil’s tax incentives resulted in subsidy payments equivalen

to 100%—or even more—of the planting cost. Because establishing

plantations was essentially dfreeT (and even had the potential to

provide a net gain), a massive wave of planting took place tha

strained the governmentTs capacity for approval, monitoring and

control. Brazil’s subsidized planting program resulted in a reported

planted area in the order of 6,000,000 ha. Only about 4,000,000 ha

are considered commercially viable.


4.3. Socio-political dimensions

4.3.1. Strategic gamesmanship

Some countries with comparative advantage may

use subsidies as a policy tool to accelerate the rate at

which plantations are established. Other countries

without such advantage may be tempted to create

subsidies in order to keep up. The strategic games-

manship is akin to the darms raceT where there can be

no clear winner.

To evaluate the gamesmanship in the case of forest

products from plantation and natural forests one of the

most frequently used techniques to analyze the effect

of subsidies is an evaluation of international trade

flows. The theory of international trade suggests that

free trade is desirable since it permits countries to

specialize in the production of goods in which they

have a natural, comparative and competitive advant-

age and trade these goods in world markets (Brown,

2000).

The volume of trade in forest products has grown

in recent years, and trade patterns have been changing

as new suppliers have emerged and a number of

countries have embarked upon different management

strategies, in some cases reducing harvests within

their natural forests and developing plantation forests.

Aside from those agreements that directly shape the

trade regime, there are also other factors that

influence the relative competitiveness of forest

product manufacturers. Market and firm attributes,

such as market structure, ownership patterns, and

technology determine the cost structure for firms;

government policies [such as subsidies] may also alter

a firm’s costs.

Although this particular case is still under review,

the strategic gamesmanship can be seen in the Notice

of Preliminary Affirmative Critical Circumstances

Determination prepared by the United States Depart-

ment of Commerce (USDC, 2001):

! Some of the key components in determining the

existence and the impact of a subsidy are the

identification of significant changes in the volumes

being traded between two countries and the

presence of a corresponding financial benefit

available to the exporters of these goods.

! Between the first and the second quarter of 2001

the seasonally adjusted volume of softwood

lumber exported from Canada to the United States

increased by approximately 23%. The United

States Department of Commerce concluded that

this rate of increase was well above any change

that might be expected due to normal market

fluctuations.10

4.3.2. Ineffective fiscal incentives

Fiscal incentives have been a popular method of

inducing industrial tree planting in many countries.

The most widely known fiscal incentive program was

introduced by the Brazilian government in the 1960s

and continued until the mid-1980s.

Fiscal incentives may ignore the fundamental

purpose of the incentive which should be plantation

establishment and the generation of productive forests

and the associated environmental benefits (Haltia and

Keipi, 1999). Fiscally related instruments are often

ineffective in promoting properly implemented tree

plantations as the recipient of the incentive is often

more interested in short term tax relief than future

benefits. Fiscal incentives are often established with

inadequate technical considerations.11

For example, Brazilian investors with approved

fiscal incentive projects in 1978 had actual costs about

46% lower than those allowed by the executing

agency. When fiscal incentives were included in the

calculation, the rate of return to the landowner ranged

t

r

-

.

t

t


from 19% for pine [assuming a high land cost] to

663% for eucalypts [assuming zero land cost]. Despite

these inefficiencies and social costs, Berger (1980)

concluded that although an average of US$ 220

million was spent annually in this program, bBrazilaccomplished a major reforestation objective—mil-

lions of hectares were established in productive

plantations in a relatively short time period.QIn their examination of the Brazilian fiscal incen-

tive program, Beattie and Ferreira (1979) concluded

that the rush to access the dextremely generousTsubsidies had five fundamental and unfavorable

consequences:

Poor location: Many plantations were established

in remote areas where land was cheap, without due

regard for eventual harvesting and transportation

constraints.

Fragmentation: Some plantations were located in

very small and isolated parcels, ignoring the

potential for scale economies associated with the

development of a dcritical massT in concentrated

blocks.

