Contents

Glossary 7

Executive summary 9

Size of the problem: the global cost of illegal logging 9

Existing measures to address the problem 10

Australia’s contribution to the problem 10

Options available to Australia 11

Compliance and enforcement costs 12

Benefits and costs of Australian measures 13

Effectiveness of Australian measures and the international context 14

Next steps 15

1 Background 17

Methodology 19

2 The problem 21

The size of the problem 21

Costs of illegal logging 25

Costs of removing illegal logging to consumers 28

Total costs of illegal logging 29

3 Regulatory and non-regulatory policy options 31

Context for the policy 31

Regulatory options for the restriction and disclosure elements 33

Factors to consider in designing the regulatory options 35

Illegal logging regulatory options examined in this RIS 41

4 Approach to modelling policy options 43

Impacts of compliance costs on willingness to supply 44

Factors affecting compliance costs 44

Modelling compliance costs of legal verification 45

Costs of disclosure measures and chain of custody costs 47

Government enforcement cost 48

Uncertainties about estimates of compliance cost 48

Summary of assumptions and implications of compliance costs 48

5 Economic costs of legality verification 50

Costs of the regulatory options 57

6 Cost–benefit analysis 59

Cost–benefit analysis of a unilateral response by Australia 60

7 Sensitivity analysis and impacts of regulatory options 63

Sensitivity to key assumptions 64

Summary of sensitivity analysis 66

Other sensitivities 66

Summary of regulatory options 67

8 Conclusion 73

Restricting imports 73

Effectiveness of and Australian initiative – international context 74

Product disclosure 75

Questions for consideration 76

References 77

Appendices 81

A GTAP model 83

B Methodology 86

C Various estimates of the non-market (social and environmental) costs of illegal logging 96

D Opportunity cost of complying with certification 102

E Cost of legality compliance 104

Boxes, charts and tables

1.1 Our analytical approach 18

1.2 Methodology 20

2.1 Estimate of illegal logging in selected countries 22

2.2 Estimated share of suspicious wood products in exports of wood products 23

2.3 Impacts of illegal logging 25

2.4 Estimates of costs of illegal logging 30

3.1 Proposed product categories for regulation 36

3.2 Key elements of the regulatory options analysed in this draft RIS 42

4.1 Compliance requirements for SDL, VLO, VLC and FC schemes 43

5.1 Simulations: Australian imports of wood products from risk countries 51

5.2 Simulations: Australian imports of paper products, printing and publishing from risk countries 51

5.3 Simulations: global reductions in logging in risk countries from unilateral action 52

5.4 Simulations: changes in illegal logging in risk countries 52

5.5 Change in production in Australia from unilateral action: all wood products 53

5.6 Change in employment in Australia forestry and wood products sector 54

5.7 Simulations: costs to the Australian economy if Australia acts unilaterally 55

5.8 Simulations: costs to the world economy 55

5.9 Welfare changes in Australia, risk countries and other countries: legality verified by full certification if Australia acts unilaterally 56

5.10 Simulations: cost to Australia per cubic metre reduction in logged wood in risk countries if Australia acts unilaterally 56

6.1 Simulations: benefits 60

6.2 Simulations: ratio of total global benefits to Australian cost 60

6.3 Simulations: ratio of total global benefits to total global cost 61

7.1 Sensitivity results for full certification and high product coverage: unilateral action 65

7.2 Sensitivity of costs and benefits for Australia under unilateral action 67

7.3 Potential impacts of legality verification, regulatory and non-regulatory options 71

A.1 Region classification 84

A.2 Sector classification 85

B.1 Logging supply and demand 87

B.2 Impact of eliminating illegal logging 88

B.3 Welfare change of eliminating illegal logging: sensitivity analysis 90

B.4 Social and environmental costs of illegal logging 91

B.5 Average shares of product categories in GTAP sectors 92

C.1 Social costs of logging 98

C.2 Estimating the benefits of eliminating greenhouse gas emissions associated illegal logging 100

C.3 Ecosystem services included in the estimate of biodiversity loss in forestry 101

