3.1 Trade, Sustainability, Policy and Planning

3.1.1 Forest Product Trade and Policies

3.1.2 Issues, which are Specific to Forest Products

3.1.3 Value and Sustainability Issues in Forest Product Trade

3.1.4 Forest Sector Planning and Trade Issues

3.1.5 Conclusions

3.2 Overview of Trade Flows of Forest Products

3.2.1 World-wide Trade Dynamics in Roundwood, Sawnwood, and Wood-based Products

3.2.2 Trade of the Tropics and Developing Countries

3.3 Trade Restrictions for Forest-based Goods and Services

3.3.1 Market Access, Barriers to Trade and Impediments

3.3.2 Tariff Barriers for Wood and Wood-based Products

3.3.3 Development of tariffs, taxes, quotas and subsidies

3.3.4 Non-tariff Measures

3.3.5 Summary: Trade Liberalisation and Sustainable Forestry

3.4 Market Development of Wood and Wood-based Products

3.4.1 Distribution and Dynamics of Forest Product Markets

3.4.2 Consumer and Distributor Actions and Campaigns

3.4.3 Criteria and Indicators for Sustainable Forest Management

3.4.4 Certification, Labelling and Other Market Instruments

3.4.5 Codes of conduct and other voluntary initiatives

3.4.6 Public Procurement Rules

3.4.7 Future Prospects of Market Based Instruments for SFM

3.5 Market Development for Environmental Services of Forests

3.5.1 Essential Attributes for Effective Market Creation: Framework for Analysis

3.5.2 Linkages with Trade Agreements and Negotiations

3.5.3 Potentials, Impacts and Trends in Market Mechanisms and Market Creation

3.5.4 Verification and Certification

3.5.5 Impact of Environmental Services on SFM and Trade

3.5.6 The case study: Conservation Easements in the USA

3.5.7 Conclusions and Recommendations

3.5.8 Recommendations

3. Trade and Market Development in Forest Products and Services

3.1 Trade, Sustainability, Policy and Planning

3.1.1 Forest Product Trade and Policies

When investigating the market developments, ex post, the trends and fluctuations are a net result from a large number of factors. The most important ones are related to the comparative advantage differences of industrial locations, and competitiveness differences of operators. Market access factors and variation in them are just one group of factors in the matrix.

Various forest products compete in the market place between each other, and against other substitute materials. A position of a sole supplier of a particular species and grade is rare, usually there is a sequence of substitute products. A supplier's competitive position depends on the characteristics of product, the cost of the domestic value chain and the whole range of international trade determinants. The market access barriers and impediments have a tendency of working through a twin bladed “scissors” effect: The direct effect comes from the hindrance of the barrier or impediment itself, the indirect effect comes from the cost competitiveness handicap. The extra cost is caused by the constraint itself, or an unsuccessful and costly effort to remove it.

Different policies may impact the market access directly or indirectly. Policies and measures can be divided in three types, according to how they influence trade and forestry:

• Trade policies and other measures that have direct impact on forest products trade, and thus indirectly impact the conditions of forestry

• Forest policies and other measures that have a direct impact on forestry, including sustainability of management, and thus indirectly impact the trade of products

• Policies and measures (such as land-use or development policies) which may have indirect impact on forestry, trade or one of these through the other.

The commercial objective of the trade and industry is the net income and sufficient return to the invested capital. Processing generates value by adding further production factors, including labour. Value added means higher income generation from a given volume of wood. As described above, the value chain of forest products is mostly cost competitive and efficient. Unavoidable “dead weight” cost components, such as transportation and energy, cannot be eliminated or scaled down.

Looking at the positive side of the coin, in any market conditions, the savings from elimination of market access barriers or impediments feed directly to the net income. This is the incentive for the market stakeholders to work together for improved market access. Even the unavoidable cost components, such as logistic costs, which should be minimised, form important service industries in transportation and related functions.

Many policies or other measures have an influence on the relative cost competitiveness position of forest based enterprises. Any forest-based enterprise under the influence of such measures will be affected and its competitiveness will be changed in relation to other enterprises in the forest-based markets, domestic and foreign. In addition, any such cost competitiveness influence changes the relative position of the impacted forest based enterprises in relation to the competitors in other sectors.

If policy changes impact the relative cost competitiveness position of some of the forest based enterprises, this will be reflected in the trade flows. The pattern of trade flows will adapt to relative changes in the policies impacting their locations. Due to the complex nature of these interactions, it is not easy to describe the overall tendencies or structure of such changes. Figure 3.1 presents a schematic illustration of the wood product markets with policy interventions.

Figure3.1 Trade, Sustainability, Policy and Planning.1 Market of Forest Products with Policy Instruments

3.1.2 Issues, which are Specific to Forest Products

Many of the generic market access factors, barriers and impediments, as well as measures have an effect on forest products as well as on other commodities, including the competitors and substitutes for wood. However, some factors have a tendency of having a stronger impact on wood products, or even a discriminating effect.

Box 3.1 Factors, which are specific to Forest Products

International, regional and national environmental conditions, policies and regulations influence the market access and competitiveness of individual producers of forest products and thus affect trade flows. On the other hand, trade liberalisation and macroeconomic policy reforms have led to expanding exports by developing countries, particularly in commodities, thereby increasing pressure on the environment.

“Although Doha WTO Ministerial Conference brought a number of “new” issues onto the WTO agenda (investment, competition, etc.), market access remains one of the most important trading issues between the developing and developed countries. …WTO members acknowledge the importance of enhanced market access for industrial products of interest to developing countries and agreed to start negotiations on the reduction or elimination of tariff peaks26, high tariffs and tariff escalation, as well as non-tariff barriers on all industrial products.” (UNCTAD, 2003)

The markets of tropical timber cover a whole range of products, from logs to primary processed timber (sawnwood, veneer and plywood), and to secondary processed wood products (SPWP). The price levels vary widely, especially in the log markets, where the species and individual log quality have a wide value scale. Still, in primary processed tropical timber products, especially in sawnwood and veneer, there are marked differences by species and grade. The visual, strength and other characteristics are mostly dependent on the log quality, while skilful sawing, peeling, drying, and other processing eliminate most defects. In plywood, the process enhances the qualities even more, with the composite structure and the glue. At the same time, plywood becomes a much more standardised product. Finally, the SPWP category adds even more value by introducing process and design characteristics that bring additional value to the end-user.

The price structure of the whole range of the tropical timber products varies according to the inherent and added qualities described above. As always, the market clearance prices are a net result from the competitive process between a number of consumers and producers. Of course, market access barriers and impediments influence the market and price formation, and bias the otherwise competitive structure of the market. We describe the market structure in a somewhat simplified way. The purpose is to highlight well enough the features that have a bearing on the analysis of market access of tropical timber.

3.1.3 Value and Sustainability Issues in Forest Product Trade

Figure 3.2 illustrates conceptually the value structure of the forest product markets. Specific and detailed features, such as (exact) variation by species, and its implications are missing. However, attempt was made to keep the structural relations as correct as possible. The data for tropical timber in the year 2000 were used as a guideline. Thus, for example, the volume shares of various product categories are approximately true to the actual situation in the year 2000. The total volume of the whole range of tropical wood products was about 41.8 million m³ in 2000. In addition, the price relations between the averages by product category (logs, primary processed, and SPWP) are approximately true to the situation in the year 2000.²⁷

The figure 3.2 summarises some of the key issues, which link the trade with sustainable forest management (SFM). Included are main issues of value creation and trade-related matters. The figure is adapted from a report for ITTC (ITTO, 2003), and modified version in Rytkönen (2003). The figure illustrates the total market value created by the sub-sector. 1) On the left hand side are the log exports, 2) In the middle are the primary processed timber products, 3) On the right hand side are the secondary processed wood products (SPWP).

The most important policy issues are the following:

• The most critical policy issue is combating illegal logging (see left hand side of figure 3.2). These values are completely removed from the tax base if the enforcement cannot recover them through fines.

• The second most important policy issue is related to environment and local communities. This is illustrated in figure 3.2 on the lower left-hand side, and is called “environmental and social externalities”. These are costs that are incurred to as damage to the environment, in case no one is obliged to pay for them. In the same way, these include the lost values caused to the local communities by harvesting practices that destroy some of their traditional values. Compensation for these damages is called “internalising environmental and social costs” on the lower right hand side of figure 3.2. Internalisation only occurs if the payments are actually made.

• The third important issue is the proposal to reach the target “niche” markets, which would possibly be willing to pay a price premium for the Mozambican high quality timber. The crucial term here is “quality” as such niche markets, for example in Europe, tend to consider legal, environmental and social issues as a part of the product quality. In effect these market increasingly require proof of “legality and sustainability”. Such proofs may need to be acquired through a third party verified SFM certification. This issue is illustrated as an expansion potential on the right hand side of the figure 3.2.

• The fourth issue is somewhat outside of forest policy domain, and concerns the increase of value added of production, i.e. movement of the timber volumes from left to right in the schematic picture of figure 3.2. It has often been found that it is ineffective to influence the industrial development from the forest resource side. However, competitive wood procurement, including tax incentives, may be a partial tool to promote value-added conversion (such as carpentry). Which process then provides increased employment and wider enterprise tax base.

• The fifth group of issues is concerned about market access, and is illustrated on top of the figure 3.2.

Figure 3.2 Value and Sustainability Issues in Forest Product Trade

Source: ITTO, 2003, Rytkönen, 2003

To summarise, figure 3.2 deals with a number of policy issues that are related to value generation in the tropical forest sector. An optimal policy mix, including tax instruments would guarantee that the overall value (area under the curve in figure 3.2) is as high as possible. At the same time, it would attempt to minimise the harmful effects that affect these values negatively. If the policies are successful, this will provide a wide economic base and thus the basis to generate high economic value, including a high government rent capture.

Figure 3.2 represents the total value of tropical timber products at the importers. The topmost curve represents the array of import prices, valued with cost, insurance, freight (CIF) included, at various entry ports in importing countries. The total area below the price (CIF) curve represents the total import value of the tropical timber imports in all markets. The second curve from top represents the corresponding export price array. The export prices are at exit ports, valued at free on board (FOB) of carrier. The difference between CIF and FOB prices reflects all the cost components, between the two ports, related to the international transaction and logistics.

Figure 3.2 further illustrates decomposition of the export value of tropical timber into three components. The decomposition is not exact but should represent the approximate importance and relative shares of the components. The decomposition has here been made from the point of view of sub-sector value added components. Starting from bottom, the basis for commercial operations is laid in the forest operations. The costs of harvesting and transport are easily linked to any particular log harvest. However, the cost of forest management is already a somewhat more difficult item. The specific difficulties are related to the long time span and geographic distribution of forest management operations. In addition, it is not always clear what items should be included (if e.g. road construction, planning, monitoring, bio-diversity protection, reforestation, etc. should be covered). If a narrow concept of forest management were applied in costing, the sustainability of the resource base would be at risk.

In Figure 3.2 there are two more cost items: net resource value and value added by processing. If the harvesting and transportation costs are high, as a consequence the net resource value accruing to the forest owner remains low.²⁸

The net resource value illustration of includes the effect of further processing. As the illustration is on output volume basis, the price should cover the cost of the whole log input, according to yields of various processes. Consequently, primary and secondary processing need to cover higher resource value per unit of output. The resulting stepped curve between net source value and value added reflects the relative income shares of tropical logs on one hand and other factors of production (capital, labour and energy) on the other. It is important to note that it is often the net resource value, accruing to forest owners, which has the highest pressure to adjust when, for example, the market conditions deteriorate.

The market access of forest products may become threatened from several directions. This situation is illustrated in figure 3.2. The classic case is the import tariffs stipulated by the importing nations. These have commonly been reduced, and logs are often entering without tariffs. But tariffs still prevail for higher value added, i.e. further processed tropical wood products. This tariff escalation functions as a hindrance for producer development effort to add value to production. The local importer in the consumer country now faces a higher price, and is forced to consider alternative sources. The alternative sources may include an exporter with preferential treatment from where the imports have lower tariffs. In the worst case the purchase decision is made in favour of local timber or substitute material.

Market access effects from the supply side of the tropical timber trade are somewhat indirect but are becoming more important. One issue is illegal operations in forest and trade. Firstly, the illegal operations affect negatively the long-term sustainability of forestry. In terms of the market, the illegally harvested timber adds to the cost of overall operations in several ways. The stolen timber volume often enters the legal market and may thus have a negative effect on price formation. On the other hand, it may get smuggled out of the country and thus not be available for value added processing. Secondly, it does not contribute to the management, rent capture (concession fee or stumpage income) or fiscal base.

Illegal timber enters the non-transparent grey market, and the illegal operations are irresponsible for many of the SFM cost items. As a result, there is a tendency to be offering timber for below the cost of legal operations. This illegal supply is likely to have a leveraged downward pressure on prices, which harms the overall market, from the legal producers' point of view in the short run, and from the global point of view in the longer run.

The issue of cost internalisation is a broad one. The assessment of the environmental and social costs is complicated due to qualitative nature of many effects and the long run and global perspectives to the accrual of the benefits and costs. Without the full cost internalisation, the market does not fully reflect the environmental and social costs. In such a situation, the output, which is based on unsustainable practices, may appear too attractive (low cost) than products based on SFM. Figure 3.2 summarises the economic effect of market access improvement.

Figure 3.2 illustrates some of the main measures to reduce the effects of constraints to open markets, and the types of effects that these measures are likely to have. Further reduction in tariffs, and lowering of the steep tariff escalation, reduce the effective price level at the consumer country importer of tropical timber. Lowered prices increase the probability of a positive purchase decision. Especially if the measure has been discriminatory in relation to key competitors, the elasticity of the purchase response may be very high (i.e. 1% price reduction would result in an increase of more than 1% in volume).

The second group of measures with somewhat similar effects compared to tariff reduction, is related to inefficient in-border procedures. The inefficient border procedures increase the transaction costs unnecessarily. Various studies have estimated the cost of inefficient border procedures to cost anywhere between 2-15% of the value of trade but these estimates are not specific to tropical timber. Kleitz (2002) warns against generalising the results of such studies, but some studies estimate that the total transaction costs are in the range of 7-10% of trade value.

The benefits of trade facilitation have been found to be at about 1-5% of the total world trade value. Even if the trade of tropical timber would already be one of the most efficient ones compared to the above range of estimates, it is still likely that savings of one percentage point or more of the trade value could be possible from improvement of the efficiency of cross-border transactions. In other words the savings in transaction costs could be around 10%.

The success rate in combating illegal logging relates directly to the resource base, which can be put under SFM and to the use in which it is meant to be according to the land-use plan. This will increase the legal resource base, add to the allowable legal harvesting volume and bring operations to a wider fiscal base. The actual net loss from both economic and environmental point of view is in a successful case converted to a net gain. The consumer countries are increasingly searching sources for “legal and sustainable wood procurement”. By building evidence for such successful action can again have a leveraged effect on a wider resource base (e.g. national level reputation).

Internalisation of environmental and social costs increases local welfare as well as local and global environmental services. Internalisation of the costs would be a prerequisite, a necessary but not a sufficient condition, for implementing a funding mechanism for sustainable practices. Often measures to implement climatic, bio-diversity and social goals are mutually supportive. Improved performance in terms of SFM is important especially from the point of view of the markets with most critical attitudes towards “sustainability and legality” of the tropical wood sources. Some of these markets have formalised market access criteria of tropical timber. To enter such markets, evidence is required on the performance. Certification of origin and a validated chain-of-custody (CoC) contribute towards this goal. SFM certification at a high level of standard could be further contributing to the credibility of the source.

3.1.4 Forest Sector Planning and Trade Issues

Policy issues and trade were discussed in the previous sections (3.1.1-3.1.3). The treatment has been quite “market driven”, and the trade in forest products has been the starting point. In the previous section on “value and sustainability” there was already a strong link to forest management sustainability issues.

Even if the starting point was the global forest products market, the other logical end of the continuum is the forest resource base. In this study project it has been concluded that the influences are bi-directional, both from the trade to the forests, and from the forests to the markets. However, the relationship is far from symmetric.

In a competitive, open, and fully market driven system, the demand and supply would be able to balance through time, allowing sustainable development of economies, markets and forests. However, there are market failures and other reasons why the balancing through time is far from perfect. Trade policies and other general policies were discussed above. They have their role to play in the attempt to correct the market failures.

It is often concluded that in addition to general policies (such as trade policies and natural resource conservation policies), sector specific measures are needed to avoid worst impacts and to promote positive outcomes such as sustainability. One reason is the typically short planning horizon, and strong preference for the immediate future, of the private operators in the forest product market place. Failures of some of these operators to pay for the true cost of their forest-based inputs, aggravates the situation. Illegality and externality as illustrated in figure 1.2 are among these issues.

Figure 3.3 illustrates the role of national level forestry planning in the overall framework of market and policy issues. General national policies, including the trade policy, can seldom make special arrangements for forest sector only. The other natural resource-related policies often need to be more specific on forests, due to their relative importance as a resource and as a part of the environment. Private action as well as public activities are sometimes in conflict with forest related policies.

Market factors and other internal and external factors, including market failures and policy failures, may cause negative influences on forests. Explicit forest policies and sector strategies exist in almost all countries. National forest plans are common as well, varying in their status, depending on the degree of market orientation, versus central planning, in the country. Most often, some form of National Forest Plan is felt necessary, to compensate for negative influences and short-sighted tendencies of users of forest-based services.

National forest sector planning, which is based on explicit forest policy and long term strategy, typically builds in the principles of sustainable forest management (SFM) and can use the criteria and indicators (C&I) for SFM in measuring the achievement towards positive planning targets.

Figure 3.3 Sector Planning for Sustainability, and Trade Issues

3.1.5 Conclusions

Trade is beneficial to development, and to SFM, if governance conditions are in place. Some economies still use protective measures, including barriers to trade. Some of these measures may be a partial remedy to structural problems. The governance conditions will be put to a historical test in a case where trade liberalisation is implemented. The danger is that the governance fails to guide a nation through the pressures of an opening international market. This is often the case, especially in developing economies. In the long run, further liberalisation of trade with domestic structural changes, can move the global and local economies towards higher welfare, simultaneously with better, sustained forest management.

A large range of potential policies and measures exist to improve the market access of forest products. The quantitative effects of the improved market access efforts are on several fronts:

• Reduced tariffs, and less steep tariff escalation, reduce import prices and thus expand the markets along the consumers' demand curve

• Trade facilitation reduces the cost of customs procedures and other border transactions. The net effect from these is similar to tariff reductions. The product appears more economical for the importer, who is likely to increase purchases

• The final result from tariff reduction and facilitation potentially enhances the net resource value of the tropical timber resource

• Successful combating of illegal forest practices can bring a larger resource base under legal and effective environmental and forest management. This increases to the volume of supplies, adds to the net resource value, and contributes to a wider fiscal base

• Internalising the environmental and social externalities increases welfare and the level of local and global environmental services. This does not come without cost, but does increase the overall cost level of resource management

• Forest sector planning can be an effective tool in compensating for some of the negative influences from market failures and policy failures. Planning, which is based on explicit forest policy and long term strategy, typically builds in the SFM principles and can use the C&I for SFM in measuring the achievement towards positive planning targets.

• Evidence of SFM improves the credibility and trust of the importers, opening up some critical markets, and thus increasing demand for tropical timber.

3.2 Overview of Trade Flows of Forest Products

3.2.1 World-wide Trade Dynamics in Roundwood, Sawnwood, and Wood-based Products

Figure 3.4 illustrates the global export supply of industrial wood raw materials on a cumulative scale. More than 215 million cubic meters of wood raw material was supplied to the international markets in the year 2000. A wide variety of species served a wide variety of needs in various processes. While it is likely that some of the high valued species are capable of maintaining their markets, and possibly even fetching increasing prices, the main tendency seems to be towards commodity grades. The fast growing plantations grown chips are likely to be increasing their share of the market.

Figure 3.4 Export Supply of Total Industrial Wood Raw Material in 2000

Figure 3.5 presents a map of the interregional net trade flows of wood raw materials. To specify this more carefully: Intra-regional trade flows are not counted here (such as trade between European Union countries). As most often there exists some cross-haulage of the same commodity between two large regions, this is eliminated as well. This means that if there is exports of wood raw material from USA to Europe, and from Europe to USA as well, the smaller flow is deducted from the larger one. The remaining flow represents the inter-regional net trade volume.

Figure 3.5 Main Net Trade Flows of Wood Raw Materials in 2000 (in 1000 cum)

Source: FAOSTAT Trade Flow Data

Table 3.1 Inter-Regional Trade of Wood Raw Material in 2000 (million cum)

EXPORTER	RUS	OCE	AFR	USA	LAC	CAN	OTH	EUR	ASI	CHN	JPN	XXX	TOTAL
IMPORTER													IMPORTS
Russia													0.000
Oceania													0.000
Africa	0.017	0.001											0.018
USA	0.005	0.023	0.001										0.029
L.Am. & Car.			-0.187	0.155									-0.032
Canada			0.002	5.293	0.001								5.296
Others	1.063	-0.185	0.667	0.371	-0.066	1.773							3.623
Europe	15.008	0.030	2.028	0.298	2.080	0.025	5.691						25.160
Asia, other	1.913	5.020	0.224	0.921	0.219	0.031	0.211	0.350					8.889
China	6.063	0.528	2.650	0.105	0.021	0.043	1.344	0.297	5.718				16.769
Japan	5.691	10.550	2.705	9.124	4.535	1.825	-0.286	0.077	5.568	1.476			41.265
Unspecified	0.135	3.257	-0.035	0.276	0.089	0.005	0.001	3.182	0.309	0.806	-0.022		8.003
TOTAL
EXPORTS	29.895	19.224	8.055	16.543	6.879	3.702	6.961	3.906	11.595	2.282	-0.022	0.000	109.020

Source: FAOSTAT Trade Flow Data

Quite similarly to the overall net trade pattern of the forest products in total (see figure 1.1), one can observe that main flows are from west to east. However, there is an important counter-current from Russia to Western Europe. In the case of roundwood, there are quite important flows from south to north as well. The dominant position of Japan as the largest import market can be seen as a strong hub. But China, too has been increasing its import demand in recent years.

Table 3.1 carriers the same information as figure 3.5, with more detailed information on individual flows. All net flows between regions are reported in the table.

[Annex table A3-3 covers all the trade in wood raw material, including the intra-regional trade and bi-directional trade flows between any of the reporting regions. Annex table A3-4 analyses the composition of the global wood raw material trade. The total trade is divided into the following components:

• Gross imports (total of the following components)

• Intra-region imports

• Inter-region cross haul

• Inter-region imports

• Net exports

From table A3-4 one can conclude that of the total volume of 165 million cubic metre, about 45 million cubic meters were intra-regional trade.]

Figure 3.6 Development of Real Export Price of Roundwood, 1980-2002

Figure 3-6 illustrates the development of roundwood prices in the past 23 years. The strong cyclicality is visible in the price series. In addition, one can conclude that a downward trend seems to be present. The nominal prices as such do not reveal this. However, deflation of the price series (by US producer price index) reveals a slight decrease in the overall prices. There has been a rather strong downward movement since the year 1993.

Figure 3-7 illustrates the development of the real export unit prices of roundwood, now separately for tropical and other origins. The tropical roundwoods have had a strong nominal upward trend (which is still visible in the real deflated prices). Instead, the non-tropical prices are heading down. Overall, the relative scarcity of tropical logs is visible here. Part of the reason is the tropical countries' policies to restrict raw material exports. The expansion of non-tropical roundwood has taken place with a decreasing price trend. One result from the differing trends of roundwood, by origin, is a decreasing trend in the competitiveness of tropical roundwood in the global markets. A further consequence is a decreasing potential for financing of SFM from wood raw material sales.

Figure 3.7 Development of Price of Roundwood by Origin, 1980-2002

Figure 3.8 illustrates how the tropical roundwood has been losing market share in the global markets.

Figure 3.8 Share of Tropical Roundwood in Global Trade, 1980-2002

Source: FAOSTAT

Figure 3.9 illustrates both softwood and hardwood supplies in the same frame, for comparison. The predominantly commodity grades of softwood on the left-hand side, and the more specialised hardwoods on the right-hand side.

Figure 3.10 shows a map illustrating the global directions of interregional net trade volumes of sawn softwoods in the year 2000. The strong dominance of Canada, as by far the main player in the global sawnwood markets, is clearly visible. Main flows are towards east. However, counter currents are several: From Russia to west, from Oceania to west, and even Europe and Latin America as net exporters to USA.