Improper land use: Land use was sometimes

distorted so that some plantations were located on

agricultural soils, while other dreforestationT was

accomplished by first clearing the native forest.

Poor monitoring: Inadequate planting quality

and maintenance occurred until the government

was eventually able to improve its monitoring

performance.

Compromised competitive advantage: The gener-

ous government subsidies may have led to some

plantations being located so far from efficient

transportation and ocean ports that their ability to

compete in international markets was compromised.

4.3.4. Inadequate analysis

The absence of comprehensive and robust analysis

is a common theme in the literature on subsidies in

general and plantation subsidies in particular. In a

recent examination of plantation subsidies in the Asia

Pacific region, Brown and Durst (2003) noted that

subsidies have largely been applied in an ad hoc

manner and that economic analysis is rarely under-

taken to assess whether a particular level of support is

justified. de Moor (1997) said: bthe key issue is to

assess whether subsidy policies are actually serving

their purpose or whether they are counterproductive,

and at what cost and with what effect on sustainable

development.Q Similarly, Pieters, a contributor to a

2003 report by the OECD on environmentally harmful

subsidies, noted that bno quantitative methodologies

appear to estimate the environmental impact of

subsidies in the forestry sectorQ. Finally, Pearce

(2002) calls for a brational look at the costs and

benefits for subsidiesQ.

5. Conclusions and recommendations

This study highlights some of the challenges in

understanding the impacts and implications of indus-

trial forest plantation subsidies on the global forest

estate. We draw the following preliminary conclusions:

1. Subsidies exist in almost all industries, some are

direct and others are often indirect [e.g. tax breaks

or investment schemes]. The general trend is

towards an increasing use of indirect subsidies

making it even more difficult to ascertain the exact

financial costs of such programs. This makes it

even more difficult to know if the subsidy can be

justified based on the economic, environmental and

social criteria.

2. Subsidies can lead to inequity and inefficient

allocation of public resources. The challenge is to

find the appropriate institutional arrangement and

monitoring systems to ensure that both equity and

efficiency issues are appropriately addressed.

Annex 1 presents a set of guidelines to consider

for both institutional and policy design.

3. Subsidies seem to be a serious contributor to the

distortion of forest product markets and prices. The

health of the natural forest may indeed suffer as a

result of plantation subsidies since they could be a

major cause of price decline in almost all major

forest product categories.

4. The terms subsidy and plantation remain ill-defined

and this frequently muddies the waters of a sensible

public policy debate on the appropriate global role

of industrial plantations.

The same findings and critiques are being leveled

against subsidies in other sectors—such as agricul-

ture—and it is not reasonable to suggest that all


subsidies to the forestry sector stop while subsidies to

other sectors, especially those that compete for the

same land, continue. Therefore the more practical

question is how to reform subsidies within the forestry

sector and ensure, to the extent possible, that they are

used to address the most critical environmental and

social market failures. In sum, we recommend two

priority target areas for government subsidy:

1. Payments for ecosystem services provided by

private forest owners, and the restoration of

degraded forest when the environmental benefits

are not quantified and valued in the marketplace.

There is an increasing pressure on forest owners

to produce more than just timber, but many of

the benefits—such as biodiversity, carbon, wet-

land habitat or water conservation—are currently

externalities.

2. Forest businesses that directly address poverty

alleviation and other long-standing social ills. The

forest industry pro-poor business models are

finding it difficult to emerge and succeed. In

addition, there is increasing pressure for industrial

plantation owners to deal with poverty alleviation,

again with little tangible benefit to the owner. The

challenge is to find a way to turn a social cost into a

benefit to the landowner, and the guidelines in

Annex 1 were designed with this in mind.