D.1 Supply and demand responses to lower resources availability 102

D.2 Changes of 1 per cent reduction in forestry resources 103

E.1 Estimated annual costs of certification for a 5-year period certificate. Medium size operation. Native forest 106

E.2 Composition of certification cost 106

E.3 Estimated annual costs of certification for a plantation with well developed systems for a 5-year period 107

E.4 Cost of compliance for various types and sizes of operation, diverse standards 108

E.5 Estimated unit cost of compliance under various standards 108

E.6 Cost of compliance for various types and sizes of operation, full certification 109

E.7 Estimated unit cost of certification 109

E.8 Legality Assurance System (LAS) costs under various scenarios 111

E.9 CoC certification components 113

E.10 Example of a supply chain with 2 steps (nodes) and 2 suppliers per step 114

Glossary

APFSCB Asia-Pacific Forestry Skills and Capacity Building Program

CBD Convention on Biological Diversity

CERFLOR Certificação Florestal (Brazilian Forest Certification System)

CERTFOR Certificacion Forestal (Chilean system for Sustainable Forest Management)

CITES Convention of International Trade in Endangered Species

CoC Chain of custody

CPRS Carbon Pollution Reduction Scheme

DAFF Department of Agriculture Forestry and Fisheries

EU European Union

FAO Food and Agriculture Organization of the United Nations

FLEG Forest Law Enforcement and Governance

FLEGT Forest Law Enforcement governance and Trade

FMU Forest Management Unit

FSC Forest Stewardship Council

GTAP Global Trade Analysis Project

IPPC Intergovernmental Panel on Climate Change

ITTO International Tropical Timber Organization

LEI Lembaga Ekolabel Indonesia

MDF Medium-density fibreboard

MTCC Malaysian Timber Certification Council

NGO Non-government organisation

OBPR Office of Best Practice Regulation

OSB Oriented strandboard

PEFC Programme for Endorsement of Forest Certification

RIS Regulation Impact Statement

SDL Self-declared legal

TheCIE The Centre for International Economics

TLAS Timber Legality Assurance System

TLTV Timber Legality and Traceability Verification

UNCCPCJ United Nations Commission on Crime Prevention and Criminal Justice

UNFCCC United Nations Framework Convention on Climate Change

UNFF United Nations Forum on Forests

UN REDD United Nations collaborative programme on Reduced Emissions from Deforestation and Degradation in Developing Countries

US United States of America

VLC Verified Legal Compliance

VLO Verified Legal Origin

VPA Voluntary Partnership Agreements

WTO World Trade Organization

Executive summary

The Australian Government is considering introducing a policy to combat illegal logging and associated trade by establishing systems that will promote trade in legally logged timber and, in the long term, trade in timber and wood products from sustainably managed forests. The proposed policy includes restricting importation of illegally logged timber and thereby assisting in reducing the environmental, social and financial damage caused by it to Australia and other countries in the region. It also includes action to require disclosure of species, country of harvest and any certification at point of sale.

The Office of Best Practice Regulation (OBPR) has informed the Department of Agriculture Forestry and Fisheries (DAFF) that a Regulation Impact Statement (RIS) is required in relation to those elements of the proposed policy dealing with restricting imports and product disclosure. A RIS is required to assess the potential economic, social and environmental impacts of a range of regulatory and non‑regulatory options available to Government.

This report, being a draft RIS, has been prepared for consultation with stakeholders, who are invited to make written submissions on its findings. It is designed to assist DAFF prepare a final RIS which will inform Government consideration of the options for combating illegal logging and associated trade in the most cost effective and efficient manner. It has drawn on initial consultations based on an issues paper circulated earlier in the process, and on interactions with government agencies with portfolio interests in combating illegal logging and associated trade.

Size of the problem: the global cost of illegal logging

The most thorough estimates of the extent of illegal logging by Seneca Creek Associates (2004) suggest that between 5 and 10 per cent of global industrial production may be associated with illegal activity and that similar percentages of global trade in wood products can be traced to origins suspected to be illegal.