Table 3.2 covers all the net trade flows between regions. [Annex tables A3-5 and A3-6 report total inter-regional gross trade flows, and the composition of gross trade into its components, respectively.]

Figure 3.9 Export Supply of Total Sawnwood by Species Group in 2000

Figure 3.11 illustrates the global net trade flows between regions for sawn hardwood. The pattern is quite different from the sawn softwood trade. In sawn hardwoods there are very major flows from the south to north. The very largest single flow is from “Other Asia” to China. Table 3.3 reports on all inter-regional trade flows of sawn hardwood.

[Additional information covering gross trade flows of sawn hardwood is in annex table A3-7 and A3-8, the latter reporting on the composition of the total gross trade.]

Figure 3.12 illustrates the real price development of total sawnwood exports, on average. The tropical sawnwood has experienced a quite volatile price history in the past 23 years. The real price seems trend-wise quite stable.

[Annex 4 includes further information on price developments. Figure A4-4 reveals marked differences in sawnwood prices to different destinations.]

Figure 3.10 Main Net Trade Flows of Sawn Softwood in 2000 (in 1000 cum)

Source: FAOSTAT Trade Flow Data

Table 3.2 Inter-Regional Trade of Sawn Softwood in 2000 (million cum)

Source: FAOSTAT Trade Flow Data

Figure 3.11 Main Net Trade Flows of Sawn Hardwood in 2000 (in 1000 cum)

Source: FAOSTAT Trade Flow Data

Table 3.3 Inter-Regional Trade of Sawn Hardwood in 2000 (million cum)

Source: FAOSTAT Trade Flow Data

Figure 3.12 Development of Real Export Price of Sawnwood, 1980-2002

Figure 3.13 illustrates the overall shift in the global export supply of sawnwood. The total export supply has expanded quite fast, by almost 50% in the last 22 years. At the same time, the real price has been slightly reduced. Actually, the price reduction is one of the reasons of being able to expand the sales volume. The negative part, from the sellers' point of view, has been that the average sales value has not grown as fast as the volume.

Figure 3.13 Shift in Global Export Supply of Sawnwood, 1980 to 2002

Figure 3.14 illustrates the relative market share performance of tropical and other sawnwood, indicating that tropical volumes have grown only little, while non-tropical sawnwood has expanded internationally.

Figure 3.14 Share of Tropical Sawnwood in Global Trade, 1980-2002

Source: FAOSTAT

Figure 3.15 presents the cumulative global export supply of all of the wood based panels, from the most commodity type particleboard to the most specialised veneer sheets. The aggregate global export supply volume was about 67 million cubic meters in the year 2000.

Figure 3.15 Export Supply of Total Wood Based Panels in 2000

Figure 3.16 presents a map, which illustrates the main net trade flows of all wood based panels, combined. Asia is very strong in panel volumes, with Japan as main importer and China as second. Europe is both a strong importer (from east) and exporter to west. Table 3.4 describes all the inter-regional net trade flows.

[Gross trade flows can be found in Annex table A3-9, and Annex table A3-10 presents the composition of the gross trade into components.]

Figure 3.16 Main Net Trade Flows of Wood Based Panels in 2000 (in 1000 cum)

Source: FAOSTAT Trade Flow Data

Table 3.4 Inter-Regional Trade of Wood Based Panels in 2000 (million cum)

Source: FAOSTAT Trade Flow Data

Figure 3.17 illustrates the evolution of the real prices of the wood based panels. The strong downward trend is easily observed. The basic driving force has been strong investment activity in large facilities with modern technology. Actually both MDF and OSB have improved the process and competitiveness of these product groups. The efficiency of the processes with ability to use low cost wood raw material, has resulted in competitive market with reductions in prices, and consequently, expanding markets.

[Figure A7-12 of annex 7 divides the prices into two components by tropical or non-tropical origin, however, the price differences are small, at least on the aggregate.]

Figure 3.17 Development of Real Export Price of Wood Panels, 1980-2002

Figure 3.18 illustrates one of the most dramatic phenomena, in the global markets of forest products. The shift in the global export supply of panel products in the last 22 years has been quite revolutionary. The export supply of wood based panels has almost quadrupled in this period. As stated above, this has required many factors: Innovations in products and processes, and investments in large-scale facilities. Indonesian plywood industry is an example of this, together with North American OSB and European MDF.

Figure 3.18 Shift in Global Export Supply of Wood Based Panels, 1980 to 2002

Figure 3.19 illustrates the outcome in global export markets, in terms of relative importance of tropical and non-tropical panels. The tropical countries gained strongly in the 1980's but levelled off about 10 years ago. The non-tropical competitors, instead, have kept growing almost linearly for the same 10 years. It is clear that the competitive market place has not had enough of space for both groups to expand at a fast rate. Annex 7 describes the global trade phenomena of wood based panels in more detail.

Figure 3.19 Share of Tropical Panels in Global Trade, 1980-2002

Source: FAOSTAT

The map in figure 3.20 illustrates the main net trade flows of wood pulp in the year 2000. The net trade flows are predominantly towards east, with the most important exception of Other Asia exporting (its highly competitive hardwood pulp from plantations) to USA. Table 3.5 covers all the inter-regional net trade flows in wood pulp with some more details.

Figure 3.21 illustrates the development of wood pulp prices in the period of 1980 to 2002. The very strong cyclicality of the pulp market price formation is the dominant feature. This is characteristic to a commodity (or actually a semi-finished product) market, where capacity expansion is quite costly and requires time. The second important feature is the trend-wise reduction of the real price of internationally traded wood pulp. This again is a net result from improved technology, broadened raw material base (hardwood becoming utilisable) and gains from economies of scale (through investments in large size mills and production lines). The related technology transfer in itself is partly a trade driven phenomenon.

One should consider the effects of the techno-economic development of the pulp industry and market from the sustainable forest management (SFM) point of view. There are several implications: (i) When the overall demand for pulp has been increasing with the growth of the economies, consequently a demand has been generated for a higher portion of the wood raw material base. This again has created economic rent or stumpage value for an increasing volume of small sized wood. On the level of forest management practices, several incentives are being created: more profitable planting, higher recovery harvesting, smaller dimension recovery, and financially feasible thinning regimes. (ii) When earlier, only softwood was usable for pulping, now hardwood became an additional choice. Consequently, stumpage value was created for small sized hardwoods. This again created new opportunities for forest management: usefulness of mixed tropical hardwood as industrial raw material, and financially attractive fast growing tropical plantations. This made a new radical regime economically feasible, where tropical forests were harvested for raw material and as a second step planted for genetically favoured (or improved) species.

Figure 3.22 illustrates the overall export supply shift in the markets of wood pulp in the past 22 years (1980 to 2002). One can conclude that the global export supply has roughly doubled while the real price has been reduced by roughly 50%. The reduction in global trading prices has been very favourable for some of the stand-alone paper mills. They have been able to source their wood pulp purchases from globally competitive producers, such as South American, South African or South Asian producers. The increased competition in the global pulp market place has put some more pressure on the pulp producers and pulpwood markets of the boreal and temperate zone. While the real stumpage prices of some of these sources had been increasing due to pulp market expansion, later the effect from efficient southern producers has put downward pressure on temperate and boreal real pulpwood prices. This has had an SFM effect too: there is now somewhat less financial incentive for sustainable management of these forests as a pulpwood supply source.

[Further information on the global pulp market is available in Annex A8. Table A8-11, which presents the gross trade flows, and Annex table A8-12, which presents the composition of gross trade in its components.]

Figure 3.20 Main Net Trade Flows of Wood Pulp in 2000 (in 1000 MT)

Source: FAOSTAT Trade Flow Data

Table 3.5 Inter-Regional Trade of Wood Pulp in 2000 (million MT)

Source: FAOSTAT Trade Flow Data

Figure 3.21 Development of Real Export Price of Wood Pulp, 1980-2002

Figure 3.22 Shift in Global Export Supply of Wood Pulp, 1980 to 2002

The map in figure 3.23 illustrates the interregional net trade flows in paper and paperboard in the year 2000. As with the previous forest product categories, there are again strong flows from west to east, but now characteristically for paper, there are very strong flows southward, too. Some new regions are expanding their paper and paperboard production. The expansion of supply is mostly driven by domestic demand (for cultural papers and for packaging of manufactured goods). However, some new large-scale operations have started in order to meet the emerging export opportunities. These are typically based on competitive local plantation pulp.

Table 3.6 describes the inter-regional net trade flows with somewhat more detail than figure 3.23. Both North America and Western Europe have a strong export performance in paper and paperboard. This is not so much due to their forest based material supplies but rather due to their superior competitiveness in technology in the more sophisticated paper and board grades. The large variety of specialised paper grades gives these traditional paper-trading regions a competitive edge, and a wide export supply base as such.

[Annex 3 presents further information on inter-regional gross trade in paper and paperboard. Annex table A3-13 illustrates the global gross trade in paper and paperboard. Annex table A3-14 describes the composition of the gross trade into its components.]

The total gross value of the inter-regional trade in paper and paperboard is USD 106 billion. This makes a major share of the total value of inter-regional trading in the markets of forest products. One should keep in mind that: (i) The domestic markets continue to be much larger than the international trade. (ii) The fuelwood makes a half of global wood use and is usually not accounted for. (iii) Non-wood forest products are only partially accounted for in the market statistics. If one bears these facts in mind, then the real dominance of paper and paperboard markets is not as overwhelming as it seems to be in inter-regional trade value.

[Annex 8 covers some further details on the markets of paper and paperboard. Figure A8-2 illustrates the global export supply of newsprint, and figure A8-3 illustrates the global export supply of other paper and paperboard.]

Figure 3.24 illustrates the very large expansion that has taken place in the international trade of papers and paperboards in the last 22 years. The real prices have dropped, and the supply curve has become characteristically flat. A large number of paper and board grades have become commodities and very competitively traded. Most grades, which enter the international market place, are produced with large machines, with high economies of scale. The net result has been lower real price level and expanded production, including supply for exports.

Figure 3.25 illustrates the development of real prices of paper and paperboard in global markets. The real prices of the whole paper and paperboard aggregate are slightly diminishing trend-wise. This is, however, a very mixed basket, and the development of prices of various paper and paperboard grades is very uneven.

Figure 3.23 Main Net Trade Flows of Paper and Paperboard in 2000 (in 1000 MT)

Source: FAOSTAT Trade Flow Data

Table 3.6 Inter-Regional Trade of Paper and Paperboard in 2000 (million MT)

Source: FAOSTAT Trade Flow Data

Figure 3.24 Shift in Global Export Supply of Paper & Paperboard, 1980 to 2002

Figure 3.25 Development of Real Export Price of Paper & Board, 1980-2002

3.2.2 Trade of the Tropics and Developing Countries

Issues of deforestation and sustainability

In spite of its limited share of production, trade has been seen by some observers as a major factor contributing to deforestation and forest degradation, particularly in developing countries (e.g. Dudley 1992, Dudley et al. 1995). In a number of tropical countries in Africa, Southeast Asia and the Guyana Shield, export oriented production has apparently accounted for a significant share of forest loss and degradation. In addition to direct impacts, indirect effects, such as opening up forest areas for encroachment, can become or trigger underlying causes of deforestation.

Indirect impacts on deforestation are linked to such factors as changing production and consumption patterns (including expanding demand for food), expansion of subsistence agriculture, demand for fuelwood and charcoal, as well as land tenure patterns. Given these other underlying causes of deforestation, some have concluded that deforestation has little to do with international trade (WTO 1997). But this view misses the point that the interrelationship between trade and deforestation is mostly indirect, and that direct, and indirect effects, are difficult to separate from each other.

Trade based on sustainably managed forests brings socio-economic benefits, thereby creating an incentive for the conservation of forest resources. The higher returns on investment, compared with alternative land uses such as agriculture, are an incentive to conserve production forests (Barbier et al. 1993).

Sustainability issues keep becoming more important, and are decisive e.g. when considering the “procurement from legal and sustainable sources”. The procurement policies and rules, again, may have a decisive role in affecting the competitiveness of various products in the purchase decision. A study prepared by the Subgroup Substitution Project of the Joint FAO/ECE Team in the Forest Industries Sector, stated as follows: “In the past, the most important environmental issues for manufacturing industries were emissions, discharges and waste. These are still very important issues and likely to remain high on the environmental agenda. However, increasingly the focus is shifting towards raw material procurement.” (Burrows and Sanness, 1998)

Another study project (Rametsteiner, E., et al.1998) researched the perceived environmental friendliness by consumers in Germany, France, Italy and UK. Similarly to some other studies, wood ranked high. In this study, a difference was made between domestic wood and tropical wood. The “environmental friendliness” of tropical wood ranked lower than that of domestic wood or glass, but higher than other substitute material, including plastic, aluminium and steel. The bottom line may be, as stated by Burrows and Sanness (1998): “…The report concludes that substitution of forest products by competing products is accelerating. In some cases, substitution is resulting from environmental claims that are erroneous, incomplete and unproven”. The study continues: “There is a need for international co-operation and action to meet these challenges because of consumers' growing awareness of environmental issues, their ignorance concerning the forest and forest industry sector and continuing focus on the sector by environmental organisations.”

Figure 3.26 Net Trade of Wood Products by Developing Countries 1980-2002

Source: FAOSTAT

Figure 3.27 Net Trade of Pulp and Paper by Developing Countries 1980-2002

Source: FAOSTAT

Tropical trade in logs, sawnwood and plywood

In previous sections the role of tropics in the trade of some key forest product categories have been presented. Figure 3.8 illustrated the development of the role of tropical roundwood in the international markets. Figure 3.14 illustrates the relative market share performance of tropical and other sawnwood, indicating that tropical volumes have grown only little, while non-tropical sawnwood has expanded internationally.

Figure 3.26 illustrates the global trade in hardwood logs during the period of 1980-2000. Hardwood logs have been selected as an example here, due to their importance for developing regions, and to indicate the competition between regions. The measure used is gross export volume, i.e. direct sum of country level exports. The quite important role of tropical logs in the international trade of hardwood logs has diminished over the years. Especially during the 1990's, the share of tropical logs has decreased from about 75% of the trade to clearly less than one half. It is important to note that the overall trend in the hardwood log trade has been almost horizontal, with some growth in recent years. In summary, the temperate and boreal logs have substituted for the tropical logs, which have become relatively scarce in supply.

Figure 3.28 World Trade in Tropical and Total Hardwood Logs in 1980-2000

Source: Annual Reviews and Assessment of ITTO, FAOSTAT, consultant estimates (tropical includes ITTO members)

Figure 3.29 Global Exports of Hardwood Sawnwood in 1980-2000

Source: Annual Reviews and Assessment of ITTO, FAOSTAT, consultant estimates

Figure 3.27 illustrates the development of the global hardwood sawnwood exports, for tropical and other hardwood sawnwood separately, in the period of 1980-2000. In hardwood sawnwood, non-tropical exports have grown faster than tropical. The global overall view reveals that the tropical regions have still a quite important role to play in the global interregional trade in sawnwood (even if supply and demand investigation reveals that an increasing share is getting consumed locally). One has to bear in mind that most of the interregional trade flows, coming from outside of the tropical zone, are of coniferous species.

The economic transportability plays a major role in wood based panel markets. Particleboard and fibreboard are mainly locally used, and almost totally intra-regional trade items. The key products in the interregional trade are the veneer and plywood. Tropical plywood was the success story of the 1980's and early 1990's. Previously, in the illustration of the global annual snapshot of the year 2000 (see figure 3.16) this was reflected especially as a major flow of panels from other Asia to Japan.

Figure 3.28 illustrates the development of global plywood exports. It is important to note that no separation is made by species. Softwood plywood is important component of non-tropical plywood. The global trade in plywood had been increasing very fast until the mid-1990's. The dominant component of the growth was tropical plywood. The whole plywood trade slowed in the latter part of 1990's and tropical plywood suffered more than the rest.

Figure 3.30 Global Exports of Plywood in 1980-2000

Source: Annual Reviews and Assessment of ITTO, FAOSTAT, consultant estimates

Figure 3.29 illustrates the development of the import market shares of the main importer regions in the global trade in tropical logs. The import market has gone through very large structural changes. Firstly, Japan has trend-wise decreased its import market share, especially in the 1990s. Even here, the pattern is not smooth. China has very quickly taken a large market share in the tropical log imports in the late 1990's, increasing its share from 10% to almost 50%. This is the largest single shift in the tropical timber trade in the last five years. European Union countries reduced their share as tropical log importers quite dramatically since 1995. In effect, EU's decrease in share is almost as dramatic as the growth of Chinese imports. However, EU still has an import market share of about 20% in global tropical log trade. The trade in logs is concentrating, as Japan, China and EU have increased their joint share in the 1990's.

Figure 3.30 illustrates the development in the import market shares in the global trade of the main consumer regions of tropical sawnwood in 1980-2000. Japan has radically decreased its import share of tropical sawnwood in the latter part of the 1990s. China has effectively compensated for the change, at least in volume terms. EU has maintained its share at over 40%, USA has remained at 5-8% level, while the rest of the world has decreased in import share of tropical sawnwood.

Tropical share in consumption of other regions

Figure 3.31 Import Shares of Consumers in Tropical Logs in 1980-2000

Source: Annual Reviews and Assessment of ITTO, FAOSTAT, consultant estimates

Figure 3.32 Import Shares of Consumers in Tropical Sawnwood in 1980-2000

Source: Annual Reviews and Assessment of ITTO, FAOSTAT, consultant estimates

Prices of tropical timber

Figure 3.33 Price of Ghanaian Sawnwood 1990-2002

Source: ITTO, 2002 (bold line in real price, deflated by ITTO secretariat)

Figure 3.33 illustrates the price development of selected (relatively consistently reported) case of tropical sawnwood. The case covers the species mahogany and Acajou on one hand, and Wawa/Obeche, on the other. One can observe the cyclical nature of the prices, but in terms of the longer-term development, an almost flat trend can be observed.

Value added forest products from tropics

Table 3.7 summarises the export development of secondary processed wood products (SPWP) from International Timber Trend Organization (ITTO) producer countries in 1996-2000. In the descriptions above, the exports of SPWP was measured by approximate estimates of its volume. A more meaningful presentation is in value terms, as in table 3.7. This table differentiates the export destinations by ITTO producers, consumers, and the world total. One can conclude that only 1% was traded between ITTO producers, and that about 10% were directed to outside ITTO member countries.

Asia Pacific region dominates the exports of tropical SPWP and covers almost 85% of the export value. Most of the remaining exports come from Latin America. The very encouraging phenomenon is the strong recovery and overall growth of SPWP exports in 1999 and 2000. Indonesia, Malaysia, Thailand, the Philippines and Brazil have all reached their record exports in those years. In total the exports of SPWP has grown by 28% in four years.

Table 3.7 Developing Country Exports of Secondary Wood Products

Exporter	To	1996	1997	1998	1999	2000
		million USD
Asia Pacific	World	3 768	3 540	2 905	4 251	4 685
	ITTO Prod.	37	36	31	53	28
	ITTO Cons.	3 300	3 038	2 503	3 718	4 228
Latin America	World	545	607	581	716	791
	ITTO Prod.	13	13	19	20	28
	ITTO Cons.	452	506	463	583	633
Africa	World	14	10	4	13	27
	ITTO Prod.	0	0	0	0	0
	ITTO Cons.	13	10	4	12	27
Producers	World	4 327	4 157	3 490	4 980	5 538
	ITTO Prod.	51	49	49	73	56
	ITTO Cons.	3 764	3 553	2 970	4 313	4 920

Source: Annual Review and Assessment, ITTO 2001

Imports of SPWP

Table 3.8 demonstrates that the import market of the secondary processed wood products (SPWP) is a very dynamic one. It is important to note that this table includes all SPWP, where tropical SPWP is just one component. However, the table makes a distinction between tropical SPWP and the other.

The most important conclusion from table 3.8 is that while the SPWP market has been growing fast (18% in four years), the imports of SPWP from tropical sources has outpaced the average global growth and increased by 26% in four years. The total net value by major importers of SPWP from ITTO producer countries was at 5.2 billion USD in the year 2000.

UK, France and Belgium have all clearly increased their imports of SPWP from tropical countries. The Netherlands is a special case, it has increased its imports strongly but most of it from outside of tropics, which again have suffered and lost in market share. Also, the case of USA is worth a closer look, it has increased its SPWP imports by a massive 88% in four years (to a level of over 12 billion USD, over twice of the total tropical SPWP trade value). Even if the tropical SPWP imports to USA have increased by 50% in four years, they have still lost in market share.

Table 3.8 Major Importers of Secondary Wood Products in 1996-2000

Source: Annual Review and Assessment, ITTO 2001

Conclusions from description of forest product trade

• As described in this chapter, the long distance trade of raw material is rather limited, especially in value terms as presented here. The key driver is the better transportability of processed products - if the market access is there!

• Traditionally, trade in logs has been an important export income source for developing countries. The dominance of tropical logs in the international trade of hardwood logs has diminished over the years. Especially during the 1990's, the share of tropical logs has decreased from about 75% of the trade to clearly less than one half. It is important to note that the overall trend in the hardwood log trade has been almost horizontal, with some growth in past years. The temperate and boreal logs have substituted for the tropical logs, which have become relatively scarce in supply.

• Globally, the supply of wood fibre will be increasingly met from managed natural forests or plantations. The role of tropical forests as an excess supply area, is necessarily becoming smaller in relative terms. The global policy issue is, if the tropical forests will be valued for the full range of services they are able to provide. The danger is that policies and investment support in the fast growing plantation forestry may reduce interest and perceived value of the tropical forests, thus speeding up the clearance for other uses.

• Most of the value created through international exchange of forest based products comes from value added products. Measured by the value of inter-regional gross trade (as was used in map illustrations of this chapter), pulp and paper create more than ten times the value of wood raw materials.

• A number of developing tropical countries have been able to create sizeable export trade by shifting the production to value added products. A range of policies and other measures have been used to facilitate this development. These measures have included instruments that have established market access barriers or impediments (such as log export taxes or log bans). Some other instruments have been closely related to market access issues (such as subsidised industrial development, fiscal incentive schemes or low concession fees on wood from government owned forests).

• Successful industrial wood based export countries in the tropics have become a part of the highly competitive global trade. There are signs that the prices of commodities have become depressed. Increasing liberalisation is likely to further enhance the competition. The challenge is to keep the value chain in such shape that the forest resource retains a value high enough to support the SFM of the natural resource.

3.3 Trade Restrictions for Forest-based Goods and Services

3.3.1 Market Access, Barriers to Trade and Impediments

Factors and measures related to market access

The past decades have seen an international movement towards elimination of many of the former barriers to trade, especially of tariffs. The positive effects of the overall globalisation have been generated, as the friction has been lowered and the mutually beneficial transactions have increased. However, work remains to be done, especially in such products, which do not easily fit into standard commodity categories. For a number of reasons, tropical timber belongs to this category.

Factors and measures on market access cover a large range of issues and instruments. This is in the very focus of this report and will be discussed in more detail in the following chapters. Both exporter and importer countries may have intentional or unintentional measures, instruments and constraints in place, which in fact form market barriers or impediments.

International trade instruments

In principle, and in enforcement of the international trade legislation, the forest-based products are treated in the same manner as any other internationally traded commodities. Of course, due to the nature of the products, certain aspects and regulations have more specific relevance. Such features include phyto-sanitary measures, concerning unwanted aspects of the bio-diversity of the place of origin.

Even after enforcement of the full arsenal of the international trade regime, a large number of technical and non-technical issues may remain unsettled. There are several groups of issues involved, including: (i) Environmental and conservation issues, (ii) Product quality issues, (iii) standards, and (iv) packaging, labelling and testing. Even if all technical hurdles would be overcome, important non-technical ones remain. These latter issues are often related non-trade policies of governments, or on preferences of the local consumers and local governments.

International trade agreements

The core of international trade regime is the WTO legislation. The starting point was based on the General Agreement on Tariffs and Trade (GATT). The regime is intended to ensure proper functioning of free trade, while taking into account the protection of the environment. Several other WTO treaties contribute to the total international trade regime. These include the agreements on: Sanitary and Phyto-sanitary measures (SPS); Technical Barriers to Trade (TBT); Trade Related Investment Methods (TRIM); Trade-Related Intellectual Property Rights (TRIPS). A number of other agreements (anti-dumping, customs valuation, pre-shipment inspections, rules of origin, import licensing, subsidies, safeguards) also exist within the WTO framework.