Finally, we recognize that when markets are clearly

distorted by the lack of competition, poor infra-

structure, tariff barriers, or subsidies governments

will be reluctant to suspend current programs or alter

them significantly until other countries are forced to

do the same. This dilemma calls for international

consideration and action. In particular we recommend

a global dialogue on the following:

1. Plantation policy mechanisms to more effectively

promote the development of environmental serv-

ices markets and alleviation of poverty;

2. economic, social and environmental issues raised

in this paper;

3. adjustments needed to the plantation guidelines in

Annex 1;

4. a code of practice for forest plantations; and finally,

5. standard terminology for both subsidies and

plantations.

Our overall goal, in preparing this paper, is to

better protect, conserve and manage the global forest

estate. The evidence suggests that the industrial

plantation forest estate is having, and will continue

to have, a significant impact on the options we will be

able to pursue in finding ways to manage the global

forest sustainably.

6. Annex 1—guidelines

The following discussion is intended to stimulate

analysis and provide a framework for subsidy design.

While the general thrust of most of the literature is in

the direction of subsidy removal or subsidy reform (de

Moor, 1997), it is recognized that subsidies can, in

selected circumstances, provide a useful means of

initiating an industrial plantation program where none

exists. The following guidelines are drawn largely

from a selection of papers by leading forest economists

(McGaughey and Gregersen, 1988; Gregersen and

Draper, 1989; IDB, 1995; Heuth, 1995; Vaughan,

1995; Morell, 1997; McCormick and Laarman, 1988;

Haltia and Keipi, 1999; Enters et al., 2003).

! Identify the appropriate role of government.

Governments can: (a) create stable conditions

where market driven forest-based development

can take place (Vincent and Binkley, 1992), (b)

make forest plantation development an attractive

proposition to the ordinary person (Asibey and

Siaw, 1999), (c) underwrite the costs of local social

and environmental benefits (Bass et al., 1996), and

(d) find appropriate mechanism for research and

extension services.

! Create links between capital market instruments

and sustainable forestry. The main issue is to

modify financial instruments to more direct linking

with sustainability. The private sector is a logical

source of capital, and Crossley et al. (1997) suggest

the following mechanisms:

o Targeted early-stage venture capital funds or

sector defining funds (debt, equity);

o Private financing from both foreign and domes-

tic sources;

o Mixed public and private financing; and,

o Tax-exempt bonds for public forestry.


! Build institutional capacity with efficient admin-

istration. The real cause of many of the observed

failures of subsidy programs is the lack of institu-

tional capacity (Morell, 1997). A challenge for

those designing subsidies is to compare the

increased benefits of adopting multiple subsidy

approaches with the increased costs of administer-

ing programs that are more complex (McCormick

and Laarman, 1988; Gregersen and Draper, 1989).

! Ensure stakeholder involvement. All major interest

groups should be involved in the development of

national policies governing subsidies and forest

conservation (IDB, 1995; Gregersen, 1983). The

four prerequisites for successful local involve-

ment—resources, knowledge, incentives, and insti-

tutions—interact and cannot effectively be dealt

with separately for each project or program

(Gregersen, 1983). While it may be efficient to

grant subsidies to large-scale producers there is

often a lack of attention to issues of equity

(Gregersen and Draper, 1989).

! Establish clearly defined objectives. The effective-

ness of subsidies for plantation forestry is depend-

ent on a clear understanding of their objectives

[short, medium, long term], the phase of develop-

ment in the industry [new, developing, and

mature], who the key players are, and what

motivates them (Rhodes and Novis, 2002). The

objectives should reflect sectoral and regional

priorities, ecological impacts, economic realities

and the input of those who are likely to be directly

impacted by development (McCormick and Laar-

man, 1988).

! Ensure consistency with forest policy and land use

sectors. Subsidy programs should be internally

consistent within an administrative and political

jurisdiction, with national and regional forest

management policies and with subsidy programs

in other land-use sectors.