It is difficult to value many of the social and environmental costs resulting from illegal logging. However, estimates compiled for this report suggest the following:

§ Non-market (environmental and social) costs associated with illegal logging are of the order of US$60.5 billion a year.

§ The financial costs to legal producers around the world are estimated at US$46.0 billion a year.

§ But consumers (through lower prices) and producers of illegal timber (through higher incomes) and products receive benefits worth around US$92 billion a year.

§ The net result of these costs and benefits is a net cost of $15 billion a year, with a potential benefit to cost ratio of 1.16.

There is thus a potential benefit to the world from eliminating illegal logging. The key questions for this RIS concerns what additional costs would be incurred as a result of measures to reduce illegal logging, how much of the benefits might be achieved through actions that Australia can take, and how the measures being assessed might interact with other Australian and international initiatives.

Existing measures to address the problem

At the present time the Australian Government is using bilateral agreements on forestry with countries in the Asia-Pacific region — such as existing bilateral forestry agreements with countries such as Indonesia and Papua New Guinea — and multilateral processes, including the United Nations Forum on Forests (UNFF) non-binding agreement on the management of all types of forests and the United Nations Commission on Crime Prevention and Criminal Justice (UNCCPCJ) resolution on illicit international timber trafficking, combined with capacity building to support efforts for combating illegal logging and associated trade. The Government is also engaged in regional processes, including the East Asia-Pacific Forest Law Enforcement and Governance.

Other countries concerned with importation of illegally logged timber are also implementing or considering new initiatives to combat illegal logging and encourage enforcement of forestry laws in producer countries. These include the amendments to the Lacey Act recently introduced in the United States, and the ‘due diligence’ regulation being considered by the European Union.

Australia’s contribution to the problem

How much of the costs of illegal logging is likely to result from Australia’s importation of timber products?

Currently, only around 15 per cent of world production of timber products is internationally traded. Of this trade, Australia’s imports account for around 2.5 per cent. This study has estimated that around 10 per cent of these imports may include illegally logged timber. Thus Australia’s imports account for about 0.034 per cent of global timber production, and 0.34 per cent of products incorporating illegally logged timber. So if Australia were able to stop its importation of such products, and this led to a commensurate reduction in illegal logging (rather than a diversion of products to other markets), it could reduce the global costs of illegal logging by 0.34 per cent, or around US$51 million a year. But any available measures would impose compliance and other costs on Australia, and may not be fully effective in eliminating illegal logging. Assessing these costs and the potential effectiveness of measures is a key part of this RIS.

Options available to Australia

This RIS has considered a number of options for implementing the import restriction element of the Government’s policy. They include self-regulation, quasi-regulation, co-regulation and explicit regulation. Each of these options would employ some kind of legality verification scheme, and decisions would be needed as to what range of timber products would be covered. This RIS has considered the use of four types of certification schemes (self-declaration of legality (SDL), verified legal origin (VLO), verified compliance with all forestry and trade laws in the country of harvest (VLC) and certification of sustainability (full certification, FC). These schemes cover an increasing range of elements of legal compliance (details are provided in table 4.1 of this report).

Restrictions have been considered for different levels of coverage of imports defining three categories.

§ Category I — solid timber and wood products (covers about 12 per cent of imports);

§ Category II — category I plus partially processed/processed timber and wood products (covers about 39 per cent of imports); and

§ Category III — category II plus selected complex products, including paper manufactures and furniture (covers 70 per cent of imports).

Options that the Australian Government might adopt could include phased introduction of more comprehensive verification requirements and phasing over a wider range of products, as well as introduction of any one of the potential combinations of schemes and product coverage. This RIS has considered the effects of introducing each of the options on a stand alone basis.

Table 1 summarises the main elements of the regulatory options that have been analysed.

1 Key elements of the regulatory options analysed in this RIS

Regulatory option	Phasing product coverage	Legality, verification compliance	Phasing compliance options	Enforcement regime
Self	-	Current systems	-	Industry
Quasi-regulation	+	Code of conduct	-	Industry
Co-regulation	+	Legislate	+	Government
Explicit regulation	+	Legislate	+	Government

Note: The regulatory options could utilise the SDL, VLO, VLC or FC schemes. The pluses and minuses indicate whether it is likely that the regulatory approaches would involve phasing-in of the product coverage or the development of timeframes for requiring importers to shift from less to more onerous legality compliance schemes.