In terms of enforcement, the international trade regime consists of three components: (i) at the very core are the rights and rules, which are supplemented with (ii) procedures, and (iii) compliance mechanisms.

Multilateral environmental agreements

The Multilateral Environmental Agreements (MEAs) are legally binding international agreements with a global scope. The MEAs have been negotiated between governments to take a joint action to mitigate environmental threats. The basis was laid for the creation of MEAs by the United Nations Conference on Environment and Development (UNCED) in 1992.

A large number of MEAs address issues that have at least partial relevance to forestry. The Convention on Biological Diversity (CBD), United Nations Framework Convention on Climate Change (UNFCCC), United Nations Convention to Combat Desertification (UNCCD) are arguably the most important from the forestry point of view. There are several others with specific relevance.

The mutually supportive role of the international trade regime and the other multilateral conventions and agreements, specifically the multilateral environmental agreements, has become of a growing concern. MEA secretariats, WTO and non-governmental organisations (NGOs) have to various degrees participated in a process, which is hopefully leading towards a higher coherence of the two large bodies of legislation.

3.2.2 Tariff Barriers for Wood and Wood-based Products

Exporter related barriers to trade

Export restrictions are still of considerable significance. They include total bans, export quotas, or selective bans based on species; direct charges such as export taxes or export levies; indirect quantitative restrictions due to controls on harvest levels; and administrative controls such as permits and licenses. Export restrictions are common in most developing countries and in some developed countries.

In the past, export taxes were used by tropical timber exporting countries primarily as a means to raise revenue from exports of roundwood and many countries continue with this practice. In a way, there was an option to collect the revenues either at the border or at stumpage. Typical export taxes were in the range of 10-20% for logs. The export taxes for processed products, sawnwood, veneer and plywood were usually negligible or small. With an increasing need for economic development, promotion of forest-based industries has become more important. The policy objectives have generally shifted to industrial investment incentives, and export taxes were replaced by strategic export bans or restrictions.

The export bans have been criticised from the point of view of effectiveness and cost. For example, the efficiency of wood conversion stayed low, partially due to export restrictions. The restrictions worked in the sense that they lowered competition on the roundwood markets, and thus lowered log prices. From the point of view of economic production function they caused substitution of wood for other factors of production. The end result was wasteful wood raw material use, i.e. low product recovery rates from logs, and unnecessarily high harvesting area and impact on forests. Some studies have indicated that the restrictions have been effective in contributing to the industrial development goal, but at a substantial financial cost (Barbier et al. 1995).

A key conclusion to be drawn from the Asia-Pacific experience is that logging bans are neither inherently good nor bad as natural forest conservation and protection policy instruments. Logging restrictions are simply one set of policy tools available to decision-makers within a spectrum of options and alternatives. If bans are adapted selectively and used in combination with other complementary policy instruments, they can help assure that natural forests will be sustained and will continue to contribute to enhancing the well-being of the peoples (Durst et al. 2001).

Export restrictions are commonly used to encourage and promote greater domestic processing by protecting local industry from import competition, enabling the local industry to obtain logs at cheaper prices, encouraging industry into further processing by banning the export in log form, etc. Since export bans are technically illegal under Article XI of GATT, many countries (such as Indonesia and Malaysia) are now turning to other measures, ranging from export taxes to permits and licenses, in place of direct quantitative controls. In recent years the focus has shifted towards encouragement of value added timber products, including placing export controls on intermediate products such as sawnwood, and even more recently towards forest sustainability issues, where the intent is to reduce overall pressure on the resource. (Bourke, 1999)

Importer related barriers to trade

Trade in forest-based products is often subject to tariff and non-tariff barriers. Even though the former have been significantly reduced as the result of the Uruguay Round, they still represent a restriction, particularly in the context of tariff escalation (higher tariffs are applied to value-added products than raw material or intermediate products). The impact of tariff reductions is limited by the fact that some large importers did not participate in the Uruguay Round (e.g. China). However, a number of countries that did not participate in the Uruguay Round, have by now undergone accession (most notably China), and their tariffs are on their way down also.

Even low tariffs may still be significant in some cases, especially where long distances are involved because the duty is charged on the basis of CIF value, rather than FOB value. In addition, tariff escalation for some finished products, e.g. for panel products, builders' woodwork items and furniture is significant. Lower tariff barriers for developing countries, in the form of GSPs, which are discretionary, tend to retain high tariffs for these finished products. It is unclear whether they are enough to exclude some developing countries from exporting such products to developed countries since there may be other factors, which may influence that outcome (Bourke and Leitch 2000). Nonetheless, one impact of this tariff escalation may be that developing countries are increasingly dependent on raw material and basic commodity export. Annex 3 summarises selected relevant tariffs of wood products.

Codes and standards are necessary in international trade as they define the criteria of products and services from the producer to the consumer. They include importer country building codes and approval systems. Testing procedures with respect to various standards are a part of the specification. The required testing procedures may be not easily adapted to the local conditions. Code harmonisation, and creation of performance-based standards will facilitate trade but their development has typically progressed only slowly.

Standards in relation to plant health are generally acknowledged legitimate. However, the complexity and severity of the requirements may have an effect on trade and be interpreted as impediment by exporters.

In recent years, environmentally motivated NTMs have become more common. The WTO rules make some exceptions to the main trade rules, based e.g. on conservation of exhaustible natural resources. As a main rule, such environmental measures as voluntary certification are considered to be outside the WTO rules. There is a concern about discriminatory treatment, as the same standards are not applied to all countries, and especially to all competing materials.

Standardisation is an important NTM issue. For example, the International Technical Tropical Timber Association (ATIBT) has a “Commission 3, Standards and Uses”. This commission works on standards and rules effecting tropical timber and its products. The commission works towards the progress of tropical wood standardisation as well as its integration in the new standards of utilisation.

The two principal missions of this commission are:

• To represent the ATIBT in front of the large international standardisation organisations such as the ISO and CEN

• Compiling and promoting of the ATIBT International grading and measuring rules

To date the achievements of the commission are the following:

• Drawing up of a publication entitled: “Terminology of round and sawn tropical wood”, due out for publication this year

• Following and evaluation of the African sawnwood and Okoume rules, in collaboration with the ATIBT arbitration chamber

• Commission 3 is currently working on the realisation of a practical commercialisation guide for peeled, sliced and sawn veneers. The object of this guide is to favour the commercialisation and regulation of these products. This document is neither standard, nor a regulation, and in addition integrates the existing CEN and ISO recommendations concerning plywood (It is planned that the guide will be available for distribution by the end of 2002).

3.3.3 Development of tariffs, taxes, quotas and subsidies

Subsidies are relatively common in the forestry sector to promote reforestation and other investment where the returns are too low to attract private investment. Subsidies have also been used for strategic reasons, e.g. to create a critical mass of wood supply to encourage industrial investment. From the point of view of trade policy, incentives, particularly financial subsidies, influence the competitiveness of individual producers. For example, subsidies (from low royalty rates) have been a trade issue in the bilateral negotiations on a softwood lumber agreement between Canada and the United States. But subsidies are a concern for sustainability of forest management also, for example, in natural forests where they can encourage excessive harvesting levels. Subsidies to alternative land-uses can also lead to undue clearing of natural forest land.

The WTO Agreement on Subsidies and Countervailing Measures specifies disciplines on the granting of subsidies and taking action against subsidies given by other countries.²⁹ Both production and export subsidies are recognised. Three categories of subsidy are identified: (i) prohibited subsidy, (ii) permissible subsidy, and (iii) actionable subsidy (otherwise permissible, except if they cause injury or threat to domestic industry of the importing country).

Among the permissible subsidies are (a) non-specific subsidy (with regard to industrial unit or sector), and (b) subsidies which are specific but meant for research and development purposes of disadvantaged regions or for environmental purposes. Counter measures and countervailing duties can be imposed by injured importing countries in certain circumstances. The Subsidies Agreement establishes special provisions for developing countries, including exemptions from the prohibition of export subsidies in countries with a per capita GNP of less than USD 1 000 per annum.

The low rent capture in tropical forest concessions prevailing in many countries is an implicit subsidy that has been considered one of the main reasons for excessive harvesting and forest degradation. While such implicit subsidies may not easily qualify as a subsidy under the WTO criteria (and therefore are not subject to WTO discipline), they are a source of serious concern (e.g. IPF 1997).

Fiscal incentive schemes have enabled such countries as Brazil, Chile and Uruguay to develop large-scale export-oriented industries. The experience of Brazil indicates that, when the fiscal incentives are removed, the supported activity (tree planting in this case) will drastically decline. From the environmental viewpoint, the expansion of industrial plantations in these countries, and elsewhere, has been criticised as natural forest area has been converted to “monoculture”. More recently, national legislation has been instituted to seek an acceptable balance between the objectives of conservation and economic development. In Brazil, for example, 20% of each holding used for tree planting is to be reserved for natural vegetation as a “legal reserve”.

The dispute between USA and Canada on the countervailing duty to compensate forestry subsidies shows that the issue can be raised in trade negotiations even though forest policies have largely been perceived as a national issue. The USA has claimed that Canada subsidises wood production through low royalty fees from forest concessions, such that the production cost is lower than economically justified. At the same time, it is claimed that production in the US national forests is also subsidised, as many of the costs are financed by Congressional appropriations (Repetto et al. 1992). Such subsidies expand the export supply of softwoods and temperate hardwoods from the US and Canada. There is a risk that such subsidies are encouraging oversupply and overuse, resulting in negative environmental impacts (e.g. CO₂ emissions) (cf. Repetto 1993).

Another example of a subsidy in this context is government financial support to forest road construction to facilitate timber extraction. Environmental groups in USA have targeted these subsidies, to protect bio-diversity. It has been an issue in some European countries also.

It needs to be pointed out that subsidies in related sectors may have adverse environmental impacts on forests. Agricultural subsidies that make crop production or grazing an artificially attractive land use has led to conversion of natural forests (Laarman 1995). Such conversion has proved to be unsustainable if the soil is too poor or gets depleted as a result of removal of the vegetation cover. Similar effects are observed in measures, which depress the market price of land. Within the WTO, agricultural subsidies are covered by the Agreement on Agriculture, not under the Agreement on Subsidies and Countervailing Measures.

Subsidies that make domestic prices differ from border prices risk generating external environmental cost, as they may promote wasteful production in resource use. In forestry however, subsidies are typically used to correct policy failures in a partial manner, rather than addressing such fundamental issues as under pricing. It is generally politically easier to apply subsidies than to remove them or increase stumpage prices on government lands. Subsidies in this context are not considered as trade policy instruments, but as stated above, they significantly affect production and, at the same time, the use and management of land resources, and thus impact on the environment.

The previous discussion has reviewed the impacts of production oriented subsidies. There are also environment-related subsidies through grants, tax concessions and other support schemes to promote research and development as well as implementation of sustainable forest management practices. Several notifications of information supporting the integration of environmental measures in the forestry sector have been made in the WTO (WTO 1997).

In general, the elimination of subsidies could yield trade and environmental benefits. From the conservation point of view, subsidies as they have been applied in the past, have often encouraged land use for plantations with legitimate development objectives in mind. Without rules and disciplines that take into account conservation aspects, the impact of subsidies will often be negative. However, necessary incentives to set the process of forest management in motion in developing countries may require the use of well-targeted and temporary subsidies, which minimise rent seeking behaviour (Hueth 1995). Therefore, in addition to transparency, appropriate policy guidelines for the type of activities supported, are likely to be needed to avoid incentives in forestry from becoming a trade issue. Furthermore, a reconsideration of how the relevant trade rules might be adjusted to better support environmental ends would be appropriate (Simula 1999).

Figure 3.38 illustrates the post-Uruguay Round tariff levels of wood products by main industrialised regions. The main focus is on the tariff escalation. At least on the average regional level it seems clear that the processing stage is an important trade policy issues, and is reflected in the applied relative tariff rates. In general the tariffs escalate from raw materials to finished products, semi-finished products are often (but not always) in between.

Figure 3.34 Tariff Escalation: Wood Products in Developed Markets

Source: UNCTAD TRAINS, 2003;UNCTAD, 2003 (applied tariff rates)

Figure 3.35 Tariff Escalation: Wood Products in Developing Markets

Source: UNCTAD TRAINS, 2003;UNCTAD, 2003 (applied tariff rates)

Figure 3.39 illustrates the post-Uruguay Round tariff levels of wood products by main developing regions. Several conclusions can be made. While the main focus is still on the tariff escalation, the overall level of applied tariffs is dramatically higher compared with industrialised regions. The existence of escalation is very strongly demonstrated. In the two Asian sub-regions, the semi-finished tariff rates are lower than for raw materials or for finished goods.

As a general comment from figures 3.38 and 3.39, one can state that some scope for tariff liberalisation remains even in the industrialised countries, especially in manufactured products. No scope for very dramatic tariff reductions remains in the developed regions. However, further allocation efficiency gains are still possible, and trade volumes involved are large. On the contrary, the tariff situation in the developing world is still very strongly restrictive and forms high barriers against international trade.

3.3.Non-tariff Measures

In addition to tariff related measures, various non-tariff barriers (NTB's) or non-tariff measures (NTM's) may be even more important, and their importance appears to be increasing (Bourke 1995). The NTM's can be defined as government laws, regulations, policies and practices that either protect domestically produced products from the full weight of foreign competition, or artificially stimulate the exports of particular domestic products.

The NTM's include both formal institutional measures designed to restrict or distort trade patterns, and other restrictions that act as impediments to trade. Even if incidence of NTM's is still high, some evidence indicates that at least regional reductions took place in the 1990s (Asia Pacific Economic Co-operation, APEC, 1997). However, a more recent APEC study identified that NTM's affect forestry and forest product trade in all APEC member economies.

Figures 3.40 and 3.41 illustrate recent occurrence of NTM's³⁰. Figure 3.40 looks at the situation from the point of view of developing countries exporting wood products. Figure 3.41 illustrates the situation from the point of view of developed countries, which export paper articles. Annex 2 presents the coding of UNCTAD for measures of trade control measures. The annex illustrates how complicated and delicate issue NTM is.

The conclusion from the empirical investigation of non-tariff measures (NTM's) is that they are very frequent. Comparison between the NTM's, which the developing country wood product trade meets, and NTM's that developed country paper articles meet, reveals that the former have a much steeper NTM barrier to climb to have access to markets. This is especially true for developing countries trying to trade with the rich quad markets (Canada, EU, Japan and USA).

Figure 3.36 NTM's Facing Developing Country Wood Product Exports

Source: Bora, et al. 2002 [% Frequency of non-tariff measures]

Figure 3.37 NTM's Facing Developed Country Paper Article Exports

Source: Bora, et al. 2002 [% Frequency of non-tariff measures]

Technical standards and plant health standards

Technical Standards

In the discussion about the general Technical Barriers to Trade (TBT) agreement, a special emphasis here is on aspects of specific interest in relation to tropical timber. The applicability of the TBT Agreement to certification is a current source of controversy. The objectives of the TBT Agreement are (i) to ensure that technical regulations and standards are not used as disguised protectionist measures, and (ii) to reduce the extent to which technical regulations and standards operate as barriers to market access, primarily encouraging their harmonisation. The main substantive provisions of the Agreement have been summarised below (TBT Agreement, Annex 3):

• In respect to standards, products originating from other WTO Member countries shall not be accorded treatment less favourable than like products of national origin.

• Standards and the process of their preparation shall not create an unnecessary obstacle to international trade.

• International standards shall be used if they exist and are relevant.

• National standardising bodies shall participate in the preparation of international standards.

• The standardising body in a Member country shall avoid duplication of or overlap with the work of other standardising bodies in the national territory or of international or regional standardising bodies.

• Every effort shall be made to achieve a national consensus on standards.

• The standardising body shall specify standards based on product requirement in terms of performance rather than design or descriptive characteristics.

• At least every six months the standardising body shall publish a work program on standards under preparation or adopted. The titles of specific draft standards shall, upon request, be provided in English, French and Spanish.

• Before adopting a standard, the standardising body shall allow a period of at least 60 days for the submission of comments on the draft by interested parties.

• Upon request, the standardising body shall promptly provide a copy of draft standard, which has submitted for comments.

TBT agreement sets out procedures to ensure that technical regulations and standards, including packaging, marking and labelling requirements, do not create “unnecessary obstacles to international trade”. The TBT seeks to ensure that product standards are not used as disguised protectionist measures, and to reduce the extent to which they act as barriers to market access.

The text of the TBT Agreement is not very explicit as regards its coverage and application to voluntary labelling programs based on non-product related PPMs. There are two aspects to this issue: (i) Whether standards or regulations, that distinguish between products, based on non-product related criteria, such as PPMs, are covered by the TBT Agreement. (ii) Whether certification and labeling schemes, related to forest products and services, are motivated by protectionist intent or constitute arbitrary discrimination.

The TBT Agreement deals with two types of possible barriers to trade: (1) Technical regulations refer to “product characteristics or their related processes and production methods, with which compliance is mandatory”. (2) A standard is “approved by a recognised body, that provides, for common and repeated use, rules, guidelines or characteristics for products or related processes and production methods, with which compliance is not mandatory”. As certification of forest management is usually a voluntary activity, the TBT provisions on standards would appear to be relevant.

Plant Health Standards

Sanitary and phyto-sanitary (SPS) measures are used to guarantee that the producer has been capable of cleaning, sanitising, sterilising or by other means to render the offered commodity free from unwanted dirt, seeds, pests or germs. Standards in relation to plant health are generally acknowledged as legitimate, since introduced pests and disease can have devastating effects on the health of domestic forests. However, the complexity and severity of the requirements and the manner in which they are enforced may have such substantial effect on trade that they are interpreted as obstacles to trade by exporting countries. Exporters also perceive costs associated with conforming to phyto-sanitary rules as being non value adding compared with other “fitness for purpose” requirements such as kiln drying or preservative treatment.

In general, alien species are one of the greatest threats to bio-diversity and they can be one of the biggest hidden environmental costs of trade. Alien species are also a significant threat to forest bio-diversity (U.S. Congress 1993). Introduction of pests into North America has infested the American chestnut and elm. An introduced pest is currently causing serious danger to North American populations of white pines.

Regulatory requirements related to sanitary and phyto-sanitary measures have been put in place to address this problem, including several unilateral and bilateral plant protection agreements (starting with the 1951 Rome Convention, UNTS 150/67, as amended). In many countries these are being tightened and becoming more demanding, especially with regard to non-wood products (e.g. medicinal plants, spices and food) and other products like softwood timber. Regulations concerning heating (or kiln drying) of sawn softwood coming into the EU market from outside the region have been in place to control the introduction of pine nematode. There does not appear to be any serious cases on this issue, which would be specifically related to tropical timber.

Protective measures of SPS type are regulated under the WTO Agreement on Sanitary and Phyto-sanitary Measures (SPS Agreement). Although some trade distortion is caused as a result of such national regulations, they are not usually unreasonable controls, since their enforcement is essential for health and safety reasons (Iqbal 1995). The SPS Agreement states that such regulations should not become unnecessary barriers to trade. It requires that any sanitary or phyto-sanitary measure is applied only to the extent necessary to protect human, animal or plant life or health, and is based on scientific principles and sufficient scientific evidence (Art. 2.2). Although there is a presumption in favor of using international standards, countries may take stricter measures if there is a scientific justification or as a result of a prescribed risk assessment (Article 3(5)). For the time being, it is not foreseen that the SPS issues would emerge as a serious constraint to market access of tropical timber.

Conclusions on market access issues and forestry

• “The practice of tariff escalation biases exports towards unprocessed resource-based commodities, characterised by low value added. This may cause difficulties to commodity-dependant developing countries in their efforts to diversify their export base…the extent of tariff escalation remains significant” (UNCTAD, 2003).

• The environmental concerns of the international community, including those who trade in forest-based products and services, need to be expressed through other instruments, in addition to the MEAs. A large variety of platforms exist to express those concerns. The national instruments are in the form of environmental policies, which again are to a varying degree reflected in the forest policies and national forest sector plans, and forest governance. Stakeholders, such as forest industry, can improve their implementation by following management plans, guides of utilisation and codes of practices.

• In the end, lots of concerns of the general public, the environmental movement and consumers are left with the “voluntary” measures, which include criteria & indicators as well as certification & labelling. Local governments are reflecting the voters' attitudes more easily than national governments, and are introducing legislation on procurement from sustainable and legal sources. Some governments are entering into bilateral agreement and formulate pairing arrangements to tackle the environmental concerns. The international Forest Law Enforcement, Governance and Trade (FLEGT) process is taking the promotion of these principles to regional level.

• International trade instruments have varying degrees of discriminatory effect towards developing country trade. The international legal regime is quite neutral, in principle. The NTMs can be more severe towards developing country exports. However, the most difficult obstacle may be in the form of the voluntary measures, such as (i) certification and labelling, (ii) local government procurement rules, and (iii) meeting the other “sustainability and legality” requirements.

• To summarise: at least three groups of market access measures still have a major negative impact on market access of developing country forest-based trade: a) tariff escalation, b) high rate of NTM occurrence, c) increasing frequency of “voluntary”, “soft” but very sticky barriers.

3.3.5 Summary: Trade Liberalisation and Sustainable Forestry

GATT Negotiation Rounds and Tariff Liberalisation

The Uruguay Round of GATT, completed in 1994, reduced most import tariffs on industrial products by one-third in the period of 1994 to1999. Tariffs on some products, including pulp and paper, would be eliminated completely in major developed country markets before the year 2005. Also tariff escalation was considerably reduced. Developed countries set bounds on all their tariffs, while developing countries did the same for 65% of their tariffs. As well, much attention was paid on non-tariff barriers, subsidies, countervailing duties, technical barriers and standards.

Based on Uruguay Round, tariffs on most forest products would be reduced by 33% on trade-weighted basis. Austria, Canada, EU, Finland, Japan, New Zealand, USA and several other major importers agreed to tariff elimination on pulp and paper. These countries would reduce their (1986) tariff by 50% by year 2000, and eliminate them by 2004. The major developed countries were also committed to reducing tariffs by 50% on solid wood products in period 1995-2000. For developed countries the average tariff on forest products (wood, pulp, paper and furniture) would be reduced from 3.5% to 1.1% (Barbier, 1996).

The Uruguay Round committed all major developed countries and a high proportion of developing countries to binding tariff rates on forest products, thus reducing market risk. For non-tariff barriers, the Agreement on Sanitary and Phyto-sanitary Measures and the Agreement on Technical Barriers to Trade would improve market access. Nevertheless, while the Uruguay Round reduced tariffs significantly, its implications for the non-tariff barriers was less clear. (Barbier, 1999).

Boyd, et al (1993) found that due to the US tariff removal on the North-American sawnwood trade, Canadian sawn softwood exports to USA would increase by 4.5%. After the 1994 Uruguay Round, FAO made several assessments of its effects on world agriculture, forestry and fisheries. Barbier (1996 and 1997) contributed to the forestry part of this work. He found that the Uruguay Round would increase the world imports by 0.4-0.5%. Brown (1997) found that gains of trade due strictly to the Uruguay Round would be relatively small also for Asia-Pacific countries.

Effects of the tariff reduction have been research through a global partial equilibrium model (global forest products model, GFPM, see “Accelerated tariff…”). Further, both local and global effects have been analysed (Brooks et al. 2001). The conclusion of Zhu et al. (2002) includes that the effects of ATL on trade would be much more important than on consumption and production. The simulation results indicate that the roundwood trade would decrease by about 5.5% on global level under ATL. As expected, the world trade in manufactured products would increase by 5-6%.

Accelerated Tariff Liberalisation Proposal and Simulation Results of Impacts

Even in some industrialised countries, tariffs on forest products (such as wood based panels) remain high. In other countries tariffs in the range 10-20% are common. In 1997 ministers of Asia-Pacific Economic Co-operation (APEC) countries called for the nomination of sectors for early voluntary liberalisation (EVSL). Canada, USA, New Zealand and Indonesia proposed the forest sector.

The process led to the Accelerated Tariff Liberalisation (ATL) proposal to cover all forest products. Products included were: logs, wood products, pulp and paper. Parties to the Uruguay Round of GATT zero-for-zero agreement would move up the elimination of tariffs on pulp, paper and paper products from January 1, 2004 to January 1, 2000. Others would attempt to remove tariffs by the same date but could delay removal until January 1, 2002. (Buongiorno, et al., 2003).

