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Report, 2012

Timber market implications of international efforts to reduce emissions from deforestation in developing countries

Jonsson, Ragnar; Mbongo, Werner; Felton, Adam


Forest-product markets can be affected by policies aimed at mitigating climate change in several ways; directly through substitution of wood products for other materials that yield more greenhouse gas (GHG) and the development and use of bioenergy and biofuel or indirectly through policies involving forest-based carbon sequestration. The most internationally relevant climate mitigation policy with a specific focus on forests, is the United Nations collaborative initiative on Reducing Emissions from Deforestation and forest Degradation (REDD) in developing countries. REDD is an effort to create a financial value for the carbon stored in forests, and thereby provide an incentive for developing countries to reduce emissions from forest loss. In addition to its intended outcomes, forest management strategies and policies such as REDD may have unintentional implications for forest sectors in countries that are not REDD targets, most notably through market linkages. By its very definition, the success of a policy effort like REDD would result in a significant reduction in deforestation and forest degradation, and consequently result in a reduction in timber supply within participating developing countries. Reduced supplies of timber from protected areas may result in increased pressure in other areas to further exploit their forest resources. This relates directly to the issue of negative leakage, i.e., the displacement of deforestation or forest degradation from protected sites to other locations.

This report is part of a study within Future Forests which assesses the potential timber market implications for European nations which source wood products from tropical developing countries affected by REDD related conservation efforts. The report is based on a literature review. The objective is to use the available literature to discern whether there are likely to be timber market implications for European nations which source wood products from tropical developing countries affected by conservation efforts like, e.g., REDD. This objective is closely linked to the issue of negative transnational leakage from conservation projects in the sense of reduced supplies of timber from protected areas exerting pressure on other areas to further exploit their forest resources.

The review is not strictly confined to emission displacements from carbon sequestration projects, since the potential impacts on the exploitation of forest resources outside project areas should be the same, irrespective of the motive for changes in land-use practices. Hence, both studies estimating product leakage, i.e., displacement of wood products resulting from conservation efforts in one location, and carbon leakage, i.e., carbon emissions displacement associated with this product movement, are considered.

There are two principle mechanisms driving leakage. Primary leakage, a type of leakage also referred to as activity shifting, concerns direct leakage effects caused by displacement of baseline activities or agents from one area to the next, e.g., a conservation project leading to displacement of people and deforestation to adjacent areas. Secondary leakage, often referred to as market effects leakage, occurs when policy actions in one place indirectly create incentives for third parties to increase emissions elsewhere. Market effects leakage is caused by a shift in market equilibrium, e.g., forest-conservation projects reducing local timber supply and thus increasing prices and pressures on forest outside the project area.

The leakage type is linked to the geographical scale. Activity shifting leakage is typically a localized process, when smallholders or local communities are affected in subsistence activities such as small-scale agriculture or firewood collection. However, when deforestation agents are internationally operating logging or agribusiness companies, primary leakage can also occur on an international level. Market effects leakage is most likely to occur on national and international scale. All of the reviewed papers concern market effects and reflect the geographical scope, mostly being transnational as well as the drivers of leakage i.e., the production of agricultural and/or timber.

Market leakage can be difficult to account for due to the rapid nature of market adjustments, and more generally due to the difficulty of identifying cause and effect. International leakage is particularly hard to quantify, as it is difficult to accurately attribute increasing emissions (or deforestation) in one country to emissions regulation (or forest conservation) in another country. However, there are two basic approaches to estimate market leakage: (i) modeling and (ii) an analytic approach, using theoretical reasoning only.

Nine of the ten studies reviewed estimate market leakage by means of modeling, and of these, seven considered transnational leakage. The results of these studies show varying degrees of market leakage. The two studies that estimate leakage ex post provide strong empirical evidence that efforts to reduce logging in one place do tend to shift harvests elsewhere. Wood products in the studies reviewed are in general dealt with on a quite aggregated scale. Related to this, woodproducts in protected sites (within project boundaries) and in the locations where leakage take place are at least implicitly assumed to be more or less perfect substitutes. The plausibility of this assumption depends on the geographical scale. The assumption of perfect substitution among wood products appears more reasonable when the scope is national, regional and continental, than when it is global. Hence, the degree of leakage could be exaggerated in some of the modeling studies having a global scope. This is because leakage diminishes if the timber supplied from non-reserved forests is a poor demand substitute for the timber retained in reserved forests. Two of the studies deal explicitly with product leakage from tropical countries/regions. Ex ante simulations in a study with global scope indicate considerable leakage from cooperation in forest conservation among tropical forest regions alone. However, here again wood are dealt with on a quite aggregated scale. Ex post estimations of products displacement/leakage from forest conservation in individual tropical developing countries also indicate considerable leakage. Though wood products here are on a quite disaggregated level, the fact that displacement is estimated through net-imports of wood products implies perfect substitutability between reserved and non-reserved timber, which could lead to an overestimation of leakage. However, in this instance most of the imported wood came from other developing countries, making the assumption of perfect substitution more reasonable. The estimate of leakage fails to recognize that displaced/leaked wood production may be traded to third countries, thus potentially underestimating product leakage.

All in all, the literature suggests that conservation efforts like REDD could result in increased utilization of forest resources in other world regions such as Europe. Hence, should REDD prove successful it would likely result in at least a temporary reduction in tropical hardwood timber supply, thereby reinforcing the current trend of declining market share for tropical timber. Should the REDD-affected countries have a collectively small impact in the global timber market, the avoided deforestation actions would be especially prone to leakage, since the supply contraction could be easily replaced by increased supply elsewhere. This leakage, small in absolute terms, would be particularly difficult to identify. Thus, a comprehensive analysis of potential impacts on wood-product markets in importing regions like Europe should apparently encompass a thorough mapping of the trends in the end-uses of tropical timber.

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Publisher: Future forests, Swedish University of Agricultural Sciences