Compliance and enforcement costs

A key element of measures that Australia might adopt to restrict imports of illegal logging is that in order to demonstrate that imports do not contain illegally logged timber, traders will have to ensure that products are covered by the selected legality verification scheme. This will impose costs on producers in source countries, and on importers and other players up the value chain in Australia. In order to meet its international trade obligations, Australia would also have to impose the same requirements on products sourced in Australia.

These compliance costs will have economic effects: they will lead to higher prices of timber product imports and higher costs to Australian producers. Consumers will face higher prices, and may reduce consumption of timber products and/or substitute products made from other raw materials such as aluminium or cement. Some Australian producers may expand their sales on the domestic market, but so might producers in other countries, such as New Zealand or the United States.

For the purposes of this study, compliance costs have been modelled using information from a range of sources (including stakeholders consulted in the early stages of this RIS process). They have been estimated for producers in developing countries where the risk of illegal logging is considered to be high, and for producers in developed countries where risks are thought to be low, and for each of the legality verification schemes. The estimates also take account of how costs escalate the more complex and lengthy is the value chain. As with other key parameters, the sensitivity of results to alternative values for these costs has been carried out.

The measures will also impose costs of enforcement. Because information has not been available on the extent of costs associated with the policy options, they have not been included in the benefit cost analyses carried out for this report.

Benefits and costs of Australian measures

The benefit cost analyses carried out for this RIS indicate that, for Australia, there is an overall net cost from unilaterally implementing import restriction and product disclosure elements.

The results also make it clear that any unilateral action taken by Australia is likely to be ineffective in reducing illegal logging because of the potential for timber products incorporating illegally logged timber to be diverted to less discerning markets and because Australia is such a small part of the global market.

The analysis indicates that applying unilateral import restrictions would only stop production of about a tenth of the products incorporating illegally logged timber currently coming to Australia. The rest would be diverted to other markets and other products (export and domestic). Because so much timber is used domestically in the country of harvest, and because much of the trade in timber flows through countries with weak or no controls on the legality of imported timber, the scope for diversion is high. Further, although it is difficult to restrict all products, if the product coverage of measures is small, illegally logged timber will flow into the non-restricted trade.

The bottom line is that because Australia’s imports account for such a small share of illegally logged timber, and restricting imports has limited effect in reducing illegal logging, Australia incurs all the costs of restricting imports without achieving commensurate benefits of reducing the damaging effect of illegal logging. This reflects the inherent difficulty of constructing measures within Australia to affect behaviour in other countries.

The analysis shows that the measures are likely to cause welfare losses in Australia and in those developing countries from which Australia may currently be importing products incorporating illegally logged timber. However, national welfare would be increased slightly in countries such as New Zealand and the United States, whose producers would expand export sales to Australia.

The analysis also shows that options using the more comprehensive legality verification schemes, such as full certification, typically impose higher costs on Australia compared to the less extensive schemes such as verified legal origin or verified legal compliance.

The analysis of the disclosure measure shows if it is introduced in parallel with the import restriction scheme, and only required at the point of entry into Australia, the additional compliance costs are very small. However, it is clear that the compliance costs increase the further along the supply chain that the disclosure of information is required. Enforcement of the measure will also be more expensive if disclosure is required at the wholesale or retail trade. Depending on how the disclosure measure is legislated, enforcement costs may fall on state governments.

The sensitivity of the benefit and cost estimates to alternative values for key parameters, including the level of compliance costs, the extent of illegal logging, the responsiveness of producers to changing market opportunities has been tested and reported in this draft RIS.