The simulation of tariff liberalisation with a global model produces a large number of numeric results for any chosen set of conditions. In this context it is only possible to summarise a few key results reported in the literature. Comparison of simulation results from two large models, Global Forest Products Model (GFPM) and CINTRAFOR Global Trade Model (CGTM), indicates that they produce similar results on similar assumptions (Brooks, 1999). With similar assumptions on economic development and tariff cuts, the results were: (i) No major global changes on production and consumption, (ii) significant changes in commodity composition of trade and in geographic patterns of production and trade. According to Wisdom (1999), for many countries and the world, the welfare gain of consumers would exceed the welfare loss of producers (due to trade liberalisation), but not by much. “The question of whether, in fact, they should be compensated, and if so, how, is a political question. It is a very important question (Wisdom, 1999).

According to Buongiorno, et al., (2003), “To judge the environmental implications of further liberalisation, changes in timber harvest can be used as a coarse indicator of impacts on the forests. Based on model projections, aggregate global timber harvest would increase little, as compared to the base scenario in 2010. The expected change in the world timber harvest is the net effect of both increases and decreases in individual countries. Projected timber harvesting would increase most in the former USSR and South America (by about 1% on an average year) and decrease slightly in Oceania and Europe, with accelerated tariff liberalisation.”

According to Tomberlin and Buongiorno (2000) and Sedjo and Lyon (1990), increased harvest in managed secondary forests, especially plantations, is likely to account for much of the net increase in world timber harvest. Taken together, these projections suggest that, at a broad scale, further tariff liberalization in the forest sector would be neutral with respect to some high-profile environmental consequences (harvesting primary forests) (Buongiorno, et al., 2003).

According to Buongiorno, et al., (2003), “Further tariff liberalisation may also lead to positive environmental changes by stimulating increases in manufacturing efficiency in export-oriented developing countries. In addition, trade liberalisation in forest products is most likely only as a part of a broader set of reduction in tariff and other barriers. This may contribute to increasing income and rising standards of living in developing countries, accompanied by decreases in consumption of fuelwood and increases in consumption of other forest products - including forest amenities and attendant conservation measures - along an environmental Kuznet's curve (Raunikar and Buongiorno, 1999).”

Single Country Case: Trade Agreements and New Zealand

It is often important to assess the potential effects of trade liberalisation on a single country. Due to the complex interactions between industrial units, domestic wood and product markets, and international linkages, it is important to have an analytical framework that allows for a whole range of trade flows to adapt to a particular scenario of assumptions.

GFPM model (see e.g. FAO 1997), which was used for ATL simulation above, was used to simulate impacts on a single country, New Zealand. Modifications were made to include bilateral trade flows, to allow better modelling of regional trade agreements. In addition, country parameters were set specifically for New Zealand (Brown, 1997 a,b).

Effects of three alternative scenarios were studied (Brown, 1997 a,b):

(i) P5 agreement between USA, Chile, Australia, New Zealand and Singapore. The tariff rates of 1997, targeted for removal by 2005, are summarised in table 7.1.

(ii) AFTA-CER between ASEAN Free Trade Association (AFTA) and Closer Economic Relations (CER) countries (Australia and New Zealand). The tariff rates of 1997, targeted for removal by differing target years, for selected commodities are summarised in table 7.2.

(iii) GATT (1994) Uruguay Round agreement.

Impacts on Production: The simulation results from all of the three cases indicated an increase in New Zealand production of processed forest products such as newsprint and plywood (compared to no liberalisation). The regional agreement scenarios (P5 and AFTA-CER) indicated a lower roundwood production, while GATT 1994 scenario indicated stable or increasing roundwood production.

Impacts on Exports: The simulation results indicate that the impacts are greater for exports than for production. Export of processed commodities - plywood, veneer, newsprint, and printing and writing paper- increased under all three alternative liberation scenarios. Instead, the primary materials, roundwood, and pulp as well, were lower under the liberation scenarios. The global liberation scenario (GATT 1994) resulted in largest changes in exports.

Impacts on Local Consumption: According to the case simulations, all the liberalization scenarios led to moderate increase in local consumption of most products (Buongiorno et al. 2003). Further, the higher production led to higher fiber consumption. However, the three scenarios differed from each other in the implications of composition of consumption

In the case of New Zealand the basic objective was to increase the value added of the already expanding roundwood supply. The regional agreements, according to these case simulations, actually reduced the primary wood consumption. Instead the global liberalization scenario (GATT 1994) resulted in a moderate increase in roundwood consumption. Thus, only global scheme was open enough for primary supply expansion.

Table 3.9 Tariff Rates of 1997 Targeted for Removal by 2005 in P5 Countries

		Tariff rate (%)
USA	Plywood and veneer	5.0
	Particleboard	0.8
	Fiberboard	0.6
	Printing and writing paper	1.5
	Other paper and paperboard	2.4
Chile	Industrial roundwood	11.0
	Sawnwood	11.0
	Plywood and veneer	11.0
	Chemical pulp	11.0
	Newsprint	11.0
Australia	Sawnwood	5.0
	Plywood and veneer	5.0
	Printing and writing paper	5.0
New Zealand	Sawnwood	8.0
	Particleboard	7.5
	Fiberboard	6.5
	Newsprint	7.5
Singapore	All products	0.0

Table 3.10 Tariff Rates of 1997 Targeted for Removal by AFTA-CER Countries

Core of Forest Governance from a Trade Perspective

The core of forest governance is based on: (i) National forest legislation. (ii) National forest policy. (iii) Government guidelines and instructions for forest management. (iv) National forest, environmental and conservation programs. Most of these elements are in some form in place in most countries. The issue is generally not that the rules would be missing or inadequate, but often there is a lack or insufficient implementation, monitoring and enforcement.

The core of tropical forest governance is enveloped in a number of “softer” or more distant elements, which include: (v) Mechanism of monitoring and evaluation (M&E) (e.g. criteria and indicators for sustainable forest management (SFM). (vi) Voluntary measures (e.g. code of logging practice, forest certification, etc.).(vii) Multilateral environmental agreements (MEAs). For example, use of formal M&E can be very beneficial for controlling the efficiency and effectiveness of the sector, but management and implementation capacity itself becomes easily a bottleneck.

Even if the ecological conditions are different, the challenges of good forest governance are mostly similar in temperate and tropical forests. Key objectives, such as sustainability are the same. Techniques to achieve sustainability naturally differ. The need to render the global forest governance under the same umbrella was recognized by UNCED in its “Forest Principles” in 1992.

Technically, the prerequisites for good forest governance are in place in many areas of the temperate and boreal region. But as is the case with tropical forests, the commitment and success of implementation and enforcement varies. When the key problems in temperate and boreal forests are: forest fires, alien species, atmospheric pollution impacts, orientation and control of small-scale private forest owners, etc., the problems in the tropics include land use changes and deforestation.

Complementary Instruments

As the international environmental conventions and the trade agreements do not cover the whole subject matter of tropical forestry, or do not apply to the specific conditions, a number of complementary measures, often voluntary, have been introduced.

Certification is here given as an example of such “soft” policy instruments (Bass & Simula 1998). Certification has typical characteristics of an instrument, which may complement the range of legal instruments and become a valuable part in the process of convergence towards effective and efficient tropical timber regime. There is a long-standing policy debate over whether governments should be involved in certification.

Policies on Environment and Development

A large number of other policies have a potential impact on the market access of tropical timber. Aggressive development policy, with high growth targets, may liquidate the tropical timber resource base in a manner, which may not be consistent with the sustainability or conservation goals. The overall issue is the internal consistency of the range of policies in terms of their impacts on tropical forests. Land use policies, regional, national and local development policies, industrial policies, fiscal policies and investment policies are among the components, which should be formulated in a manner not conflicting with the sustainability targets.

Linkage of Forest Products Trade and Forest Management

Trade can have impacts on forests through two main channels: 1) through physical volume impacts due to increased harvesting demand for net exports, 2) through economic effects in the form of factor income.

In general, increased net export of forest products of a country increases (or increased net import decreases) the demand for wood raw material. In principle the effect is similar to the impact of increased domestic demand of similar forest products (product mix, however, is usually different).

The increased trade (net export) effect will usually increase the harvesting intensity of the local forests. The size of the effect depends on exact composition of the trade increase, and respective conversion rates of the industrial processes. In addition, the type of cutting is related to the quality of raw material requirements.

To summarise, the volume effect of the trade is related to the basic question on sustainable quantitative wood supply with wood type quality constraints. As such the trade impact is not intrinsically different from domestic impact. The supply response comes primarily as a short-term reaction (typically higher volume and higher price) and secondarily as a long-term supply response. Especially the latter is very intimately related to the sustainability question, and needs a support from a consistent and effective policy for SFM implementation.

The (increased) trade pull effect may be reflected in higher domestic harvesting volumes (and possibly higher log prices). The immediate issue is the maintenance of sustainable levels of harvesting even as short-term gains are possible. The related political issue is if constraints of sustainable land-use and environmental services are maintained.

The extraction of timber or other forest product related for trade can generate important trade income. The income may have positive macro-economic effects: income, employment, balance of payment, and multiplier effects.

From the point of view of trade impact on SFM, the key issue is what happens to the factor income of forest: stumpage, royalty, resource rent, or the financial value of the forest products at the level of forest itself. Ownership, tenure and legacy issues are related to the necessary pre-requisites of economic benefit to forests, or their owners as well as dwellers and people in nearby rural areas.

In case that the necessary requirements are in place to generate value from trade, and to channel it to the economy and to the forestry, a part (but not all) of the important objectives towards SFM have been reached. In a functional SFM, the forest owners get fair resource income from trade, including such government which has implemented a system of effective rent capture and revenue collection. Of course there are a number of hurdles on this way. The opposite case is if the operations are illegal, and the whole value is dissipated, e.g. to foreign or corrupt interests.

The trade effects on SFM can usually be improved by a number of measures. On the forestry side, the SFM measures are similar to the measures in a fully domestic operation. As closed economies are more of an exception in an era of open global markets, there is a pressure towards harmonisation of local national measures. On the trade side, there are a large number of issues and parameters, which can improve the conditions for SFM.

The volume effect is obvious: as long as a dedicated production forest base is under-utilised, any impacts from increased net exports will be positive (assuming that SFM conditions, among others, are met). In such conditions, any restrictions such as local or foreign government interventions, which act as barriers or impediments, cut into the potential welfare.

Elimination of market access constraints can have their impact through allowing a higher utilisation of domestic potential supply. In addition, more open market access can improve the total trade income by eliminating unnecessary cost. The elimination of cost in a competitive market place typically lowers the prices for consumers (at least in local and global competitive markets). In so doing, the consumer's welfare is increasing. But at the same time, elimination of unnecessary cost can increase the producer's welfare as well.

The final scene in the act is played in the forest sector itself. If the trade liberalisation, barrier elimination and trade facilitation increase the potential factor income of forestry, it is the matter of the capacity of the sector to negotiate a fair share and reap the financial harvest through stumpage, concessions, contracts, revenue collection and financial management.

The long-term sustainability is related to the sector's performance in re-investing a fair share of the (highest potential factor income) in the spirit and practice of SFM.

3.4 Market Development of Wood and Wood-based Products

3.4.1 Distribution and Dynamics of Forest Product Markets

Shifts in supply and demand

The drivers, which continue expanding the required volume in forest based commodities, include the following:

• Increasing global demand for a wide range of commodities and services

• Decreasing barriers and impediments, which open markets for competition

• Increasing share of production entering international trade

• Increasing domestic demand for wood raw material

• Increasing domestic demand for wood based fuel for energy

• Increasing demand for services, such as carbon and bio-diversity

The drivers, which continue increasing the value added, and simultaneously decreasing the relative value of basic production from natural forests, such as in the tropics, include the following:

• Decreasing real prices of commodities at consumers

• Increasing relative costs of such components as labour and energy

• Increasing competition from plantations

• Best available technology gets transferred through investments

• Foreign direct investments are channelled to best opportunity areas

• Illegal harvesting and trade, without compensation to forestry

To summarise, the factors above make small, export dependent countries especially vulnerable. Especially developing countries, which depend on exports, can only maintain the real export income level by increasing volumes. This puts extra burden on maintaining the sustainability of forest management. Only a well-developed forest governance system can successfully balance the trade impacts and SFM.

The attempt of the quantitative data analysis was to capture the overall shifts in the markets. The prices were ranked in increasing order and cumulative trading volumes were calculated. The results have been plotted in these figures. As the volumes and prices both react to demand and supply shifts, this was used as a method to visualise the overall shifts in the market. In these figures, the total annual sales value (at importers) is represented by the area under the curve.

The overall impact of above-mentioned drivers can be observed in the market shifts in several forest-based products. As was stated above, it is likely that the natural forests, especially export-dependent tropical forests, are especially vulnerable to such global market shifts. Figure 3.38 illustrates this type of global phenomenon. The market demand for roundwood was growing strongly in the 1980-2002 period, and traded volume was expanding during that period, it did so at the expense of prices.

Figure 3.38 Shift in Roundwood, Tropical and Non-tropical, 1980 to 2002

Figure 3.38 illustrates how the global export supply of roundwood has been growing, rather dramatically, by 30 million cubic meters by volume, while the real price (in 2002 USD) has dropped very strongly. The overall shift has been divided into tropical and non-tropical components. Tropical is getting more scarce but not more expensive, while non-tropical is expanding and getting clearly less expensive.

Figure 3.39 illustrates how the global export supply of sawnwood has expanded. The expansion has mostly taken place in the non-tropical (mostly softwood) markets. New efficient sawmilling capacity has emerged typically at the supply price levels of USD 160-180 per cubic metre of sawnwood.

Figure 3.40 demonstrates how the global export supply of wood based panel has expanded. This has taken place both in tropical and non-tropical producer countries. The tropical expansion is very particular, as the supplies have expanded at almost homogenous supply prices, indicating a major boom in relatively similar conditions.

Figure 3.39 Shift in Sawnwood, Tropical and Non-tropical, 1980 to 2002

Figure 3.40 Shift in Wood Panels, Tropical and Non-tropical, 1980 to 2002

Changes in directions of trade

Table 3.11 Change in Directions, Tropical sawnwood 1996 to 2000

Table 3.11 illustrates the changes in directions of trade, which have occurred in the period 1996 to 2000. The expanding trade flows have been highlighted in green colour, and decreasing flows in pink colour. In the middle remains an area, which is the most turbulent. These are the flows, where otherwise expanding exporters make an exception and reduce there trade to those particular destinations. And it includes importers, which otherwise expand their overall imports but for some reason decrease their buying from particular source countries.

Changes in sensitive and dynamic markets

Chinese Markets

China has increased its wood imports very fast during recent years, especially in 1999. In the year 2000 China already imported more than 13 million m³ of logs, of which 6.4 million m³ of softwood logs and 7.2 million m³ of hardwood logs. Tropical log imports were at 6.1 million m³, or 85% of the total hardwood log imports. The tropical log imports to China continued increasing in the year 2001, reaching 7.3 million m³. Thus the tropical logs have had an excellent market performance in China.

The patterns of Chinese consumption of imported raw material and semi-processed materials (such as sawnwood) are explained, in part, by China's expanding exports of wood products. So, it is important to note that an important share continues to third markets in the form of value added products.

In 2000 China imported 3.1 million m³ of hardwood sawnwood. Almost 2.0 million m³of this volume was tropical, the remaining 1.1 million m³ was from temperate and boreal sources. In the period of 1997-2000 tropical sawnwood maintained its market share (at 62-64%) in the Chinese imports. This does indicate competitiveness of tropical sawnwood in the Chinese import markets, and likely non-existence of high barriers or impediments to market access.

Figure 3.41 illustrates the Chinese tropical timber imports by value share. The value shares show a dramatic decrease in the degree of processing. Logs in 2000 make over 40% of the total value of Chinese imports of tropical timber. Other primary processed timber products make over 50% of the import value, the value of SPWP is under 5%.

As illustrated in the previously, the tropical (and developing world) trade has been fluctuating widely both due to global economic cycle, and in terms of its relative market share. Some of the main reallocations of the forest product trade from developing countries have taken place in Asia. After a very strong expansion of Asian plywood and sawnwood capacity and exports, the importers relative shares have changed as well. Mainly China has increased its share while the largest importer, Japan, has decreased its imports somewhat.

Figure 3.42 illustrates the development of the share of tropical sawnwood in the hardwood sawnwood consumption in China. The tropical sawnwood has been a very small player in China, until recently. The consumption share of tropical sawnwood increased slowly until 1996, after which the tropical share increase dramatically, from under 5% to almost 30% of hardwood sawnwood consumption. Figure 3.43 illustrates that the increase in the Chinese imports of plywood has not been covered by all sources in a similar manner. Instead, the share of tropical plywood has decreased, while plywood from other sources has increased its share.

Figure 3.41 Value Shares of Tropical Wood Products in Chinese Imports

Source: Annual Reviews and Assessments, ITTO 1996-2001

Figure 3.42 Tropical and Other Hardwood Sawnwood in China, 1980-2000

Source: Annual Reviews and Assessment of ITTO, FAOSTAT, consultant estimates

Figure 3.43 Shares of Tropical and Other Plywood in China, 1980-2000

Source: Annual Reviews and Assessment of ITTO, FAOSTAT, consultant estimates

Japanese Markets

Figure 3.44 illustrates the value shares in the Japanese tropical timber imports in 1995-2000. The structural change has been quite fast. The value share of logs has dropped from 27% to 15%. The value share of plywood has increased from under 40% to 50%. The value share of sawnwood has slightly decreased to about 10%. Most importantly, the value share in SPWP has increased from 15% to 25% of tropical timber import value in five years.

The Japanese tropical log imports have declined from 5.8 million m³ in 1997 to 2.1 million m³ in the year 2001. Tropical sawnwood imports decreased from 1.1 to 0.6 million m³ in the 1997-2001 period. Tropical plywood imports to Japan have remained on a high level (4.8 and 4.5 million m³ for 1997 and 2001, respectively).

Temperate and boreal hardwood logs have maintained an important and stable import market in Japan, varying in the range of 0.4-0.6 million m³ in 1997-2001. As the tropical log market has declined, the relative share of temperate or boreal hardwood logs has increased from 9% in 1997 to 18% of hardwood log imports to Japan, in the year 2001.

Figure 3.44 Value Shares of Tropical Wood Products in Japanese Imports

Source: Annual Reviews and Assessments, ITTO 1996-2001

The analysis of temperate and boreal hardwood sawnwood development is somewhat difficult, as the statistics tend to differ. However, the indications are that the temperate and boreal hardwood sawnwood has maintained its markets quite well, while the tropical hardwood sawnwood market has declined in Japan since the year 1997. In the hardwood plywood markets, the role of temperate and boreal hardwoods is almost negligible in Japan.

In conclusion, the part of the Japanese sawnwood and plywood production, which uses temperate hardwoods, has been declining, but more slowly than tropical log based production. The consumption and imports of temperate hardwood sawnwood and plywood seem to have maintained their levels rather well in 1997-2001. The structural adjustment in the past decade has not been as drastic as that of tropical sawnwood and plywood trade. In tropical plywood, the competitive edge has clearly shifted and stayed with tropical supplier countries.

3.4.2 Consumer and Distributor Actions and Campaigns

Market abstinence: campaigns and boycotts

Campaigns and boycotts are tools to encourage consumers to abstain from the purchase of products not deemed to meet certain legal, environmental and social criteria. Campaigns are issue-based plans of action aiming to raise consumer and government awareness of perceived injustices and players not meeting their global environmental obligations. Campaigns use many tools to get their message across including publicity, dialogue through policy processes, and petitions. The fundamental objective of consumer boycotts is to restrict consumer demand for the boycotted products to an extent that imposes economic hardship on the producer. The boycotting group hopes to induce the producer to change their behaviour and often, to influence policy decisions in both the public and private sector. Greenpeace activities for the promotion of SFM include campaigns for example against:

• Germany's biggest public bank to protest against rainforest destruction and contamination caused by German investment in an oil pipeline that runs through Ecuador's Amazon rainforest.

• Danish-owned companies which continue to import timber products from Liberia calling for the public to send letters of halt the import.

• Dutch companies to stop the imports from Cameroon of timber products, which are thought to be illegally logged. Furthermore, in June 2003, Greenpeace has called for a boycott of all timber products originating from Indonesia in response to the high levels of illegal logging known to be occurring.

Box 3.2 The Impact of Consumer Boycott - Experience from Ghana

Despite raising awareness of some critical issues, and influencing consumer behaviour, boycotts and campaigns can influence the ability of those targeted to respond to such criticisms and indeed may have an adverse effect on SFM.

It is almost impossible to definitively extract the trade impacts of boycotts, from the many other market factors. One of the effects of a boycott, and perhaps intentionally so, is the reduced economic potential of forests. Lowering incomes reduces incentives to protect and manage tropical forests, which results in increased rates of deforestation as the land is converted to more profitable uses. Without other incentives, this is very much the case in developing countries with little access to capital. NGOs such as WWF are increasingly recognising the devaluing effects of boycotts on forests in developing countries and are looking to more positive incentives, such as certification, to value sustainable forest management.

Retailer and wholesaler actions

The verified commitment to and system of improvement is designed to allow enterprises working towards certification to gain access to the market, providing an incentive. This is already bearing fruit - B&Q in the UK is already willing to consider buying wood products from members of the TFT despite a very strict preference for FSC certified products in its Timber Buying Policy.

The promotion and support for step-wise approaches links closely to the issue of legality of timber. Many countries are beginning to look for ways of differentiating and excluding illegally produced timber from entering. The first step in verification of progress towards SFM is to prove legality - otherwise there is no point an enterprise going forward to invest in SFM, and potentially no way of getting wood imported. An independent verification of legality is clearly attractive, even though no actual product label is likely to be possible.

Buyers and trade supporting producers: A Buyer's Group is a network of companies and organisations all committed to an agreed vision or set of principles which influences how they buy (and sell) products. WWF has been actively working in partnership with governments and private sector, particularly in the large producing and consuming nations, to help create demand and supply for sustainably managed forest products, through its the Global Forests and Trade Network (GFTN). The Network includes over 800 companies in 19 countries committed to producing, trading or purchasing certified timber and products and is thought to be responsible for more than half of the demand for certified products.

For example, WWF has recently joined forces with IKEA in a three-year program, carrying out forest projects that will contribute to the development of global toolkits on forestry issues and promote responsible forestry in Russia, China, Romania/Bulgaria and the Baltic countries. The GFTN is partway through a study to see how they can make the step-wise approach work.

The concept of Producer Groups is as a network of producers and other organisations, which can support each other in a common vision towards improved production methods (i.e. SFM). The WWF's GFTN includes producer groups as well as buyers, and aims to help create markets for legal certified timber, through improving both supply and demand.

At present WWF/GFTN supports the FSC certification scheme, as the only credible form of forest certification. However, it recognises the role of other certification systems and there is scope for change through the process being undertaken to seek dialogue and assess which other schemes meet FSC standards.

Whilst not a buyers group, an influential group affecting buyers decisions is the US-based Good Wood Alliance which compiles and annually selective list of suppliers from both certified and non-certified sources.

Other initiatives include the TFT, which brings together traders and producers of tropical timber in its membership. It actively promotes a supportive approach between the two, with several examples of producers working to support producers in order to get a certified timber supply. The TFT embodies a pragmatic approach, and also supports the emergence of step-wise certification.

There are also individual examples of buyer companies supporting development of their suppliers. Finnforest has an initiative in which they are working directly with an Indonesian supplier on developing their standards of practice. They see this as a way of avoiding trade barriers (such as boycotts of Indonesian timber proposed by NGOs and indirect barriers of them not being certified), whilst ensuring they reach targets and commitments for trading sustainably produced products. They are also looking at similar arrangement with suppliers in Brazil.

This is a commonly emerging story - buyers are now realising that to sustain their supply line they need to invest in and support it. The rapid development of the TFT also demonstrates this trend. Whilst this trend is encouraging, it is important to note that it is typically only happening for supply-short products (i.e. tropical timber) - there is no evidence of such support to smaller producers for example in the UK.

3.4.3 Criteria and Indicators for Sustainable Forest Management

Developments in forestry over the past decade have focused on progress towards sustainable forest management (SFM), an approach that encompasses environmental, economic and socio-cultural objectives of management in line with the “Forest Principles”. These were adopted at the United Nations Conference on Environment and Development (UNCED) in 1992 and the proposals for action adopted by the Intergovernmental Panel on Forests (IPF) and the Intergovernmental Forum on Forests (IFF). The specific toolbox developed to describe and help monitor progress (or lack of it) towards SFM, in particular at the national level, is called criteria and indicators (C&I). The development of this tool within regional country-driven initiatives started prior to UNCED, by the International Tropical Timber Organization (ITTO) to demonstrate members' commitment to achieve sustainable management of tropical forests. It has spread world wide since.