! Analyze all land use options. Identify all potential

land-use options and carryout sufficient analysis to

confirm that plantation forestry is in fact the

dhighest useT.! Develop and use an information systems

approach. Plantation programs should ensure

continuity from the initial concepts, to initial

implementation and into subsequent management

(Gregersen and Draper, 1989). It is essential that

an adequate base of information and data be

established as the foundation for all subsequent

analysis.

! Adopt a dphasing in/outT of the subsidies. In some

instance direct subsidies can be applied during the

initial phase, then replaced with indirect subsidies

such as variable and enabling incentives during the

daccelerationT phase, and finally, in order to avoid

creating a dependency relationship, a discontinua-

tion of subsidies once the industry has reached

maturity.

! Create efficiency test in the project life cycle. An

effective monitoring program needs to be created to

ensure that the subsidies are being spent efficiently.

! Make allowances for changing conditions. The

planning horizons in any forestry activity are very

long. It is therefore important that subsidy pro-

grams include a degree of flexibility that will allow

appropriate modifications to be made in response

to changing conditions.

! Use third party verification for benchmarking and

monitoring. For credibility and transparency it is

important that the type, amount and duration of

subsidies be examined by private firms engaging in

assessment and auditing practices entirely inde-

pendent of government influence. It is critical

however that the auditing be seen as an extension

of existing activities such as compliance monitor-

ing, wood product certification, etc.

! Have a well-designed compliance, penalties and

enforcement procedures. It is standard procedure in

the development of a legislative framework to

design appropriate compliance, penalties and

enforcement.

! Create alternative approaches . There is an

increasing need for alternative approaches to

funding for sustainable plantations, particularly

for industrial, social and community-level proj-

ects; in particular, the role of the private sector

needs to be re-examined and likely enhanced.

There is also a need to establish stronger links

between farmers and the business community

through arrangements such as joint ventures in

tree planting for industrial and social purposes;

corporate assistance in terms of technical advice,

seedlings, etc.; and funding assistance with long-

term supply contracts that provide security for the

grower. McGaughey and Gregersen (1988) out-


lined methods for new approaches which reduce

dependency on subsidies.12

! Beware of dside effectsT. A common danger of any

subsidy program that attempts to change the

behavior of individuals or groups is the unexpected

effects that can occur. If the design is not carefully

assessed before its introduction:

o Planting may take place in sub-optimal locations;

o The species selected may not match the site;

o Actual costs for plantation establishment may

be less than the estimated costs [resulting in

dover-paymentT];o Individuals or groups outside the target recipient

group may become the major beneficiaries;

o Corruption may be facilitated;

o Natural forests may be degraded rather than

conserved;

o Small landowners and settlers may be displaced

rather than participating in the economic benefits

flowing from the incentive; and

o A precedent for granting subsidies in other

sectors of the economy may be set.

Acknowledgements

We wish to thank Stewart Maginnis, IUCN – The

World Conservation Union, and Chris Elliott,WWF for

instigating the project. We also are grateful to Forest

Trends and the International Institute of Applied

Systems Analysis for their support in paper prepara-

12 Initiatives include corporate multiple outputs, low-cost planting

techniques, local nursery production, individual small-holder con-

trol over forestry activities, cost sharing by beneficiaries and

government, initial in-kind grants and loans and support in

developing markets. Technical assistance must be well researched

and effectively delivered. In their study of community forestry

development, Gregersen and Draper (1989) offered the following

recommendations for designing a social forestry program strategy:

o Each subsidy option must be considered in terms of its

workability, efficiency, and consistency;

o Each option must be assessed in terms of implications for

recurrent costs to ensure that the program is carried through to

the end; and

o Planners must ensure that subsidies are tied to the desired actions

and outputs and that they are equitably distributed. Otherwise,

from a social point of view, a subsidy may not contribute to

improved performance.

tion. In addition, wewould like to thank the anonymous

reviewers, as well as Hans Gregersen, Sara Scherr,

Arnoldo Contreras, and Arvind Khare for their com-

ments on earlier drafts of this paper.

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Industrial forest plantation subsidies: Impacts and implications

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