A number of intangible benefits associated with the policy have not been taken into account in the analysis. These intangibles include:

§ Australia providing a role model to other trading partners;

§ Australia ‘sending a message’ to trading partners that they should also invest in measures to curb illegal logging, with the initiative could be seen as a step towards more effective national and multilateral moves to improve the sustainability of all logging, legal or illegal;

§ a sense of morality for those Australians concerned about the issue;

§ a stronger position for Australia to negotiate international actions if the country is not seen to be benefiting from illegal or unsustainable behaviour in other countries; and

§ maintenance of existence values such as people gaining benefits from knowing the forests in other countries are not being illegally logged.

If it were possible to place a value on these intangible benefits, their inclusion in the analysis could lead to a higher estimate of the net benefit of the restriction element. However, this value would have to be large to provide a positive net benefit, a possibility that is compromised by the low level of reductions in illegal logging caused by unilateral action. Further, the analysis has not taken account of all of the costs, since it was not, for example, able to gather estimates of the costs to government of enforcement.

Effectiveness of Australian measures and the international context

An important issue shaping the results of the cost-benefit analysis is that while Australian measures to restrict imports of products incorporating illegally logged timber can be reasonably — although not completely — effective in limiting such imports, they are much less effective in reducing the amount of illegal logging occurring in the world.

A new Australian initiative would, however, be implemented in a context where some significant importers of timber products are also putting in place measure targeting importation of illegally logged timber. This could reduce the scope for diversion of illegally logged timber. This analysis has tested whether the actions being taken or considered in the United States and members of the European Union would increase the effectiveness of an Australian restriction measure in reducing the extent of illegal logging. The results show that the effectiveness of Australia’s actions would be increased, but not enough for the benefits to exceed the costs. This is because opportunities for leakage would remain. This is not entirely unexpected because trade in timber products is only about 15 per cent of global production so a significant share of illegally logged timber (85 per cent) is consumed within the country where it is harvested. So any action aimed at trade is only likely to directly target about 15 per cent of illegal logging. It may have other flow-on effects to domestically consumed products, however, that said, even action targeted at the 15 per cent of timber products that is traded is unlikely to be 100 per cent effective in its enforcement. (It is possible, of course, that actions taken by governments in countries which are major markets for timber products may encourage a more rapid adoption of a culture of legal compliance within countries where illegal logging occurs or extensive use is made of illegally logged timber. This study has not modelled this possibility.)

If a full — and effective — multilateral agreement were in place that included the main sources and users of illegally logged timber the scope for diversion of illegally logged timber in response to an Australian measure to restrict imports would be substantially reduced. To be effective such an approach would need to target domestic consumption as well as trade. Similarly, agreements and cooperative arrangements with developing producer countries, such as Indonesia, Malaysia and Papua New Guinea, and consumer countries, such as China, that are designed to improve forest governance, achieve sustainable forest management, forest certification and verifying the legal origins of timber products would also complement a restriction measure and increase the probability that it would be effective. This might also be true for initiatives for regional capacity building through overseas development aid. This analysis has not assessed the likely impacts of such complementary measures.

Next steps

Initial consultations for this RIS were conducted in April with about 60 stakeholders in Australia directly involved in production and trade of wood products, or in efforts to reduce illegal logging and improve the sustainability of forestry activities. The aim of this preliminary process was to seek input on the relative importance of the many issues associated with developing measures to combat illegal logging. An Issues Paper was prepared to introduce key issues/questions likely to influence the outcome of the RIS. The broad topics for discussion relate to the motivation of the policy and the options for action, the problem of illegal logging and its size, and the dimension of potential costs (including compliance costs) and benefits of an Australian policy.

Stakeholders’ comments on each of such issues varied considerably. However, there was a consensus that taking action to address illegal logging is a complex task, and that, despite the election commitment, there is still uncertainty on what the timeframe, instruments and outcomes of the Australian policy approach would be.

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

1 Background

The Australian Government is considering ways to meet an election commitment concerned with combating illegal logging and associated trade by establishing systems that will promote trade in legally logged timber and, in the long term, trade in timber and wood products from sustainably managed forests.