At the international level, C&I has been recognised widely, including in IPF/IFF/UNFF, ITTC, COFO, Conference of the Parties to the Convention on Biological Diversity and it has also been brought to the attention of the WTO Committee on Trade and Environment. Currently, it appears prominent among the only few common denominators in the international forest policy deliberations. It is increasingly used as a systematic tool to guide practical action towards SFM and to monitor progress. Consequently, it can also have many implications to trade, market access and certification in particular.

While international trade of forest products is regulated through WTO and regional trade agreements as well as ITTA, sustainable forest management is not. There is no legally binding international instrument on forests and international guidance to countries is provided by “soft law” means, such as the Forest Principles and proposals for action agreed by IPF, IFF and UNFF. In addition, regional political commitments to SFM guide national actions. These processes include the following:

• The Central American Forest Convention and associated Lepaterique Process on C&I.

• The Ministerial Conference on the Protection of Forests in Europe (MCPFE) and associated Pan-European Process on C&I.

• The Conference of Ministers in Charge of Forests in Central Africa (COMIFAC, also known as the Yaoundé process).

Non-tariff barriers, and whether or not certification counts as such, have not been widely discussed at WTO. Certification has been adopted enthusiastically in some quarters, notably by many environmental non-governmental organisations and also some governments, particularly in developed countries. However, it continues to be perceived by many developing countries as a trade barrier that reduces their competitiveness, in particular in Africa.

Criteria and indicators to evaluate and to implement sustainable forest management

The broad introduction of the concept of sustainable forest management can be traced to the Forest Principles and Chapter 11 of Agenda 21, adopted at UNCED in 1992. Principle 2b specifically states that:

“Forest resources and forest lands should be sustainably managed to meet the social, economic, ecological, cultural and spiritual needs of present and future generations.”

It goes on to specify that: “These needs are for forest products and services, such as wood and wood products, water, food, fodder, medicine, fuel, shelter, employment, recreation, habitats for wildlife, landscape diversity, carbon sinks and reservoirs, and for other forest products.”

And further: “Appropriate measures should be taken to protect forests against harmful effects of pollution, including air-borne pollution, fires, pests and diseases, in order to maintain their full multiple value.”

The concept of SFM has continued to evolve since 1992 through the international forest policy dialogue (IPF/IFF/UNFF) and a large number international and regional initiatives and meetings aimed at describing SFM, translating the concept into practice and elaborating a tool to measure progress, in particular through the C&I. C&I form a tool for assessing trends in forest conditions and forest management. They provide an implicit definition of what sustainable forest management means and a common framework for describing, monitoring and assessing progress towards SFM. C&I approach forests as eco-systems, which provide a wide array of environmental, economic and social benefits to society.

National-level criteria define the range of forest values to be addressed and the essential elements or principles of forest management against which the sustainability of forests may be assessed. Each criterion relates to a key element of sustainability, and may be described by one or more indicators. Indicators measure specific quantitative and qualitative attributes (and reflect forest values as seen by the interest group defining each criterion) and help monitor trends in the sustainability of forest management over time.

Nine eco-regional forestry processes involving 149 countries, whose combined forest area equals 97.5 percent of the total forest area in the world, have been established since 1992 for the development and implementation of criteria and indicators. Most of them meet on a regular basis to refine the concept of sustainable forest management through the development of criteria and indicators, and to follow up progress through country reporting. The nine C&I processes were established by forestry-related governmental representatives, agencies and institutions, in many cases involving NGOs. (FAO, 2003a)

Criteria and indicators have many applications, including as a framework for setting goals, facilitating and monitoring sustainable forest management and the effectiveness of national forests programmes and policies, strategic planning, communicating progress to policy makers and the public and building bridges among stakeholders (CICI 2003).

In addition to guiding national forest policy making, other areas where C&I is used as a guiding tool are forest management planning, implementation and evaluation, including operational level guidelines, model forests and forest certification. Also the IPF (1997) emphasised multiple roles of the C&I tool, including its potential to clarify issues related to forest certification and marketing of forest products even though C&I are not performance standards. (CICI 2003; Rametsteiner and Wijewardana, 2002)

The European example demonstrates the wide use of the C&I tool. The Pan-European Criteria and Indicators, developed under the Ministerial Conference on the Protection of Forests in Europe, are considered an instrument for measuring and reporting progress towards sustainable forest management in Europe as a whole. It is based on the commitments (resolutions) made at the Helsinki ministerial conference in 1993 on sustainable management and conservation of biological diversity in European forests. On the basis of these C&I, a complementary instrument, the Pan European Operational Level Guidelines (PEOLG), was also developed and adopted in the Lisbon ministerial conference in 1998. These guidelines are designed for sub-national application at a practical level and represent a common framework of recommendations for sustainable forest management that can be used on a voluntary basis. They contain specifications for performance of forest management and were later adapted as the regional framework for voluntary national certification standards endorsed by the Pan European Forest Certification system. (Rametsteiner and Wijewardana, 2002)

The conceptual development of C&I has gone a long way since UNCED. This has taken place through criteria and indicator processes, complemented by a number of intergovernmental meetings such as the FAO/ITTO expert consultation in Rome in 1995 and the International Conference on Criteria and Indicators for Sustainable Forest Management (ISCI) in Helsinki in 1996. The process continued in the International Conference on Contribution of Criteria and Indicators for Sustainable Forest Management (CICI 2003) in Guatemala City, and subsequently as IPF/IFF/UNFF recommendations on the development and implementation of C&I.

CICI-2003 gathered representatives from all of the above processes, government officials, international organisations, including NGOs, and experts in the field. It demonstrated a much increased understanding of the issue of sustainable forest management and its potential contribution to wider issues of development and the place and role of criteria and indicators as tools for reaching and monitoring SFM with a view to improved policy and field level practices.

Indicators among the nine eco-regional initiatives vary widely owing to differences in forest types and environmental, social, economic, political and cultural conditions. On the basis of earlier recognition that the sets of criteria in all nine processes are very similar, the conference agreed - first time ever at an international forum - that SFM comprises the following common thematic areas:

• extent of forest resources

• biological diversity

• forest health and vitality

• productive functions of forest resources

• protective functions of forest resources

• socio-economic functions

• legal, policy and institutional framework.

At the global level, the future (2005) Global Forest Resources Assessment will be largely structured according to the above thematic areas, yet providing its own set of globally compatible variables. Thus clear linkages have now been established between politically defined broad goals for SFM (the thematic areas) in various regional C&I processes and the forest resource assessment (FRA) as an existing reporting process on forest resources.

National-level criteria and indicators are being complemented by the development and implementation of criteria and indicators at the forest management unit level in a number of the processes as well as by other actors such as NGOs and the private sector. The major driving force for the development of C&I at the forest management unit level is certification.

The degree of implementation of criteria and indicators at the national level varies considerably. Many countries around the world have developed their own national criteria and indicators on the basis of the regional set; collect data for indicators; and use them to report on the status and trends in their forests and forest management. This information helps guide and monitor forest policy development (national forest programmes) and management practices; and is also used for promotional purposes (such as certification); and to international reporting purposes (e.g. Ministerial Conference on the Protection of Forest in Europe, ITTO etc.).

Although the usefulness of C&I is recognised world wide, in many developed countries, action is limited by the lack of trained personnel or institutional capacity for collecting and analysing information and for following up the development and implementation of improved management prescriptions based on the information obtained.

Relationships between criteria, indicators and certification

Despite the different levels of implementation, criteria and indicators have helped clarify and build consensus on the concept of SFM. They have establish a framework for monitoring process in implementation and the effect of action, which has been recognised by various forums, notably by IPF/IFF and UNFF.

Forest certification, although not yet widely applied in developing countries, is a market-based tool for third party auditing of sustainable management practices in production forests. In January 2002, the world had 109 million hectares of certified forests (2.8 % of the world's forests). Greatest interest in certification continues to come from Europe and to some extend North America. The Pan-European Forest Certification (PEFC) scheme and the Forest Stewardship Council (FSC) are the two main international certification schemes. PEFC only covers Europe. FSC, the Malaysian national certification scheme, and Kerhout are the main certification schemes operating in the tropics. (Atyi and Simula, 2002)

Setting up an appropriate relationship among SFM, C&I and certification can produce a greater commitment to forest and forest management by different actors and interest groups. For example, ITTO's C&I training and field testing showed that a major motivator for many countries/forest managers in collecting data for indicators was the desire to eventually seek certification of their timber products. (Johnson, 2001). The broad objectives of certification and C&I are identical; to promote good, sustainable management of forests. There are also many differences between these two concepts, especially regarding scale, purpose and participating actors.

The scale of C&I frameworks range from national to forest management unit FMU level. Forest certification is mainly concerned with the sub-national, particularly FMU, level. Purpose: Criteria and indicators provide a means to measure, assess, monitor and demonstrate progress towards achieving the sustainability of forests in a given country or in a specified forest area, over a period of time. On the other hand certification is a means to certify the achievement of certain, pre-defined standards of forest management in a given forest area, at a given point in time. Being a descriptive tool, C&I are not intended for assessment of the performance of forest management, whereas forest certification is based on prescriptive standards (that can be based on C&I). C&I contain no targets or performance expectations, while certification is an assessment against performance standards. Actors: While the elaboration of C&I is often led by governmental bodies, forest certification standards and systems are set up by private bodies. (Simula, 2002)

In many countries and in many certification schemes regional or national criteria and indicators have been used as the basis or starting point for certification, when developing standards or guidelines for performance at the management unit level (see Box 3.2). Many C&I based certification schemes have also taken note of the Forest Stewardship Council Principles and Criteria and made efforts to ensure a degree of compatibility. C&I based certification is driven by many forest owner, industry and government representatives, whereas many environmental NGOs representatives continue to stand behind FSC and other schemes that are based on their own principles. CICI 2003 encouraged voluntary approaches, such as certification schemes, to use criteria and indicators as a useful reference in promotion of monitoring sustainable forest management (CICI, 2003)

Box 3.3 Examples of Use of C&I in Certification

Implications of criteria and indicators to trade

The international trade in wood and non-wood forest products affects sustainable forest management both positively and negatively. Difficulties in realising positive impacts from trade are related to barriers on trade liberalisation, access to market and internalisation of environment-related costs. Trade liberalisation, accompanied by sound environmental and social policies, could have positive impacts, since sustainable forest management has the potential to promote economic development, contribute to poverty alleviation and reduce environmental degradation on a long-term.

Debates on trade and SFM continue within the negotiations of a new International Tropical Timber Agreement (ITTA), implementation of the World Trade Organization (WTO) Doha Declaration, UNFF, regional trade agreements and national trade policy making. Key issues on the trade-SFM agenda include illegal trade, certification and labelling, public procurement, valuation of forest products and services, traditional forest related knowledge (TFRK), alien species, and trade in endangered species. IPF/IFF/UNFF has not as yet found a solution to increase market transparency in order to improve market access for forest products and services, including those coming from sustainably managed forests. It is worth noting, though, that during the recently started preparatory negotiations for the new ITTA, many countries have expressed their interest in including C&I in the new agreement.

As WTO does not explicitly deal with forest product trade, national issues have a greater effect on forest policy development than do international concerns. These include national forest programmes, forest tenure, sector rules, subsidies and logging bans. An example is the 10-month (in effect since 7 July 2003) ban on the import of all round logs and timber products originating from Liberia, prompted because the Government had not shown that revenue from the timber industry was used for legitimate social, humanitarian and development purposes (UN, 2003). China as a major consumer of wood, is another example where in part due to the logging bans the country has recently shifted from timber exporter to importer. These and many other examples of logging bans clearly indicate lack of adequate measures of SFM and means to report on trends in forests and action taken.

The potential of C&I as a systematic tool to help evaluate progress towards SFM is strong, in particular after the international recognition of common thematic elements (criteria) of sustainable forest management in the CICI 2003 meeting in Guatemala. Key emerging trends that have linkages also to forest products trade include:

• Integrating criteria and indicators into national forest programmes, as recommended by IPF and CICI 2003.

• Using common thematic elements (criteria) as a structure for global reporting in global FRA.

• Using C&I as a basis or reference to set standards in certification.

The examples of successful uses of C&I and the benefits of this tool in promoting and achieving sustainable forest management should be further communicated to those fora that deliberate on trade and SFM including WTO/CTE, ITTO, COP of CBD and UNFF. This would likely speed finding solutions to increased market transparency in order to improve market access for forest products and services, especially those coming from sustainably managed forests.

3.4.4 Certification, Labelling and Other Market Instruments

Purpose and forms of certification

Certification is a procedure by which written assurance is given that a product, process or service is in conformity with certain standards (see ISO, 1996). Although different definitions and categories of certification exist, main types of certification schemes distinguish between first, second and third party certification as well as between system-based and performance-based certification schemes (table 3.2). Many, but not all certification systems provide labels for certified products or services. A certification label or symbol is indicating "that a product, process or service has been certified against a certain standard" (Dankers, 2002).

Table 3.12 Basic Principles of Certification Systems

Certification principles	Definition	Examples
First party verification	Internal assessment of production systems and practices.	Sustainable Forestry Initiative (SFI), business ethics standards, company standards, codes of practice, codes of conduct)
Second party verification	Assessment of a second party (e.g. customer or trade associations), who assess the company according to contractual obligations.	EU Regulation 2092/91, public procurement policies
Third party verification	Independent assessment of a separate accredited third party	International programmes such as the Forest Stewardship Council (FSC), the Pan-European Certification Framework, PEFC) and various national programmes.
Standards	"Documented agreements containing technical specifications or other precise criteria to be used consistently as rules, guidelines or definitions of characteristics, to ensure that materials, products, processes and services are fit for their purposes" (ISO, 1996).	Standards by various accreditation and certification bodies.
System-based standards	Focus on the process and evaluate whether specific systems are in place, which allow organisations and/or producers to achieve their (performance) objectives.	Environmental management systems ISO 14001/14004, Social Accountability 8000, SFI, Pan European Forest Certification Scheme (PEFC) Canadian Standards Association (CSA)
Performance-based standards	Focus on the outcome, the quality of goods and/or services, which should be in accordance to defined standards.	FSC, Rainforest Alliance/SmartWood, IMAFLORA, CFV, ERA, WWFMedPO

Source: Adapted from Walter (2001)

SFI, PEFC and CSA are mainly system-based certification schemes, which include some performance-based standards (Fern, 2001). Third party certification is defined by ISO as a "person or body that is recognised as being independent of the parties involved, as concerns the issue in question” (Carey, 2000).

PEFC is mainly based on the Pan-European forest process on criteria and indicators for sustainable forest management (Fern, 2001). Major inter-governmental processes or initiatives on criteria and indicators for sustainable forest management, covering some 150 countries, are documented by FAO (2001b).

Environmental management systems

A number of Environmental Management Systems (EMS) verify the progress of a company towards environmental commitments. One major EMS scheme relevant to the forestry sector is the 14000 series provided by the International Organisation for Standardisation (ISO). These standards assess and verify what companies are doing about applicable regulatory requirements and to reduce its impact on the environment. ISO is a process-based approach that verifies that the company is working to continually improve its environmental performance and allows entry at any level. ISO 14000 is expanding and experiencing considerable popularity in countries such as Japan, the UK and Sweden.

Table 3.13 ISO Certificates Issued in Forest Based Industry Sector

Source: ISO website

The statistics are not indicative of a significant trend in forestry corporations of using ISO standards but for those operations of an international nature. The flexibility in using an ISO-type standard makes it quite attractive to international corporations and those supportive of stepwise approaches to certification.

Fundamentally what sets ISO aside from forest management certification is that the emphasis is on a process model of continuous improvement of company systems (vs. forest management itself). There are neither benchmark levels of performance which producers or industry members have to meet to become ISO 14000 accredited nor specific forest management standards or criteria. Rather, the ISO standards require the improvement of environmental management systems as a means of reducing environmental impacts.

Achievement of ISO standards can be promoted in company literature but no labelling of products is involved. The marketing advantages are therefore limited in comparison with forest management certification systems. The motivations for introducing environmental management systems or seeking ISO certification are mixed but often reflect a desire to improve efficiency particularly in a context of tightening environmental regulation or increasing NGO and community pressure.

In South Africa, most of the large plantation companies have adopted environmental management systems and some have been certified. Sappi, for example, was one of the first of these to be certified to ISO 14001. Its environment department was looking for the means to provide the discipline required to cope with a changing legislative framework and national and international expectations and to gain management commitment. The advantage of ISO 14001 is that its emphasis on continuous improvement and allows for uptake by a company regardless of its existing management level. Furthermore, its management system framework is familiar to and therefore relatively easy to sell to the senior management.

Forest management certification

The purpose of forest management certification is to provide an incentive to improve the quality of forest management, through auditing forestry practice against specified standards. It is performance-based certification, and unlike ISO, minimum standards must be met before certification can be achieved. It also certifies actual forest management practices - not just company systems - and as such is a sharper tool for promoting SFM.

The 'original' forest management scheme is that of the Forest Stewardship Council (FSC), which was established in response to concerns about tropical forestry in particular, as an alternative to failing government policies (traditional instruments) and to threatened bans and boycotts. There are now a number of different forest certification schemes of one type or another, with the following coverage:

• About 100 million hectares of forest world wide (less than 3% of the world's forest), mainly in developed countries (92% of the total certified forest area).

• All continents with the majority of certified forests in Europe (54%), followed by North America (38%), Africa (3%), Latin America (3%) and the Asia/Pacific region (2%)

• Both international and national forest certification programmes

Since its introduction, the potential value of certification as a tool for contributing to the achievement of SFM, has been recognised. Both the proliferation of schemes and the consequent rapid increase in certified area demonstrates the widespread belief in that value.

Figure 3.45 Certified Forests by Certification Scheme in 2003

Figure 3.46 Certified Forests in 1994-2002 and WB-WWF Alliance Target 2005

Few forest management enterprises would argue that the process of achieving and maintaining forest management certification has improved their forest management practices. Certification demands both achievement of specified, minimum standards of forest management and some level of system against which to verify practice through an audit. Thus, the actual level of improvement (incremental difference) depends on the starting point for each enterprise. The standards required by certification schemes are 'best practice', and mean that almost all enterprises have to make some changes to their operations on the ground in order to achieve it. Key impacts of certification on SFM include the following:

• Environmental impact: An improved approach to environmental issues is widely reported, with better EMS', better monitoring and research, better dealing with bio-diversity issues. The general trend is for a 'tightening up' or consolidation of procedures, rather than wholesale change from 'bad' to 'good' - many enterprises (especially the larger, developed country ones) will at first say that certification has made no difference to the forest operations on the ground, before conceding that the procedures are now better to ensure and record best practice. By contrast, producers in Malaysia have observed that certification criteria guided on the ground practices and keep operators on track

• Social impact: There are widespread observations of better stakeholder consultation and communication, better health and safety systems for workers, and improved attention to all the social groups who might be affected by forest management. In South Africa in particular, the forest industry feels that certification has kick-started improved thinking on social issues, which was previously a significant problem.

• Economic impact: The improved management, monitoring and recording systems have enabled better planning of forest and financial resources, better communication has prevented later problems, certification has improved corporate transparency. In general, enterprises observe better efficiency and consequent cost-effectiveness all-round. Many, especially smaller, enterprises in the UK feel that certification provided a useful management review that improved their business.

Most of these changes link to the audit process itself. Audit requires documented management and monitoring records and plans - not something that all enterprises previously kept, or not in a systematic way. The use of agreed standards of forest management has lead to a shift towards more scientifically rigorous models of forest management (especially for smaller and community forestry enterprises, especially developing countries). In addition, the process of standard setting, where it has been done at a national level, has been useful in bringing together wider range of stakeholder interests to discuss the meaning and implication of 'SFM'. This has increased awareness amongst practitioners and has filtered through to policy definition and forest planning - with an assumed trickle-down to practice. Participation in developing standards means that standards are more about 'S' than just 'FM'.

A key observation is that most operations that have been certified say the biggest challenges have mainly been about implementing the systems to aid audit and verification, rather than wholesale change in practice 'on the ground'. Forestry has traditionally been in many cases a practice of management 'from the gut', rather than a systematic operation with clear checks and balances. Standards and performance criteria are new to many operators, who have traditionally relied on a 'feel' for the natural environment. This is especially the case for smaller and less developed enterprises - these variations will be discussed below.

Because certification demands best practice, uptake is generally easier for companies that already have good practice - for example, many companies applying for FSC or PEFC forest management certification already have ISO certification. Therefore the incremental impact on SFM is generally perceived to be limited. The worst performing forestry companies remain 'out of reach' and the minimum performance standard approach of forest management certification seems unlikely to encourage SFM amongst them. Certification has not yet offered incentives to change the behaviour of the bad producers.

However, these are generalisations - the reality in practice depends greatly on the type and location of the enterprise. Forest producers are extremely varied - from large corporate 'fibre factories' to individually and commonly owned land with some trees on it. It is worth looking at some of the different types of forest producers and the circumstances under which they normally operate to analyse how certification impacts on forest management differently.

Comparing large and small enterprises: Relatively few small forest owners are taking the steps to improve SFM by getting certified. In 1999 only 4 percent of FSC certified areas were 'small enterprises', which was causing concern to FSC and discontent and resentment in other players. Main reasons hindering certification of small enterprises are high costs, difficulties in compliance and problems to access information. The cost per hectare or per cubic metre increases with decreasing size of the organisation - the smaller you are, the higher the proportional cost of certification. The cost of USD 1 000 is cited as the minimum cost possible for certification- for small areas of forest or woodland this is clearly very high, and does not yet include any costs of management improvements to reach the standards.

• Compliance - the issue of improvements needed to reach the standards also relates to the appropriateness of standards for the smaller woodlands. Many small woodland owners find the standards difficult firstly to understand (see box) and secondly to implement, as the requirements are more adapted to large forest areas than small ones.

• Access - In countries where there are no active certification working groups, small forest owners cannot easily get access to information about certification or certified markets. They are thus far less likely to proceed with it.

The problems for small forest owners also link to the systems needed for certification. Large enterprises and forest management companies usually have some level of systematic approach to SFM, with procedures, reporting practices and checklists for managers and contractors, which makes audit relatively easy. Small ones tend to manage on a more ad hoc basis, as current circumstances dictate. An analysis of the impact of UKWAS certification in the UK, for example, highlighted that most certified small forest owners previously had few if any systems in place for managing their forest and that this had to change to enable the required audit process. Whilst seen as a worth while thing to do, many had found this a significant challenge and would not have been able to face certification without professional help.

Comparing plantations and natural forests: The majority of certified forests are well-managed plantations (mainly in South Africa) and certified by FSC. Plantation management is typically more systematic than natural forest management. Planning and management towards harvest is in place and it tends to be easier to go through the audit process. Many of the 'sensitive issues' that certification was designed to address, such as forest loss and degradation, and local use by communities, are less of an issue (proponents of FSC had not designed plantation issues into the scheme to start with). In developing countries, the majority of certified forest is plantation - there are very few certified natural tropical forest areas.

Comparing developed and developing countries: The area of certified forests in developing countries is only 8% of the overall total (including all types of third party forest management certification systems).The share of tropical timber producing countries (ITTO members) is less than half a percent, contrasting with North America's 9%. By contrast to the average, 19% of FSC certified forest is in developing countries (Ebaa'a, et al., 2002).

Different countries operate under very different conditions, particularly relating to both management standards and to enforcement/legality issues - the two issues are, of course, linked. Developed country foresters are subject to effective and regulated legislation, whilst in developing countries, even where there may be good legislation, it may not be enforced. Partly due to weak enforcement of legislation, and partly linked to real economic and technological hurdles, the majority of enterprises in developing countries operate to much lower standards. Consequently, achieving the standards required for certification is a much greater challenge. This is despite western perceptions that the intensity of auditing in developing countries is lower. Many people feel that certification schemes have not been designed in a way to allow developing countries to make progress in this field

Box 3.4 Problems in Tropical Forest Management

Source: Ebaa'a, Nussbaum and Simula (2002)

Developing country producers often perceive certification as yet another market requirement imposed by their buyers, they find it difficult to meet and fear it will become a barrier to trade rather than help them export. Having looked at these differences, it is not surprising that biased patterns of forest management certification have emerged. The key imbalances have reflected the scale and location of enterprises reflecting several key issues:

• Economies of scale - costs of getting certified and getting into markets is relatively bigger the smaller you are, and the further you are from the standards. The cost issue has been a major debate as noted in the box below.

• Standards assuming western, scientific approach to forestry - lots of info, requires formal training to understand the standards, non-prescriptive standards means they must be interpreted, standards do not take account of the very different socio-cultural conditions or complex land-use issues in developing countries.

• Assessors' interpretations/bias - often western, technical-forestry focused, not always seeing big local picture.

The issue of the cost of doing SFM - and who is best able to carry it - is important here. Many enterprises in developed countries relate that the changes required to meet certification were limited, more about systems than operational practices, and have not increased costs significantly. Meanwhile in developed countries, some enterprises record cost increased of up to 30 %. The typical and widely observed trend is that producers carry the cost of certification, whilst manufacturers pass it on to consumers.

Consequently, there have been significant recent moves to address the imbalances by overcoming these problems - to make the certification process (the 'tool') something that every forest enterprise can aim for if it wants, and if the market demands.

Making certification work for small enterprises: FSC has addressed this problem by developing the Group Certification approach. This allows small enterprises to come together under one certificate (either forest management or CoC) to allow better economies of scale in terms of fees and monitoring effort. FSC has also taken up the recommendation³¹ of developing a version of the standards specifically for small forest enterprises. This will be required of every national standard development process in order to help understanding, interpretation and implementation of the certification standard by small operations. These efforts have been reasonably successful for FSC - now almost 20% of FSC holders are smaller than 1,000 ha.

Even more dramatic in terms of bringing in small enterprises has been the introduction and uptake of the PEFC and ATFS. Both were specifically designed with the smallholder in mind (though PEFC also covers large enterprises) and now account for 48% of the worlds certified forests. In Finland, around 96% of the national forest area is now certified to one system or another - a significant leap forward for the many smallholder foresters who could not see a way forward under the early FSC approach.

Promoting a stepwise approach towards certification: Certification remains a challenge for developing country enterprises largely because of the 'gap' between their current management standards and the minimum performance standards that certification demands. But the industry has recognised that these enterprises need some incentive and encouragement in order to encourage efforts towards certification. The process of improvement towards being certified takes time and investment, and, without the returns of the access to export markets that certification brings, few enterprises can afford it - they may as well continue selling to markets that do not demand it, and continue 'business as usual'.

To overcome this, some of the certification bodies (e.g. SGS' Certification Support Programme) and other organisations (e.g. Tropical Forest Trust) have begun to develop models for a 'stepwise approach' (or 'phased approach') to certification that can 'reach down' to producers and pull them up gradually. The approach is for a third-party gap assessment followed by an action plan towards certification with the company. The certifier is then monitoring the progress towards the action plan.

Box 3.5 Phased Approach to Certification

Source: SGS website, and Ebaa'a, Nussbaum & Simula 2002.

Supply chain certification

A 'supply chain' is the chain of ownership (or 'custody') of a product from producer, through processors and manufacturers, to distributors and retailers. Labels are the means of letting the market know that goods have been managed according to given standards. They can be tied to certification programmes and used as a marketing tool.

Labelling typically involves getting 'Chain of Custody (CoC) Certification'. This provides an unbroken trail of acceptability that ensures the successive links in the supply chain of forest products, from transport to processing and distribution can be verified to product origin. The nature of the product will determine the level of complexity of supply chain management. For example, the systems for high value wood products such as furniture may be relatively simple compared to the production and certification of particleboard or pulp and paper products where a degree of product segregation will be required. So far, the only forest management certification schemes providing CoC and labelling options are FSC and PEFC.

Bass et al (2001) have undertaken a comprehensive analysis of the impacts of certification on supply chains. Their key findings indicate that certification contributed to the following:

• Increased transparency in supply chains, ensuring certified companies selling consumer products to European and American markets or to businesses and governments now know where their products come from.

• Flow-on effect in corporate mindset - rather than keeping supplier identity confidential for competitive advantage, more companies are making supply chains transparent to reduce threats to corporate reputation.

• Changing purchasing patterns - companies seeking certified products will change suppliers to access such products, but such decisions often also relate to other economic or business imperatives. Certification has diversified the supplier base for many companies, with consumers having more choice from sometimes unexpected origins.

• Sub-sector change, not across the whole industry - the retail sector supply chain, particularly in the softwood sector, there is pressure for suppliers to become chain of custody certified. However, this is not really the case for businesses not supplying retailers or tropical forest managers as there is a much less formal, and to some extent less transparent, business ethos.

Purchasing behaviour in various links of the supply chain has influenced trade in forest products, and when combined with certification, this has a flow on effect to sustainable forest management. However, this has been the case most notably in those operations that do not have to make large leaps to become certified.

Certification, Policy and Trade

Certification was originally intended to be independent of government intervention, as a voluntary market tool to promote SFM. However, the success of certification in encouraging SFM and the influence of policy on a large number of players has meant that there is benefit in government being involved in standards setting. This has been born out by a number of country examples.

Committees set up for multiple stakeholder certification processes have been used as a model for other governmental purposes such as standards setting or national forestry program (NFP) development. In Ghana, where no multiple stakeholder forest forum previously existed, the certification group was used as a model to establish the NFP group.

However, in countries such as Malaysia, Ghana and Indonesia, where government has been extensively involved, certification can be viewed as a means to implement policy, rather than a means to challenge and improve it.

Governments can also influence whether certification is adopted by the private sector. Subsidy structures can encourage the establishment of forestry infrastructure. Lower stumpage fees, forest rents and trade tariffs can also provide incentives. To maintain such benefits, private sector must be actively engaging with the government. The formation of producer and buyers groups provides a powerful lobbying influence on government processes, and provides a point of reference for governments seeking consultation on policy development. Consequently the two groups, when combined with civil society organisations, can be more effective.

Finally, government and local authorities have significant buying power and thus can influence the market through the development and implementation of policies, which encourage the purchasing of products, which meet sustainability and legal criteria.

The benefits derived from certification in forest policy processes have primarily come about through the participatory approach to certification standards and the procedure development, especially where national certification working groups have been organised. The consultative process brings together all actors in the forestry sector to work towards a common objective. The ability to meet regularly over a period of time to develop standards and to conduct audits, builds trust and a shared objective between groups previously thought to have different imperatives. This is certification's primary contribution to sound policy processes.

Box 3.6 Impacts of Certification on Policy

Certification is particularly effective in situations where the policy and regulatory framework is already sound. Whilst the old command and control approach to forestry management is no longer relevant, its building blocks are still required to act as incentives and disincentives. A sound policy framework provides the broad and long-term framework for sustainable forest management and appropriate legislation acts as a “stick” for poor performers. Certification, along with a number of other market-based instruments, can increase the likelihood of meeting policy targets, and reduce enforcement costs associated with traditional command and control approaches.

A critical issue in many developing countries is unclear ownership of forest resources. This often results in a short-term view of resource utilisation, providing limited motivation to support the implementation of forest policy or to become involved in processes such as certification.

There is no clear evidence to suggest that certification can and should be universally applied in preference to other tools for policy implementation. Regulatory, information, institutional, contractual and other market tools are all valid ways of achieving sustainable forest management. The trick is to get the appropriate mix of tools correct, providing a balance of coercion, persuasion and incentive.

Trade in certified products is probably highest in the UK, where market share of certified products is about 25%, compared to less than 5% across the EC, about 4% in the Netherlands, and 1% in Germany and similar in USA. Globally, the ITTO approximates certified products as about 8% of the total, but there is no mention of certification in formal ITTO and FAO trade statistics.

Sawnwood and solid wood products have dominated most of trade in certified forest products. Main markets are in the home improvement. On the other hand little change has taken place in paper or construction markets as yet. Paper has experienced CoC certification problems - though this is easing with debate and compromise.

Some small markets emerging for certified non-wood forest products (NWP) such as fruits, nuts and medicinal plants. NWFP certification is more complex than certifying timber, as more than one product may be assessed in the same forest area, and the requirements of management can be different, and even conflicting. In addition, certified timber production does not necessarily guarantee sustainable NWFP production (and vice versa).

Changes towards certification in forest products are clearly slow in the international trade - mainly due to the perceived and real supply and demand problems. Total demand for tropical timber certainly outstrips the supply of certified tropical timber, for all the reasons highlighted previously. In particular, many producers remain deterred by perceived high costs of certification. Slow progress towards mutual recognition of different schemes also deters further certification, and thus supply and confuses demand.

There is no clear evidence of consistent price premiums, though there are some reports of (mainly temporary) premiums in particular for the tropical hardwoods in short supply. An example is quoted in FSC's newsletter (Mar-April 2003) of a 44% price premium on FSC logs at auction in Malaysia - but this may reflect the context of local/regional prices vs. European prices. In the UK there is evidence of pulp mills paying 1-20% less for uncertified wood.

There is some debate about the justification of premiums - buyers purport to want 'to make sustainable timber sources more competitive than unsustainable timber sources', whilst producers complain that 'people want us to do good forest management but are only willing to pay the same as for illegal logs'. The real problem is that wood products are not priced appropriately to include the environmental and social costs of good products.

However, certification differentiates suppliers in the market place, gives market advantage and influences some customer buying decisions. For example, in the Netherlands there was no traditional trade in Scandinavian softwoods, but due to the government/NGO promotion of certified wood, now Scandinavian softwoods are on the market. Similarly, the UK home improvement store Homebase previously did not buy from South Africa, which is now supplying 10% of its wood purchases, in plantation pine products. It has been observed in the UK that there has been a general shift away from tropical hardwood towards more 'trustworthy' North American and European hardwoods, which are experiencing a significant revival.

Some influences have been less directly attributable, for example, ten years ago in the UK the majority of new window-frames in buildings were made from U-PVC, partly because wood's bad press. Now wood is much more in favour and is in higher demand.

Market growth is constrained by limited supply and demand, limited interest from forest owners, and the proliferation of certification schemes. What are the emergent push and pull factors influencing these patterns?

3.4.5 Codes of conduct and other voluntary initiatives

Codes of conduct

World wide there is an increasing trend for forests to be managed by the private sector rather than the state. Consequently, the private sector is in many places keen to demonstrate their reputation in order to protect and maintain this situation.

Codes of Conduct are an industry initiative that aims to set standards across an industry or company and provides a set of principles by which members of associations/companies agree to behave ('first-party' declaration/certification). Where codes reflect environmental values they can be a very useful tool to support sustainable practices. However, a key caveat is that to be effective the Code must have 'teeth' - the ability to sanction members effectively. Many industry Codes of Conduct do not, or sanctions are not meaningful because membership does not bring tangible benefits (for example access to markets, training, industry information etc) that make them need to stay in the association and comply.

An example of a Code of Conduct is the UK Timber Traders' Federation (TTF), which represents the majority of UK importers. It published its code in 2002 and it is one of the few with effective sanctions. The code states that “members are committed to sourcing their timber and timber products from legal and well-managed forests” and that “Members unreservedly condemn illegal logging practices and commit themselves to working with suppliers and other stakeholders towards their complete elimination”. The Code further states that “independent certification of forests and the process chain is the most useful tool in providing assurances that the timber they deal in comes from legal and well-managed sources” The Code has a Code of Conduct Complaints procedure with sanctions including fines and suspension of membership and expulsion from the Federation.

The UK Code has been used as a model for newer schemes in Africa, Japan, Netherlands and Italy. A number of TTF members have also signed up to the 'Forests Forever' Environmental Purchasing Policy that assesses suppliers to ensure timber importing companies trace their purchases through the supply chain to ensure high forest management standards at source and report annually.

Supply-chain management

Some large companies have established systems to trace the source of the wood they use and to ensure that it has been harvested from well-managed forests. These internal supply-chain management systems have usually been in response to NGO pressure or bad publicity about one of their suppliers. In some cases this approach has been a forerunner of moves to require suppliers to achieve certification. The UK DIY retailer B&Q, after high profile NGO campaigns linking European consumption to tropical deforestation in the late 1980s and early 1990s, stated publicly that it would buy no more tropical hardwoods from Brazil because it could not be sure of its source. Its next step was to develop systems for tracing the sources of all its wood-based products. This was followed by a policy of persuading its supply base to become certified.

Ethical investment funds

A rise in the awareness of and demand for Corporate Social Responsibility (CSR) in recent years has seen an increasing number of large companies becoming concerned about their environmental and social responsibilities. Research indicates that 130 of the UK's top 250 companies produced environmental reports in 2001, of which 70 included social and ethical performance. Companies are beginning to see the link between their financial performance and how they deal with sustainable development and CSR.

Responding to such pressure, markets have developed for 'ethical investment funds'. These are investment funds, which allow investors to select or exclude certain industries from their portfolio (for example, exclusion of tobacco companies, animal testing, biotechnology, etc.). Since 2000, in the UK occupational pension fund managers have been required to disclose the extent to which they take into account social, ethical and environmental considerations when they make investment decisions. However, a pension industry review suggests that this has had limited impact to date as few funds have yet to invest 'responsibly'. In addition, relatively few forest management organisations are registered on the major stock markets for investments and thus are not likely to be influenced by these pressures, unless their buyers are.

It is difficult to assess the impact of ethical investment funds on forest product trade patterns and forest management. In general, this type of fund invests mainly in established companies listed on developed country stock markets and invests very little in developing country companies. They are unlikely to invest in or have much influence on companies engaged in natural forest operations in the tropics. As the forest sector globalises and foreign direct investment increases their influence is likely to grow. At present, they are important as one of a number of factors, which together will influence company behaviour. The South African forest product company, Mondi, was affected by the London listing of its parent company, Anglo American. This introduced stronger pressure from shareholders and more stringent reporting and disclosure requirements. This increased investor scrutiny was one of a number of factors which in addition to market pressure, prompted Mondi to seek FSC certification for its forest operations.

More direct impact can be expected from socially responsible venture capital funds, which provide larger amounts of capital for company start-ups and expansions. Specialist Timber Investment Management Organisations (TIMOs) raise money from institutional investors to manage a portfolio of forest properties and are important players in the US. As timberland investments tend to move counter-cyclically with stocks and bonds they constitute an effective way for institutional investors to diversify and reduce risk. These organisations typically adopt a policy of sustainable forest management and several of them are looking beyond the US to investments in emerging markets. For example, the investment made by GMO in the company Gethal in the Amazon, Brazil, was conditional on a strategy to obtain forest certification. However, investment by the TIMOs in natural forest operations in the tropics is relatively rare. Their preference is for plantation forests in temperate countries with low political risk. UBS Timber Investments which manages over USD 1.3 billion focuses on Argentina, Australia, Chile, New Zealand and Uruguay.

Environmental liability

Provision of bank finance to companies making investments abroad or launching a new type of activity has typically been preceded by an analysis of both commercial and non-commercial risks, with the extent of political risk often being a deciding factor. Increasingly, commercial banks are incorporating environmental assessment into their due diligence provisions

The need for this has been highlighted by the case mentioned earlier of the pulp and paper sector in Indonesia. The international banks involved did not adequately assess the risks related to timber supply and social conflict. In some cases, this was because export credit agencies guaranteed the companies' loans.

Corporate social responsibility

Environmental niche markets for forest products are growing - in Europe and North America in particular, although social niche markets remain small. These markets increasingly are shaped by 'soft law', such as certification, which is scrutinised by civil society. Product chain-of-custody information is also becoming increasingly important as buyers, manufacturers and producers attempt to send signals through the supply chain about market demands and sustainability.

Until recently the social responsibility of a major forestry company ended with its formal obligation to pay royalties and taxes and perhaps cash compensation to communities for lost assets, a few jobs and perhaps the construction of schools and health clinics. Yet a few big companies involved in forest trade are paying more attention to a wider group of stakeholders. It is widely claimed that companies practising corporate social responsibility have a number of financial benefits, which ultimately affect the returns and risks for investors. Typical arguments include:

• Clean technologies are usually more efficient. Similarly, good working conditions can lead to higher productivity and fewer disputes with labour unions and make it easier to attract and retain employees.

• Changes in legislation (e.g. tightening regulations) or changes in rules on liability for damage can imply significant costs and companies that can prepare for regulatory change will have a competitive advantage.

• Less risk - Companies with good environmental and social performance are likely to be perceived less risky by financial markets, which tends to reduce capital cost and insurance premiums.

• Secure markets - compliance with environmental and social standards can secure markets, and occasionally higher prices.

• Public reputation - this can affect the company's social licence to operate, reducing the time required to secure government approval of, and community support for, new developments or expansion.

In many developing countries, the first two factors are less relevant as enforcement of legislation is weak and consumers are interested primarily in price and quality alone. So the argument hinges on the financial implications of company reputation at local, national and international level.

The most common reason for not specifying and using certified wood is 'there is not enough supply'. But it is clear that without increased demand (market pull) the benefits of certification will not materialise, and without support, many producers will turn to easier markets rather than invest in improvements towards SFM to enter 'green' markets (market push).

The pull factors include procurement policies, buyers groups, consumer demand, price premiums, and preferential market access. The push factors include efforts to make certification more accessible (group and stepwise certification) and support to producer and trade groups (like the GFTN).

Key trends in pull factors: The UK's Timber Trade Federation predicts that government procurement policies (linked to illegal timber issues) could significantly change the pulling pattern - potentially involving 20% of UK timber industry. In addition, lots of architects working in private as well as public sector are now asking for advice on sourcing of sustainable timber. Similar patterns are emerging across Europe and North America.

Domestic markets in producing countries are also critical to the 'pull' - where there are strong domestic markets (e.g. Brazil and India), producers may feel export is unnecessary and therefore avoid certification. Without domestic demand for certification, certification is unlikely to have an influence on SFM.

Key trends in push factors: The advent of group certification has made a significant difference to the take up of certification and therefore trade. Step-wise approaches look set to extend this. Linking up supply and demand through initiatives such as the GFTN and TFT will also be key. The approach of mutual support appears important in terms of re-building the balance - many producers feel that they have been the weaker player in the trade of certified products until now.

An overarching current problem is the general global trade slowdown since “9/11”. When supply is low, traders take what they can get and certification becomes less important as a specification. This has been an issue for tropical hardwoods, especially Asian, in recent months.

Remaining Challenges: At the moment, certification typically acts to highlight good practice, promoting only minor incremental improvements in SFM. It does not yet clearly apply pressure to transform the worst problems of forest use. The key issues for the future are in getting certification beyond the 'good' producers and making it influential and applicable to the 'bad' ones.

It remains an expensive process (improving practice and paying for audit) for many - the debate clearly is still polarised in terms of where cost is and should be borne, and this needs to be opened up. Step-wise approaches and support from buyers to producers are helping - without significantly more market pressure (demand), producers will not shift to SFM through certification. These progressive and pragmatic initiatives will increasingly be necessary to protect the future of the wood industry and ensure sustainability.

3.4.6 Public Procurement Rules

Purchasing policies are essentially guidelines for staff to utilise in the selection of products and services to meet the required criteria. These include 'green purchasing' policies, which place environmental values at the forefront of any purchasing decisions, and procurement policies where environmental factors do not necessarily preclude purchase, but must be considered, amongst other factors, when making purchasing decisions.

Many EU member states are in the process of developing their own public procurement policies, under the umbrella of the EU Procurement Directive. The Directive provides criteria for sustainability and legality assessment, but also states that contracts must not create barriers to trade and discriminate against suppliers from other countries. The implementation of such directives is controversial and has led to differing views of as to whether environmental criteria can be used to assess tenders. The Commission has argued that such criteria cannot be considered at the award stage as they do not bring an economic advantage that directly benefits the public authority, but experience has shown that if environmental considerations relate to the tender subject then they can.

Box 3.7 Using Environmental Criteria in Procurement

In Germany, some local authorities have implemented a procurement policy, prescribing certified timber. Some states in the USA have similar approaches. The development of Kerhout in the Netherlands has closely reflected the Government's priorities. The UK in particular has spearheaded implementation of these commitments.

The UK Government commissioned an in-depth consultation on “procurement of timber products from 'legal and sustainable' sources by UK Government and its executive agencies”. This is clear evidence that the Government wants to change the way it acquires timber and timber-products, in response from the policies in place. The UK procurement policies encourage use of certification schemes as evidence of wood products being 'sustainable and legal'. Due to uncertain supply of certified products, procurement officers are increasingly supportive of the step-wise approach to help ensure that, where they can't get certified products, they are getting legal products. The Government believes that this supply-chain pressure will in turn lead to more producers seeking certification.

As more governments develop similar policies and guidelines, this trend is likely to continue. Government procurement officers need to find ways to simplify access to specified and acceptable products - this will most probably promote certification, within the bounds of trade regulations and WTO.

Any Government body insisting on certification as a pre-requisite for import could be contravening WTO - anything 'mandatory' is difficult to reconcile with WTO. 'Voluntary' means that demand has to come from the consumer to transform the market.

In the USA many of the local governments have stipulated against illegal and unsustainable sources in their wood procurement. Annex 2 compiles a list of these regulations.

Box 3.8 Debate about Certification and WTO

To fit with WTO, UK procurement policies encourages use of certification schemes as evidence of 'sustainable and legal', but allows for a tenderer to put forward 'other forms of evidence'. However, this leaves government procurement officers, trying to fulfil government commitments, with a difficult problem of how to assess the credibility of the evidence - how do they decide which labels to accept? The commissioned consultation recommends accepting only labels authorised by 3^rd party certification/labelling schemes, which conform to the UK's sustainability criteria, and require mandatory 3^rd party verification of other evidence. The supplier would then have a choice in how to demonstrate compliance and specific labels or certification schemes are not mandatory. The procurement officer would then only have to make one initial assessment of which certification and labelling schemes conform. The associated demand to require 'legal and progressing to sustainable' (where there is no certification of SFM) supports the need for step-wise approaches to certification that will verify legality as a first step and is useful as a focus for producers.

Clearly, harmonisation of the proliferation of certification and labelling schemes would be important to ease assessment - the forest industry needs to concentrate on what standards it is prepared to accept and adopt. This would also help to ease WTO's fears. However, as yet, no known forest certification cases have been brought before the WTO TBT panel. As Roe et al point out, this suggests that the potential trade barrier problem is being dealt with by governments and is not emerging.

3.4.7 Future Prospects of Market Based Instruments for SFM

Although forest management certification has also been recognised as a potential tool to promote sustainable forest management, the efficacy of this tool is still subject to considerable debate at the international level. Furthermore, although the certified forest area has increased rapidly it is not likely that expansion continues boundless. Only 7% of global industrial roundwood output is traded; many developed countries consider certification as a trade barrier; and markets for certified wood are limited as customers are rarely ready to pay premium.

The debate between different certification schemes continues, although common understanding among the schemes is gradually emerging. The proliferation of certification schemes has exacerbated the need for an international framework for their mutual recognition and a set of internationally agreed criteria and indicators as reference for a credible forest certification. (Parviainen and Suoheimo, 2002 and Tang, 2002).

However, do consumers really care which certification scheme is used? Likely, only a small percentage care at all; and some may be satisfied by just knowing that the forest product comes from a well-managed forest. The key seems to be reliable, credible information on the conditions and trends in forests and forest management, rather than certification per se. C&I can serve as a tool, a framework to provide such information for all users. Perhaps the efforts in the future should concentrate more on how to obtain the reliable data, rather than arguing which certification scheme is the best.

With increasing number of certification schemes, the role of governments in certification is also increasing for setting the broad rules of game and follow-up on possible political implications of how certification is implemented. This trend may also contribute to the increasing role of C&I in certification.

It remains unclear whether there will be a strong and growing demand for certified wood. However, there appears to be an increasing demand for accurate, reliable information on forest conditions and management. C&I provide a widely recognised framework to arrange such information.

Government initiatives have often failed to curb forest loss and degradation. NGO campaigns have raised awareness of the problem amongst consumers, and threatened attacks on the wood industry. Consequently, the use of market-based instruments as an alternative approach to promote SFM has increased rapidly. Forestry is changing from being a problem that only governments are held responsible for, to a problem that civil society and consumers can and do influence.

A key issue throughout this review is the increasing recognition of the real cost of forestry. As social and environmental values of forests are grappled with, this cost is being estimated and efforts made to cover it through a variety of means and new instruments. It remains a challenge, not least in terms of ensuring that the cost is borne equitably, by all the real users, and not only by the producers or those who have to live with the consequences of deforestation.

Traditional instruments used by governments are increasingly trying to link into the real price of forestry through more rational stumpage fees, performance bonds and incentives - the much-needed new innovations are being developed and tested by economists world-wide, as failures are common.