It is intended that the policy will have five main elements, in which the Australian Government would work with regional (international) governments to:

§ build capacity within regional governments to prevent illegal timber harvesting;

§ develop and support legal and sustainable certification schemes for timber products sold in Australia;

§ identify illegally logged timber and restrict its import into Australia (the restriction element);

§ require disclosure of species, country of origin^{^[1]} and any certification (the disclosure element); and

§ argue that market-based incentives aimed at reducing emissions from deforestation and forest degradation should be included in a future international climate change agreement.

This policy would complement other national government and industry initiatives aimed at combating illegal logging and associated trade, as well as initiatives being taken by other countries that play a significant role in trade and production of timber and timber products.

Actions to regulate the importation into Australia of timber and associated products would have a range of impacts for Australia, including increased business compliance costs to meet legality and disclosure requirements, increased costs to consumers of imported and domestically-supplied timber products and a potential decrease in the supply of imported timber products. The Office of Best Practice Regulation (OBPR) accordingly informed the Department of Agriculture, Fisheries and Forestry (DAFF) that a Regulation Impact Statement (RIS) was required to assess the impacts and efficacy of potential measures to deliver the import restriction and product disclosure elements of the policy.

1.1 Our analytical approach

Source: TheCIE.

The Centre for International Economics (TheCIE) has been engaged by DAFF to prepare the RIS. As part of the RIS process, this draft Statement has been prepared for consultation with affected and interested parties. It presents an assessment of the costs and benefits of a range of regulatory options for delivering the import regulation and disclosure elements of the proposed policy. It also considers the potential for achieving the underlying objectives using non-regulatory means. Following the consultation process, a final RIS will be prepared: it will help DAFF determine the most effective and efficient options for meeting these objectives. Steps and timing for this draft Regulatory Impact Statement

Chart 1.1 summarises the 17 step approach adopted by TheCIE for preparing the RIS. The approach involves four stages:

§ clearly defining the rationale behind the policy and policy options;

§ economic modelling of the forestry sector;

§ assessing the costs (economic, environmental and social) of illegal logging and benefits of reducing it; and

§ bringing the first three streams together to assess the benefits and costs on a consistent basis and logically argue through the findings via a transparent reporting process to stakeholders, the OBPR and DAFF.

This draft RIS incorporates the results of all the steps leading up to and including step 14 in chart 1.1, including initial consultation with stakeholders. Its purpose is to provide a benefit–cost analysis of the range of options for stakeholders to comment on.

Methodology

The methodology for undertaking the cost–benefit analysis and the main elements considered in this process are set out in chart 1.2.

The analysis relies on existing global estimates of illegal logging. These have been used together with current trade data to estimate the volume and value of illegal timber imports to Australia.

As there is considerable uncertainty surrounding these estimates, sensitivity testing has been conducted on parameters derived from these estimates.

The analysis also uses existing literature to identify the non-market costs of illegal logging and a variety of secondary sources to estimate these costs globally.

Various regulatory and non-regulatory options for delivering the restriction and disclosure elements of the proposed policy are assessed. To assess benefits to Australia we use a global general equilibrium model of trade to estimate the global financial costs of eliminating illegal logging and compare these costs to the global non-market benefits of eliminating illegal logging. From this we can determine Australia’s potential share of these global benefits. To estimate costs to Australia we use a model of compliance costs and the global general equilibrium model to estimate the global and Australian impacts of Australia’s options to restrict imports of illegal logging. This also enables us to estimate the reduction in illegal logging caused by Australia’s actions and the net cost to Australia and to other countries.

We use the estimates of reductions in illegal logging from Australia’s options to estimate what proportion of the global benefits of reducing illegal logging might be attributed to Australia’s policy approach. We are then able to assess costs to Australia against benefits achieved to determine the net benefits or costs from the policy.

1.2 Methodology

Source: TheCIE.

2 The problem

The motivation and rationale for the proposed policy stems from the proposition that illegal logging and resulting trade is a significant global problem causing environmental, social and economic harm.