Abstinence appears to have been most valuable as a threat to stimulate change, by creating awareness of a need to change and pressure on the market to do so. As a tool to do this it has been extremely effective and the role of NGO campaigns remains strong, but only in constructive partnership with other tools that can implement the change. Without this, bans and boycotts risk simply pushing the problem elsewhere and excluding the problem from dialogue towards solutions. Experience suggests that campaigns that point to solutions and are well informed are more successful in building a dialogue of trust within the market and avoiding confusion and misinterpretation.

Certification links to all of these. It has seen a massive expansion in the past decade. Ten years ago, retailers could not tell their customers anything about their wood supply - now some can give confident information on the sustainability their sources, right to the forest level. But it is clear that certification can only really impact on SFM if it is more widely taken up - not just adopted by those who can achieve it easily, without much change. Evidence highlights that certification needs to resolve some of the problems, which make it difficult for some stakeholders to use:

• Consumers need reliable and simple labelling - the mutual recognition debate is important.

• Small enterprises need to be actively included - this is being addressed through group schemes, simpler standards and cost-saving through local certifiers and schemes

• Developed country enterprises need to be encouraged into the markets - developments towards step-wise approaches and producer group support from buyers will be increasingly key.

• Markets and demand need to be significantly expanded - buyers groups need to be developed in new areas (e.g. ongoing efforts in China) and domestic markets (e.g. Brazil).

Forest policy reforms are beginning to link into and learn from the certification experience. This can broaden the SFM impact of certification, and there is opportunity for improved efficiency of forest governance as a result.

Trade groups and pressures have become increasingly important in response to increased market and public awareness of forest problems. This area is likely to become more important - government procurement policies are focusing increasingly on forestry issues and buyers are beginning to see the need to work with producers to improve their performance and maintain their market in the face of consumer fears about wood. Trade cannot influence forestry if fewer people buy wood.

Market based instruments (MBI) can be extremely effective at promoting SFM, but typically to date have only really worked in well-developed markets and economies. It is also important to recognise that MBIs are diverse and often complementary to each other, and to traditional regulation. There is no simple, single solution - they can only be applied as part of a holistic drive to promote SFM. Markets and trade are only a small part of the influence on SFM in its wider sense.

3.5 Market Development for Environmental Services of Forests

3.5.1 Essential Attributes for Effective Market Creation: Framework for Analysis

The potential of various environmental services for market development varies considerably, because some services lend themselves better for trade, whereas in some cases supply can be ensured best through instruments such as taxation and government regulation. In this study, the marketability of key environmental services, or their proxies, will be analysed using a set of criteria, based largely on the assessed degree of excludability and rivalry and possibilities to eliminate or reduce the impact of factors prohibiting effective formation of markets.

Several attributes, which “measure” marketability/tradability as well potential to influence forest products trade have been identified as the framework for the analysis:

1. Easiness of defining and enforcing a property right

2. Degree of excludability and rivalry, i.e. how easy it is to exclude consumers from enjoying the service even, if they do not pay for it, and to what extent consumption of a service reduces consumption opportunities available to others

3. Commoditisation potential: how easily an environmental service can be translated into a homogenous, measurable “package” that represents the actual service demanded by the market and overcomes the problems of non-rivalry and non-excludability

4. Demand and supply potential: existence of enough buyers and suppliers with access to information, evolving demand and supply drivers

5. Value and significance of the service: value will in principle be defined as a function of demand and supply; a service can be very important but if its supply far exceeds the demand it may not command much economic value

6. Locality of the market: is the market mainly local, or is there international demand

7. Transaction costs: easiness of creating a “platform” where buyers and suppliers can exchange information and carry transactions; legal requirements; easiness of verification, accreditation and registration of services; need for organising buyers and suppliers

8. Scientific uncertainty: verification of service delivery and linkage between service and management (land-use) action

9. Risk: uncertainty regarding that the service will be delivered, permanence of national and international policies (agreements), leakage impacts,

The market feasibility assessment looks at the potential for international trade and impacts on forest products trade and SFM. Markets for forest environmental services are still relatively nascent so the question of having considerable impacts on forest products trade, e.g., by expanding the plantation area for carbon sequestration will primarily depend on if any of these markets will take off on a large scale.

This uncertainty about the future extent of markets for various forest environmental services justifies the study's emphasis on the potential for market development. If these markets will not take off in a significant manner, the question about them having any major impact on forest products trade and SFM may become a “moot” issue. This means that, in principle, the assessment based on criteria 1-9 must precede the assessment of the potential and the impacts on trade and SFM.

3.5.2 Linkages with Trade Agreements and Negotiations

The WTO agreements, including GATT and GATS, do not define “environmental goods” and the definition of “environmental services” is limited to end-of-pipe activities, not explicitly covering sustainable management of natural resources. The coverage of trade negotiations remains uncertain in this respect. Definitions will have implications for the competitive advantage of environmental goods and services, national sovereignty in regulating environmental service and good delivery (sustainable development), and the nature and level of service provision (e.g., marketing of shade-grown coffee or eco-labelled forest products). Definitions may also influence the competitiveness of individual countries in the production of wood and non-wood products.

Carbon, biodiversity and water services of forests may be significantly affected by the Doha Round. As regards carbon, the main issue is the potential conflict between the still-evolving rules for CDM-based emission trade under the Kyoto Protocol and the WTO, particularly GATS. How this potential conflict is addressed could have major implications for how CDM projects are implemented. The potential impacts of including the protection of biodiversity and landscape as environmental services in the WTO definitions are not yet adequately known and stakeholders have different views on them. In the area of water, the key issue has been opening service delivery to international competition. Defining water resource as an environmental service would broaden the view making watershed management an environmental service subject to GATS regulations. However, many definitional proposals are vague and do not allow a ready assessment of their relevance for markets for forest-based environmental services and sustainable forest management.

3.5.3 Potentials, Impacts and Trends in Market Mechanisms and Market Creation

Markets are bringing together a buyer and seller so that they can trade commodities, be they services or goods. Direct transactions are obviously quite different from other market-based mechanisms such as taxation or subsidy schemes. The basic requirements for environmental services markets to develop are that demand either exists or can be created, a price or value can be established for a forest ecosystem service, and that suppliers (landowners, resource managers, etc.) are able to produce and sell this service to buyers. In addition, a link between buyer and seller is required to allow exchange of information and drawing on various sources of funding.

Markets can be defined at local, regional or international level, which has implications for how market failures can be rectified. Environmental services can be traded individually or as a bundled commodity. A whole range of mechanisms exists for market-based transactions but it is obvious that markets are not the sole solution for sustainable delivery of forest environmental services.

A large number of different market-based mechanisms or have been promoted for trading environmental services of forests. They reflect differences in the nature of environmental services or goods and the level of market sophistication.

Various intermediary mechanisms through NGOs, trust funds, etc. are dominating (35% of all the cases reviewed), followed by direct negotiations between seller and buyer (17%), pooled transactions (12%) and over-the counter trades (12%). Other options include investment fund/venture capital, joint ventures, clearing house transactions, auctions, commodity exchange etc. As a whole, market mechanisms for forest environmental services are not yet well developed. Governments, NGOs and various funds, such as GEF, are still playing a central role in intermediary and direct negotiation-based transactions, and spontaneous (free) market formation is less common.

Various mechanisms rely on different degrees of private sector involvement. In the one end of the market continuum, there are private deals, which require only a limited amount of public sector involvement. In the other end, public, non-market transfer payments for environmental services are applied. In between, one can find formal public-private sector arrangements or open private trading based on government-organised markets driven by market regulations (e.g. setting of caps).

The potential of various environmental services for market development varies considerably, because some services lend themselves better for trade, whereas in some cases supply can be best ensured through instruments such as taxation and government regulation. Many factors influence market creation for environmental services such as (i) demand and supply potential, (ii) value and significance of the service, (iii) geographic location of the market, (iv) commoditisation potential, (v) easiness of defining and enforcing a property right, (vi) degree of excludability and rivalry of the service provided, (vii) transaction costs, (viii) scientific uncertainty and verification possibilities, and (ix) risks. The length of the list and the nature of the themes suggest that market creation for environmental services is a complex process.

Carbon Offsets

Under the United Nations Framework Convention on Climate Change (UNFCCC) and the Kyoto Protocol a considerable effort has been made to define provisions for carbon sequestration in national greenhouse gas accounting. However, the rules under the Clean Development Mechanism (CDM) are still to be agreed upon. Trade development in the forest based carbon services has therefore suffered from significant uncertainties and remained limited. Nevertheless, there are about 110 projects covering a total of about 5 million hectares of which most are related forest conservation (Table 3.14 on following page).

The situation is expected to change and carbon sequestration will probably be the most significant forest-based environmental service in terms of international trade. New projects would be focusing on the two eligible activities, i.e. afforestation and reforestation.

Activities with regard to 'Land use, land use change and forestry' (LULUCF), properly planned and under right conditions, can both store atmospheric carbon and provide other environmental benefits, such as biodiversity conservation and watershed protection. Carbon market could thus indirectly contribute to the promotion of SFM, based on multiple forest services. However, under the current rules, the Kyoto Protocol “misses” an opportunity to contribute substantially to the protection of biodiversity and watershed values associated with natural forests in the developing countries, because they are excluded from an international carbon sequestration market. At the same time, an opportunity to provide financial incentives for adopting SFM practises to provide multiple environmental services is not fully utilised.

Table 3.14 'Activities Implemented Jointly' and other carbon sink projects worldwide (2003)

These figures are based on data provided by projects, and may not always be accurate. For some projects no area data was available.

Forest Biodiversity

Protected areas, bioprospecting rights and biodiversity-friendly products are the most common commodities based on the number of cases applied (Landell-Mills & Porras 2002). Other commodities include commercial debt-for nature swaps, conservation easements and conservation concessions, biodiversity credits and tradable schemes of biodiversity offsets. Unfortunately, there are no financial statistics on the relative market share of private/non-state sector purchase of biodiversity services, let alone the respective shares of various market-based instruments.

Promotion of integrated conservation and development projects operating in state-owned protection areas has been one of the most common ways of trying to conserve forest biodiversity. The other commodities are quite small in relation to protected areas especially when looking at the areas involved. The management of these areas has been traditionally financed by the public sector but complemented, especially in developing countries, with non-state sector financing through NGOs and international (semi-NGO) conservation organisations.

The interest in biodiversity prospecting is driven by the potential value of genetic information that could be used e.g. by the seed industry to improve productivity or resilience against diseases, or by the pharmaceutical sector to develop new products. Since the 1980s more than ten bioprospecting deals have been struck, some of them well-documented (e.g. between INBio and Merck in Costa Rica, and Medichem Pharmaceutical and the State of Sarawak). Despite the great values (possibly USD 75-150 billion per year) involved in the nature-based pharmaceutical sector, most of this value has not been translated into significant bioprospecting value. Industry's willingness to pay for access to biodiversity is low (Aylward 1993, Simpson et al. 1994, Barbier & Aylward 1996, Laird & ten Kate 2002). Most of the value is generated during the R&D process.

Marketing of biodiversity-friendly products, such as shade-grown coffee or cocoa, which protect indirectly forest biodiversity, is a rapidly growing sector. The global market for “sustainable” coffee is estimated at USD 455 million, of which the North American market accounts for between USD 152 and 188 million. The share of shade-grown coffee represents 1-2 percent of the total market. Consumers' willingness to pay a modest price premium for organic and shade-grown coffee is well established. (CEC 2001).

The proliferation of market-based schemes and data on increased private sector financing for delivery of biodiversity services suggest that these markets have grown very rapidly recently and that this trend is likely to continue. There are powerful demand drivers in the play that support this conclusion:

• increasing public awareness about the importance of biodiversity will enhance people's willingness to pay for conservation,

• economic growth and increasing income levels (mainly in developed countries) contributing to the willingness to pay for biodiversity services,

• increasing scarcity of biodiversity due to deforestation and forest degradation

• limited resources of governments address biodiversity problems,

• increasing private sector investment into biodiversity for a variety of reasons

The main supply drivers are innovative efforts aimed at commoditising biodiversity and development of new payment mechanisms that reduce transaction costs. As a whole, the supply of conservation opportunities still far outstrips the willingness to pay for conservation. High levels of competition in supply, i.e. between projects available for funding, and relatively low competition in demand, tend to push the payments for conservation low, barely above the opportunity cost of land. This suggests that more emphasis should be paid to measures that strengthen the demand-side to enhance competition and willingness to pay for biodiversity.

Watershed and Soil Protection Services

Watershed and soil protection services are one of the first forest environmental services that were seen to have potential for market-based transactions. The basic notion, where upstream action generates benefits downstream, and the beneficiaries pay for the service, is easy to understand and can be readily accepted.

In pure physical terms, the supply of watershed services from forests is very large. In a study carried out by Revenga et al. (1998), where a watershed or river basin were defined as the entire area drained by a major river system or by one of its main tributaries, the watershed area represented 55 percent of the world's land area (excluding Antarctica).

Forests are associated with a range of services delivered at a watershed level. The cases reviewed by Landell-Mills & Porras (2002) highlighted five of them:

• water flow regulation: maintenance of dry season flows and flood control;

• water quality maintenance: sediment load control, nutrient load control (e.g. phosphorous and nitrogen), chemical load control, and salinity control;

• erosion and sedimentation control;

• land salinisation reduction/water table regulation; and

• maintenance of aquatic habitats (e.g., maintaining water temperature, shading rivers/ streams, ensuring adequate woody debris in water).

The existing markets for watershed services are, however, modest and local, often involving watersheds that supply nearby urban or rural settlements. Typically, payment schemes are confined within national boundaries. Watershed services are marketed through a number of different mechanisms. For analytical purposes they may be grouped into the following categories using a slightly modified version of the typology developed by Powell and White (2001): (i) self-organised private deals, (ii) centrally managed private schemes, (iii) trading schemes, and (iv) public payment schemes.

Self-organised deals with little or no government involvement have emerged in selected locations and situations. For example, private interests may need water quality or flow that goes beyond regulatory standards, or where there is no effective regulatory system in place. Financing is from private sources but may take various forms as user fees, transfer payments, land purchases, cost sharing arrangements, and/or low interest credit (Johnson et al. 2002).

In centrally managed private schemes there is no direct link between buyers and sellers. This type of arrangements are found in the United States, where independent trusts are funding conservation easements on private land relying on support from private and corporate sponsors. Negotiations with landowners are handled centrally by the trusts without direct involvement of the funding partners. Deals may also be concluded without any contributions from the direct beneficiaries. Site selection is based on multiple criteria, and protection of watershed functions is frequently only one of several objectives.

In a trading scheme, government sets an upper limit or “cap” on the total emissions of particular pollutants, in this case sediment load or runoff. Individual facilities or landowners have a defined maximum allowable amount of emissions they can release, known as “credits”. If a company or landowner finds they can easily meet their allowable limit, they can then sell their excess credits to other entities, which can not meet their limits as easily or cheaply. Trading emission credits enables companies and landowners to make economic decisions as to whether it is cheaper to lower their emissions or to buy credits from others who have been able to do so. Regulators in effect do not care who takes action so long as the overall standard is met or the cap is not exceeded (Johnson et al 2002, Conservation Finance Alliance 2003). The reasons for the limited coverage of trading schemes may relate to the difficulties in benefit valuation, or the low competitive edge of forests in providing watershed services. It appears that the watershed protection measures undertaken under the various trading schemes tend to take place on agricultural land (e.g. Environomics 1999).

Public payment schemes are where government or a public sector institution pays for the ecosystem service. Of the three categories of financial mechanisms, public payment schemes are the most predominant in the world today. The financing can come from various sources including general tax revenues, bond issues, or user fees. Payments are made to private landowners and private or public resource managers. Public payment schemes also have the largest geographical coverage. The largest schemes in global terms are found in the United States, China, and Vietnam.

The future development of markets for forest-based watershed services is subject to many uncertainties. Currently, the main drivers behind demand are the failure of regulatory measures to accomplish adequate protection of watersheds, and continued degradation of watersheds, which is increasing their scarcity. It is therefore likely that the market expansion will continue.

A number of factors are constraining demand, in particular lack of scientific evidence on the contribution of forests to watershed services. While the perception that forests have a number of positive impacts on watershed protection is widespread, there is limited scientific evidence to support it.

While the total area of the world's watersheds is large, only a fraction of them could become part of environmental service arrangements. If the current projections of increased scarcity materialise, watershed services will gain substantially in value and give a boost to the development of market-based watershed mechanisms.

Landscape Beauty and Recreation

Markets for landscape beauty and recreation have existed for a long time, and they are intimately linked with amenity values and development of tourism and recreation. In the past the focus was on landscape objects but more recently, the value of broader landscapes for local people and tourism has been recognised, and these values are being brought under protection. There is clearly an increasing demand in some of the wealthier countries.

The demand for landscape beauty is mainly based on development of tourism. International tourist arrivals have grown by 7% a year since 1950 (WTO 2000) and nature-based tourism has increased even faster. In the future international tourist arrivals are forecast to grow 4.1% annually until the year 2020. Regarding nature tourism, the World Resources Institute estimated in the beginning of 1990s that it was growing between 10-30% a year. TIES has estimated (1999) that nature-based tourism comprises 20% of the world travel market, and ecotourism 7%. Tourists travelling abroad were estimated to have spent USD 166-260 billion in 1994 (Ecotourism … 2003).

UNEP (2001) has identified inter alia the following trends affecting the development of nature-based tourism:

• Across the globe people are increasingly concerned about social injustices and environmental problems, and protected areas are well placed to take advantage of this trend

• Educational levels are rising, and higher educational levels are strongly correlated with demand for outdoor recreation activities (hiking, cycling, kayaking etc.)

• The expansion of long-haul air travel will increase global demand for protected areas, which often feature among main destinations for international travellers

• In wealthy countries, expanding number of retired people with good savings increases tourism in general

• Rising living standards increases demand for high-quality services

• Changes in leisure time vary; in a number of countries leisure time during working life is restricted guiding demand towards short-term, easily accessible services. On the other hand, longer paid vacations in Europe and in a few emerging markets lead to an overall increase of demand.

Key mechanisms for the valorisation of landscape beauty are (i) fee-based mechanisms; (ii) mechanisms involving private sector and local communities; and (iii) mechanisms for protection of landscape:

• Fee-based mechanisms: Protected areas cover 1 280 million ha, or 9.5% of the total land area of all countries (World Commission on Protected Areas 2003). Protected forest areas alone are estimated to occupy 480 million hectares, 12.3% of the total forest area (FAO 2000). While not all protected areas charge fees, they are widely used, and it is therefore believed that this is the most significant payment mechanism for landscape beauty among the three types of arrangements referred to above.

• Mechanisms involving private sector and local communities: Tour operators play a central role in the markets for landscape beauty. While consumers usually pay for nature-based services, intermediary tour operators that provide access to these services have contributed little to their maintenance. For instance, a study carried out in Australia on five major national parks indicated that user fees collected by them amounted only to 0.3% of total tourist expenditure in and around them (Driml and Common 1995).

No global statistics are available on the development of community-based tourism, but given the proliferation of cases presented in the literature, the number of such enterprises is undoubtedly large. However, generalisations are difficult because of large variation in natural conditions, attraction level, affected area, number and type of actors, etc. For instance, in the reviewed cases the area affected by community-based tourism reportedly ranged from 8 600 ha to 600 000 ha.

• Mechanisms for protection of landscape: Europe and the United States are at the forefront of applying market-based mechanisms to protection of landscape. Within the European Union inter alia the UK, Germany, Austria and Sweden have embraced the concept of protecting traditional cultural landscapes, and provide compensation to landowners for benefits they forego because of protection.

The principal European programmes for landscape protection are focused on agricultural activities, but where forest is an integral part of the landscape, landowners may also be compensated for restrictions imposed on forest management. A few afforestation schemes also include landscape protection among their objectives. For instance, the objectives of the Farm Woodland Premium Scheme (FWPS) in the United Kingdom are to enhance the environment through the planting of farm woodlands, thereby improving the landscape, providing new habitats and increasing biodiversity. Since 1992 about 35 000 ha have been approved for planting (DEFRA 2003).

The overall growth of nature-based tourism will provide increased financing to protected area management, but the present trends suggest that government budgets will remain the main source of revenue, at least in the short and medium term. However, the market for landscape beauty is large and expanding. Given the rapid growth of nature-based tourism, the problem lies less in market creation than in ensuring that protected and conservation areas are able to capture a fair share of the benefits associated with this development.

The supply of landscape beauty through subsidy systems similar to those applied in Europe is subject to controversy and may be restricted in the future. This issue has been raised in the current round of WTO negotiations and the United States, and the developing countries have challenged them suggesting that such payments are an indirect subsidy to agriculture.

3.5.4 Verification and Certification

The expansion of markets for other environmental services will require verification to achieve adequate credibility of the service delivery. Independent third-party certification would help land managers garnering public confidence and credibility, and also payments for services call for transparency and accountability. Private investors or other beneficiaries will want to know that they get what they pay for. On the other hand, verification/certification would add to the transaction costs, and consequently reduce the market opportunities.

Certification of environmental services would make sense especially when bundled services are provided, i.e. in the case of joint production of different environmental services from forests. This would reduce transaction costs and, at the same time, facilitate marketing of multiple services. Linking verification of environmental services with SFM certification is another option to reduce transaction costs.

3.5.5 Impact of Environmental Services on SFM and Trade

Markets for forest environmental services are still relatively nascent so the question of having considerable impacts on forest products trade (e.g. plantations for carbon sequestration) will impinge on if any of these markets will take off on a large scale.

Carbon offsets from forests have the best potential to become a globally traded environmental service. With regard to impacts on trade in forest products, reforestation and afforestation projects will expand the timber supply, mainly in tropical countries, and to a lesser extent, the energy cost effect will influence the location of processing industries. The available projections for demand of forest-based carbon credits in the first commitment period suggest that under specific circumstances carbon plantations could increase wood supply to the extent that it would affect timber price at regional level. Use of bioenergy promoted by the provisions of the UNFCCC and the Kyoto Protocol will increase wood demand for this purpose giving a boost to efficient use of forest harvest and processing residues.

The upper level of the LULUCF-CDM market during the first commitment period would be about 600 Mt CO₂ equivalents (excluding the United States). A more realistic level of trade during the same period would be 110 Mt CO₂ equivalents, representing a possible global market value of USD 876 million depending on the unit price. Were new plantations established primarily in sub-tropical regions, this would amount to some 14 million hectares in total. If the entire area were industrial plantations, they would potentially supply a timber volume representing 3-5% of the current global production of industrial roundwood and pulpwood. This volume would be large enough to affect timber prices at least on a regional level.

The current cap imposed on afforestation and reforestation under CDM would allow more than a five-fold increase in plantation area compared to the above projection. However, other factors such as higher political risks in developing countries, unsustainable land uses, high opportunity cost of land, problems with insecure land rights, weak enforcement, etc. may reduce the interest in LULUCF projects. On the other hand, if the expansion to such an extent proves feasible, a large share of the new forests would probably be established in tropical developing countries. This would lead to a substantial increase in supply, and probably depress timber prices globally, which again may reduce the overall planting rate because of reduced profitability.

The impacts will be first observed in Latin America followed by Asia. Africa would require special support to have access to carbon offset trade.

Forest plantations will be favoured, because during the first commitment period (2000-2012) one can credit only afforestation and reforestation projects. Further, non-Annex I countries do not have caps concerning emissions resulting from reductions in forest carbon stock. Such impacts may be exacerbated in the second and subsequent commitment periods by inter-annex leakage resulting from decreased timber harvests in industrialised countries. During the first commitment period this impact will be small.

Uncertainty regarding treatment of leakage and LULUCF rules concerning natural forest management and avoided deforestation leaves during the second and subsequent commitment periods a number of options open with different implications for trade; these need to be studied in more detail before firm conclusions and recommendations can be made.

The incremental impacts of other environmental service markets (biodiversity, landscape beauty, and watershed management) on wood supply and prices, and thus on international trade flows, are likely to be insignificant. However, local impacts can be important, including closing of production facilities because of reduced wood supply. The emerging markets for forest environmental services will offer an opportunity for low-income forest owners and managers to benefit economically from good husbandry or stewardship of their forest resources.

Additional revenue from environmental services will make SFM economically attractive in many locations but may not give a major boost for improved practices due to limited market sizes. Direct payment schemes for forest biodiversity services, including conservation concessions/easements and private conservation funding, are expected to have the most positive impacts on SFM in incremental terms. Other mechanisms will have positive impacts to a varying degree, depending on how closely the marketed commodity is related to the environmental service itself. However, most market-based mechanisms will mainly influence the sustainability of already existing forest conservation areas. The challenge is to turn the increased revenue flows to incentives for resource managers to adopt more sustainable practices.

Markets cannot develop and operate without government interventions. In fact, international environmental agreements/regulations have a strong potential to increase demand for services generated by sustainable forest management. Markets and regulation are both needed; the question is about the balance between the two, and about the strengths and weaknesses of the market mechanism. Unless market creation for forest environmental services succeeds in generating more revenue than the total market costs, and equitably distributed to the land stewards, the incentives for SFM will not be created.

3.5.6 The case study: Conservation Easements in the USA

Most of the forest land in the USA sold by large paper companies has been acquired by financial investors. Where natural forests are involved, especially in the northeast, the use of Conservation Easements (CEs) has been growing rapidly, and it has come to play a key role in forestland investments both for conservation and for production. CEs now cover about 1 million ha of land in the USA and the area is growing rapidly.

In general, in property law of the US some limited property rights or values may be granted to third parties. In the USA it has become quite common for land owners to sell or donate easements that legally require and guarantee that a property will not be further developed for commercial or residential purposes and that it will remain in its natural condition. It is also possible to guarantee watershed services through CEs, and users can pay fees for these.

This legal amendment to the deed cannot be removed when the property is sold or transferred, so that the guarantee is in principle perpetual. This often lowers the market value of a property, and that difference in value is donated by the land owner for a tax deduction or is paid to the owner by a government entity or by a non-profit or philanthropic organization. Subsequent property taxes are also usually lower, further compensating the land owner. The easements are often granted to and held by non-profit land trusts that inspect properties and take legal or other actions if they perceive violations to agreements. State governments have allocated billions of dollars, and the federal government has allocated hundreds of millions of dollars, to purchase such easements. Foundations are also a major source of funding. A number of major non-profits work to facilitate and quicken the pace of the transactions.

A recent development very important to the subject of timberland investments is the advent of “Working forest” easements. In this case the restriction is that the property cannot be otherwise developed, but that sustainable timber harvesting can take place. As mentioned above, the value of the land itself under timberland needs to be acquired at a fairly low price if the value of growing timber is to repay an adequate return on investment. This is especially true if timber has recently been harvested, and there is a long waiting period before any commercial harvesting should again take place. A working forest easement facilitates a non-profit group or source of public funds paying for all the potential development values of the property so that a timber investor need invest only that amount which is justified by the future timber sales values. In many areas of wealthy countries (and this is becoming true in middle income countries such as Costa Rica or Thailand) the intrinsic value of land, which is ultimately based on its future development value, is simply too high for a timber growth return to justify the purchase price. In principle, working forest easements make it possible for any land to be devoted to sustainable forestry, if there is a source of conservation funding and a willing investor. And the solution itself is long term if not perpetual. As Best and Wayburn (2001) point out, more forest can be conserved for the same amount of funding with production forests than with protection forests.

There are several sizable recent examples in the northern hardwood forest in New England and New York near the Canadian border that illustrate a form of the process. Over 200,000 ha were involved in three deals in 1999. Large paper companies wish to sell large tracts of forestland that they have owned and operated for many years. (Their motivation was considered above.) Conservation organizations wish to maintain forest cover and protect forest values, especially biodiversity. The state government involved agrees that some of this land should have protected area status, but they would also like to assure that much of the land remains production forest. The state promotes this to maintain or increase economic growth and jobs and to use conservation funding more efficiently. The conservation organization buys the land from the paper company. Some of it is transferred to the state as protected area (often adding it to contiguous protected areas). For other large areas a working forest easement agreement is reached amongst the conservation group, the state and a timberland investor (the new land owner).

The state contributes part of the purchase price of the land to the investor. In some cases the timberland investment organization, rather than the conservation group, has taken the lead, and this is an integral part of their strategy to maximize the return on investment. In discussing the northern hardwood forest of the northeast USA, Best and Wayburn (2001) make the following comments. “The heritage of (industrial forest) properties and the region's economy has been one of 'boom and bust,' tracking cycles of massive harvests followed by reduced activity as the forest renewed itself. The CE requires management that results in a sustained yield of high quality saw-timber, a dramatic change from the fiber based goals of the papermills in the past, and a change that bodes well for the future of the region.”

There can be controversy in many aspects of the process. How it is decided which lands are appropriate for protection or production? How will sustainable forest management be defined in a legal agreement? And of course what are the values and the level of prices? However for most large transactions of natural forest land in the United States, easement agreements of one kind and another have become an essential element in the process. It appears that such mechanisms could also work in developing countries with international funding agencies brokering the process. This could help improve the very poor record of establishing sustainable forest management areas in these countries. Rather than relying on government to enforce norms on public forests, which is related to overall government capacity and is thus a long term process, projects could be based on a governmental legal agreement with an investor where non-profit groups could inspect and take legal action for compliance and international or national public funds could provide funding for the environmental services provided.

The above caveats on secure land title and rule of law apply. But if government provided guarantees and international funding agencies took an interest, this would increase investor confidence and lower the perceived environmental risk. It would also reduce the investment required to acquire productive timberland, because public monies would be funding the desired environmental services. Essentially then this is a system, as it now functions in wealthy countries and as it could function in poorer countries that create a public/non-profit/private investor partnership and that provides public funding for environmental services of forests while facilitating private investment in sustainable forest management. It would seem that international funding agencies interested in global environmental benefits might profitably consider experimenting with such mechanisms.

3.5.7 Conclusions and Recommendations

Forest Environmental Services and Market Mechanisms with Potential

The previous chapters have demonstrated the wide range of market-based mechanisms used in commoditising biodiversity, carbon sequestration, watershed management, landscape beauty and bundled services. In

Table3.14 they are summarised according to the level of public involvement and geographic dimension of the market. Despite the proliferation of various kinds of private payment schemes for forest environmental services, most schemes still rely on active public sector involvement. International transfer payments under the “public transfer payments” category, although sometimes using fiscal instruments, imply mainly a non-market approach (Richards & Moura Costa 1999, Biller 2000).

In terms of the relative size of markets, international markets dominate in the carbon offsets, biodiversity and ecotourism. These markets are driven by international demand originating from developed countries. Markets for watershed management services are largely local.

Table 3.15 Market-based Mechanisms by Degree of Public Sector Involvement

It is difficult to prioritise various forest environmental services in terms of their market development potential because most of the markets are still nascent, and their development faces considerable challenges. There is also insufficient data on the monetary importance of the various types of services and payment schemes and associated institutional arrangements. Furthermore, the importance of markets depends on the adopted perspective. Small markets for localised forest environmental services, such as watershed management, can be crucial for the well-being of the local beneficiaries, providing at the same time needed income for the land owners and managers without having any implications at the national or international levels. Forest-based ecotourism is globally a very important business that, however, appears to have only minor impacts on the sustainability of natural resource management because of the limited financial flows to the actual resource managers. On the other hand, though maybe only 1-4% of the total value would go to the local communities, this additional revenue may be fully adequate to provide incentives to protect the specific area. It all depends on the prevailing context. Despite these difficulties, an attempt is made in Table (following page) to summarise the general market development potential of the key environmental services of forests.

In terms of market potential, the following general conclusions can be drawn:

• Carbon offsets from forests have the best potential to become a globally traded environmental service, but the current market situation is extremely fluid owing to uncertainties related mainly to international policy. At present, there are some 110 projects covering more than 5 million hectares, including projects under the activities implemented jointly (AIJ) umbrella and other projects.

• Demand for nature-based tourism is growing at a rapid pace internationally, regionally and locally. In 1994 tourists travelling abroad were estimated to have spent USD 166-250 billion. It will be important to increase revenue capture from economic activities to the benefit of protected area management.

• There are a number of forest biodiversity-related services with differing potential for market development. In general, the potential for major expansion of the market is constrained by problems in commoditisation, and defining and enforcing property rights. Various direct payment schemes, such as conservation easements and concessions, and biodiversity-related nature tourism appear to offer the greatest development potential. Demand for biodiversity-friendly products, such as shade-grown coffee, is also increasing rapidly. Nevertheless, public transfer payments will continue to dominate in the near future, but possibly channelled using new innovative mechanisms, involving also the private sector.

• Market-based arrangements for watershed services are currently applied in a limited area. There is considerable potential to expand markets for watershed services mainly locally if the current constraints are removed.

Markets for bundled environmental services are expanding, driven especially by developments in the supply and among intermediaries and increasing awareness about the opportunities provided by joint production.

Table 3.16 Marketability of Forest Environmental Services and Their Impacts onTrade and SFM

Impacts on Trade and Forest Management

As most of the markets are nascent, waiting for a take-off, they do not yet influence management of forests to such an extent that wood supply and prices would be affected. Even when the markets will take off, the impacts on trade in forest products are likely to remain small and mainly local, with the exception of carbon offset trade based on forest sink projects. Therefore, quantitative analysis of these impacts should be concentrated on carbon mitigation services provided by forests. Any assessment at this stage remains speculative but the following outcomes may be expected:

Impacts on trade:

• Trade in forest products will be affected mostly through timber supply effects associated with reforestation and afforestation projects, mainly in tropical countries, and to a lesser extent through energy cost effect, influencing location of the new investment in processing industries. The possible impact of carbon sequestrated in wood products will depend on how it will be accounted for under the Kyoto Protocol.

• The upper level of the LULUCF-CDM market during the first commitment period would be about 600 Mt CO₂ equivalent (excluding the United States). A more realistic level of trade during the same period would be 110 Mt CO₂ equivalent, representing a possible global market value of USD 876 million depending on the unit price. Were new plantations established primarily in sub-tropical regions, this would amount to some 14 million hectares in total. If the entire area were industrial plantations, they would potentially supply a timber volume representing 3-5% of the current global production of industrial roundwood and pulpwood. This volume would be large enough to affect timber prices at least on a regional level.

• The current cap imposed on afforestation and reforestation under CDM would allow more than a five-fold increase in plantation area compared to the above projection. However, other factors such as higher political risks in developing countries, unsustainable land uses, high opportunity cost of land, problems with insecure land rights, weak enforcement, etc. may reduce the interest in LULUCF projects. On the other hand, if the expansion to such an extent proves feasible, a large share of the new forests would probably be established in tropical developing countries. This would lead to a substantial increase in supply, and probably depress timber prices globally.

• The impacts will be first observed in Latin America followed by Asia. Africa would require special support to have access to carbon offset trade.

• Forest plantations will be favoured, because during the first commitment period (2000-2012) one can credit only afforestation and reforestation projects. Further, non-Annex I countries do not have caps concerning emissions resulting from reductions in forest carbon stock. Such impacts may be exacerbated in the second and subsequent commitment periods by inter-annex leakage resulting from decreased timber harvests in industrialised countries. During the first commitment period this impact will be small.

• Uncertainty regarding treatment of leakage and LULUCF rules concerning natural forest management and avoided deforestation leaves during the second and subsequent commitment periods a number of options open with different implications for trade; these need to be studied in more detail before firm conclusions and recommendations can be made.

• The incremental impacts of other environmental service markets (biodiversity, landscape beauty, and watershed management) on wood supply and prices, and thus on international trade flows, are likely to be limited on a global scale. However, local impacts can be significant.

The impacts on sustainable forest management can be summarised as follows:

• Additional revenue from environmental services will make SFM economically attractive in many locations but may not give a major boost for improved practices due to limited market sizes.

• Compared to business as usual, the impacts of carbon sink projects on biodiversity during the first commitment period may be limited as only some 14 million ha might be covered by plantation activity.

• There are no reasons to assume that carbon forest projects would have any more adverse environmental or social impacts than other plantation establishment, on the contrary due to the CDM's provisions for sustainable development and biodiversity.

• The current CDM rules favour establishment of fast-growing plantations, which often are monocultures. There is a risk of a leakage leading to expanded harvests in natural forests, which would have negative impacts on biodiversity.

• Direct payment schemes for forest biodiversity services, including conservation concessions/easements and private conservation funding, are expected to have the most positive impacts on SFM in incremental terms. Other mechanisms will have positive impacts to a varying degree, depending on how closely the marketed commodity is related to the environmental service itself. However, most market-based mechanisms will mainly influence the sustainability of already existing forest conservation areas. The challenge is to turn the increased revenue flows to incentives for resource managers to adopt more sustainable practices.

Socio-economic Impacts

Due to the large number of various schemes related to markets for forests environmental services and the different contexts where they are being applied, it is difficult to generalise about their socio-economic impacts. Furthermore, most schemes are only pilots, or are relatively recent, so it is too early to make firm and detailed conclusions about their socio-economic impacts. However, this review and other studies have indicated that emerging markets for forest environmental services offer an opportunity for low-income forest owners and managers to benefit economically form good husbandry or stewardship of their forest resources.

In principle, market-based mechanisms are predicated on voluntary transactions between buyers and sellers and should thus benefit all of those involved (Shilling & Osha 2003). All the environmental services have the potential to enhance positive socio-economic impacts or sometimes cause negative impacts. The challenge is to pay adequate attention to equity and socio-economic impacts during both the project (market) design and implementation phases to enhance the positive impacts and minimise negative ones. The envisaged benefits for the poor resource managers are (Landell-Mills & Porras 2002, Cohen 2002, Pagiola 2002):

• Means to increase the income and employment opportunities of the rural poor

• Means to diversify household income sources

• Means to improve livelihoods of people through securing long-term supply of forest products for subsistence use and environmental services such as regular water supply, maintained agricultural productivity

• Improved social capital through strengthened local institutions and community capacity

• Positive development spin-offs in human and physical assets when investments are simultaneously made e.g. in communication infrastructure, training and education to facilitate the establishment and functioning of the markets

• Transfer of additional funds especially from the private sector in the North to the South

The main social and economic costs and constraints to pro-poor market development are:

• Possible marginalisation of weaker groups, e.g., because of eviction from conservation areas or reducing access to traditionally used forests

• Increased service costs, e.g., water fees that can hurt the poorest groups

• Insecure tenure and poorly defined property rights, in general

• Weak power and low degree of organisation as well as inadequate skills and education to participate in the market in “equal” terms

• Inadequate finance, access to market information and communication infrastructure

• High participation costs in market exchange

It is important to acknowledge that the prime objective of payment schemes for environmental services is not to make local people better off but to market environmental services desired by the buyers. Also, there is nothing inherent in the functioning of any markets that would automatically enhance equity. On the contrary, there are reasons to believe that development of markets for environmental services may initially benefit people who have good access to capital and especially to land. The markets are also likely to favour countries that are better off, well organised, and with strong legal systems, including secure property rights. It is possible to make market-based mechanisms to work for both the people and the forests, but it requires concerted co-operation between local stakeholders, government authorities, NGOs, private sector intermediaries and international donor agencies. In Chapter 9.2 some recommendations are made how to enhance the role of markets for forest environmental services in poverty alleviation.

Limitations with Market-based Approaches, and the Role of the Government

Individuals and societies in their decision-making have treated ecosystem services, including the ones derived from forests, too often in the past as free (e.g., Daily et al. 2000). However, it is now well understood that many services are not free any more; ecosystem capital is becoming scarcer. Using markets as way of allowing resource managers to capture the value ecosystem assets and internalise the external costs and benefits in their decision-making can lead to profoundly favourable effects in terms of promoting conservation and sustainable forest development.

Despite the significant potential, reflected in the almost exponential increase in the interest in MES, it is important to acknowledge that the markets are not the only solution, or panacea for sustainable delivery of all environmental services. Some environmental services, such as supporting the functioning of natural ecosystems and related knowledge, are very much public goods and do not lend themselves well for market-based development. Also, although markets can, and should be, used to promote environmental purposes, market forces have often resulted in unsustainable practices, overexploitation of timber and non-timber forest products being good examples. Commoditisation of all environmental services for marketing purposes may result in opportunistic behaviour even in a situation, where the services have been provided in the past as a public good without any problems.

Markets cannot develop and operate without government interventions. In fact, international environmental agreements/regulations have a strong potential to increase demand for services generated by sustainable forest management. Markets and state regulation are both needed; the question is about the balance between the two, and understanding the strengths and weaknesses of the market mechanism (Heal 1995). Intelligent design of markets for forest environmental services involves identifying appropriate roles for the private sector (markets), government and other agents within an overall system of environmental governance, and creating incentive systems that impel each actor to play its role effectively and responsibly. A detailed analysis of the respective roles of the markets and state is beyond the scope of this study. Nevertheless, the importance of identifying the optimal package of market and regulatory arrangements is emphasised here to avoid creating an impression of promoting markets as an automatic alternative to non-market alternatives (cf. e.g. Heal 1995, Simpson 1999, Landell-Mills & Porras 2002).

Finally, successful market creation for forest environmental services alone does not automatically turn into sustainable natural resource management and equitable development. Unless market creation for forest environmental services succeeds in generating more revenue than the total market costs, and this “profit” is channelled equitably to the land stewards, the incentives for SFM will not be created (Simpson 1999, Pagiola & Platais 2002, Shilling & Osha 2003). The value of forests is a function not only of the marketed and non-marketed goods and services they provide, but also who has access to them and how the resource managers are allowed to benefit from this access. Unfortunately, these important principles and issues are too often forgotten, when markets are harnessed to guide the production of environmental services from forests.

3.5.8 Recommendations

Recommendations for Consideration at the National and International Levels

The creation of markets for forest environmental services will require a number of measures by national governments. Many of the action needs, such as clarifying property rights, are similar irrespective of the environmental service, and in fact, form part of an enabling environment for sustainable resource management in general. However, due to a large variation in the nature of the provided services, the pre-conditions for successful market development have also differences.

• Improve property rights and responsibilities associated with a specific ecosystem service, including drafting of new legislation, seeking legal opinions, developing property right registries, and enforcing property rights to ensure adequate excludability.

• Define caps and stricter environmental standards, where appropriate, to introduce scarcity, and thus promoting market creation

• Provide financing for pilot projects, facilitating the formation of markets, and analysing lessons learned and incorporating them into policies and national programs

• Establish appropriate governance structures and helping to establish market infrastructure, rules, procedures, verification and enforcement systems as well as intermediaries to help with market development and operations

• Remove perverse incentives that distort markets for forest products and environmental services and encourage the loss of forest benefits.

• Develop national trade policies and other market instruments that could promote environmental services, either as individual commodities or through a bundled concept.

• Support development of service provider associations and user groups, and developing a platform, where they can interact

• Increase willingness to pay and reducing the asymmetry of information by disseminating information on the value of forest environmental services and action needed to secure the supply of the service

• Undertake/fund relevant research (see recommendations concerning research)

At the international level, the following measures are recommended:

• Reduce sovereign risk in markets for forest environmental services by clarifying and agreeing on the basic rules for trade, including the measurement and verification methods and treatment of additionalities and baselines, leakage and permanence³².

• Define forest environmental services under the WTO agreements as this will have impacts on demand for services and thereby for their property and use rights. The key issue is the potential conflict between the interests of local stakeholders and those of external investors and beneficiaries.

• Agree whether payments made by the public sector for environmental services (e.g. for biodiversity or landscape) are considered subsidies (falling under the WTO Subsidies Agreement), or remuneration for verifiable services produced by land-owners.

• Explore the possibility of developing standard approaches to verifying the delivery of environmental services, using similar approaches as adopted in certifying the sustainability of forest management.

• Consider the need to subject provision of forest environmental services to sustainable development, and, if deemed appropriate, develop methods to operationalise it.

• Agree on how environmental services, especially carbon credits, should be classified in international trade (statistics).

• Continue support pilot projects but put more focus on Africa, Southeast Asia, and countries-in-transition. Until now, only few, mainly Central American, countries, have benefited from pilot projects to develop MES.

• Study the positive and negative impacts of including the management of natural forests and avoided deforestation, as well carbon sequestrated in harvested products, under the Kyoto Protocol.

• Create a clearing-house to exchange information (best-practice market-based mechanisms, successful pilot projects, market information, databases, publication, links, etc.) on markets for forest environmental services. This clearing-house could be combined with a clearing-house for innovative financing mechanisms for SFM.

• Carry out a study aimed at quantifying the flows of public sector and private sector payments for forest environmental services, and developing a monitoring system for keeping this information regularly updated.

Recommendations to Enhance Poverty Alleviation Impacts of MES

The main measures to enhance the participation of poor land owners, resource managers and rural dwellers in these markets and to fairly benefit from MES opportunities are the following:

• Secure land tenure and designate property rights for all products and services associated with the land resource, including recognition of community property systems where appropriate

• Develop clear rules for project design, that would include assessment of social impacts and adequate participation of local groups in project design and implementation

• Establish or introduce intermediary organisations to help the forest owners to participate in the market through provision of training, research, monitoring, and marketing services

• Develop ways of reducing transaction costs and risks, e.g., by helping farmers and communities to organise themselves and establishing intermediaries to help selling environmental services produced by a large number of smallholders/communities

• Improve access to markets for environmental services and finance by carrying out research, establishing market support centres, introducing special funds, strengthening financial intermediaries, etc.

Pro-poor market development of environmental service markets can be facilitated and poverty reduction impacts enhanced, were such projects were implemented in co-operation with other development efforts. Many of the measures needed to create the pre-conditions for environmental markets are the same activities, which create conditions for sustainable rural development and natural resource management in general, reducing thus the overall costs for market development.

Priority Areas for Research and Development

In the following, the main research needs from the viewpoint of market creation for environmental services from forests are identified by key themes.

• Accelerate research on valuation of environmental assets and services and their demand.

- Conducting valuation studies of environmental services provided by forests and relating these to the opportunity costs of foregone land-uses to help with pricing

- Carrying out demand studies for various environmental services to better understand the demand function, e.g., for specific conservation areas to improve the pricing of the service

- Developing equitable and efficient payment schemes that “internalise” the “externalities” and pay attention to the quality and quantity of services provided by different land properties and take into account trade-offs when joint (bundled) services are provided

• Initiate research on regional and national aspects of MES and their impacts on trade in forest products

- Providing detailed and localised estimates of the potential to contribute to carbon mitigation through forestry related measures, paying attention to financial profitability of the these investments and other factors that may affect feasibility

- Carrying out studies looking into system-wide adjustments, considering (i) increased storage of carbon in harvested wood products, (ii) impacts of increasing wood supply on prices and thus on incentives to expand plantation areas, and (iii) leakages caused by converting forest land to agricultural land and between both Annex I and non-Annex I countries and natural forests and plantations

• Improving the understanding of supply and demand relationships for environmental services from forests.

- Determining scientifically the linkages between forest management and flow of environmental services from forests in a situation, where services are produced jointly

- Developing ways to integrate biodiversity conservation, watershed management and carbon sequestration in natural forests into a bundled service

- Quantifying the relations between water quality, flow regulation, sediment prevention, water supply and aquatic productivity based on various land-use practices

• Supply studies focusing on transaction costs.

- Developing mechanisms for commoditising environmental services so that the commodity's nature and extent is unambiguous, and its delivery and use can be measured and enforced at a reasonable cost

- Identifying ways of decreasing the most critical transaction costs, paying special attention to the potential of developing markets for bundled services, and improving the distribution of these costs so that the incentive framework is improved.

• Develop standard verification and certification tools applicable to environmental services from forests

- Identifying appropriate measures of service flows and developing monitoring, verification and certification methods for them

- Standardising watershed service definitions and measurement

- Developing low cost certification systems for forest environmental services, building on already existing forest certification schemes

• Studying the cost-effectiveness of various market-based mechanisms used to pay for forest environmental services.

- Comparing the cost-effectiveness of various mechanisms (including government service delivery), paying attention to the distribution of costs and benefits among the stakeholders

- Studying the incremental benefits from applying these mechanisms to see if they really make a difference in the behaviour of producers and consumers

- Identifying the pre-conditions, which need to be put in place to improve the functioning of these mechanisms

- Identifying those conditions, where the responsibility for delivering an environmental service could be delegated to a market, and identifying the role that the government needs to play in setting up, regulating and promoting market-based transactions

²⁶ A practice has developed to refer to tariff peaks as rates that are more than three times the national average.
²⁷ This abstraction fails to fully describe the intra-category richness of the products and their values, thus there are exceptions, especially in the very high valued end of each category.
²⁸ The most distant operations in difficult conditions, may justify higher costs. Usually then the sales prices reflect this. As explained above, the present illustration can not fully account for variation for species, neither can it cover location specifics.
²⁹ For the main body of WTO legislation, see Section 5.1.
³⁰ Quad countries are: Canada, EU, Japan and USA
^31
32 Although discussion on these aspects has until now concentrated on carbon offset trade, they are also relevant for other services if their markets are to be expanded significantly.