Forest laws (in theory) are designed to overcome economic problems relating to the public good characteristics of forests. They aim to limit access to forest resources in order to ensure that users take account of the full social costs of exploitation. In the absence of laws and well defined and enforced property rights, logging can lead to sub-optimal environmental, social and economic outcomes.^{^[2]} And so logging that occurs in breach of these laws can also have negative impacts, not only for the localities and countries where the logging occurs, but also, in the case of losses of some environmental functions of forests, such as carbon sequestration and maintenance of bio-diversity, for the whole world.

Unclear forest tenure, weak political institutions, poverty, corruption, poor enforcement, and large financial incentives involved in avoiding the full costs of obtaining timber legally lie at the heart of most illegal logging (Seneca Creek Associates (2004)).

Preventing illegal logging is an important part of realising the full benefits to society provided by forests (along with ensuring that forestry laws are well-designed to achieve these broader benefits.) Restricting imports of products derived from illegal logging is seen as one way of reducing illegal logging and associated trade, and in effect to help enforcement of forest laws. However assessing the impact of such restrictions on reducing environmental, social and financial damage caused by illegal logging involves dealing with some complex issues.

The size of the problem

Estimates of the extent of the global level of illegal logging vary substantially, depending on the definition of illegal logging used and the methodology and assumptions employed. At the lower end, the American Forest and Paper Association (2009), estimates that illegal logging accounts for around 10 per cent of the total global harvest, whereas Greenpeace (2009) estimates that the proportion may be up to 80 per cent in some countries.

The wide range in the estimates of the extent and associated cost of illegal logging raises the issue of the reliability and accuracy of underlying data and methodologies used to generate them. For example, the most widely cited study, Seneca Creek Associates (2004), uses data which is 6 years old and therefore may be out-of-date. It is important to take into account the relative uncertainty of such estimates when considering the impacts of illegal logging in a particular country.

Many of the estimates of illegal logging are also constructed using anecdotal evidence or limited research (due to the difficulty with obtaining up-to-date empirical data). A common approach has been to assess the overall governance of a country based on a corruption index to infer some level of illegality: the resulting proportion (percentage estimate) is then applied to all of the country’s timber harvest (Curtin 2007). A briefing prepared for Chatham House asserts that half of the logging occurring in countries judged to be at ‘high risk’ of illegal logging is illegal (Brack, 2007). The brief further estimates that illegal logging accounts for about 10 per cent of the total global timber trade, or around US$15 billion per year.

A snapshot of illegal logging in some countries

Table 2.1 presents some published data for key countries such as their share in world production of roundwood, estimated size of illegal logging, and perceived corruption.

2.1 Estimate of illegal logging in selected countries

Country	Share in world production of roundwood (per cent)(a)	Proportion of illegal production of timber (per cent) (b)	Corruption index (of 180 countries (c)
Brazil	6.8	20-47	80
China	8.2	30	72
Indonesia	2.9	70-80	126
Papua New Guinea	0.2	70	151
Russian Federation	5.8	10-15 (northwest) 50 (far west)	147
Solomon Islands	0.03		109
United States	12.4	< 1	18

Sources: (a) FAO (2009, data for 2007). (b) World Bank (2006) and Seneca Creek Associates (2004). (c) Transparency International (2008).

Estimation of illegal logging exports

The most comprehensive and widely cited estimates of illegal logging production and trade are those in Seneca Creek Associates (2004) and Turner et al (2007).

Turner et al (2007) estimated the illegal share of roundwood harvested in 2005 with three estimates for each exporting country or country group — high, low and most likely (table 2.2). Seneca Creek Associates (2004) estimated the shares of products from suspicious sources for softwood roundwood, lumber and plywood, and hardwood roundwood, lumber and plywood in 2002, which are between the high and most likely estimates by Turner et al (2007).

The data from these sources have been used to generate the starting estimates of the proportion of illegally logged timber and products from the countries and regions used in the modeling undertaken for this study.^{^[3]} These estimates are presented in table 2.2.

2.2 Estimated share of suspicious wood products in exports of wood products

	2002 share from Seneca Creek (2004)^a	2005 share from Turner et al (2007)^b
	2002 share from Seneca Creek (2004)^a	Low	Most likely	High
Australia	0	0	0	0
New Zealand	0	0	0	0
Other Oceania	75	50	75	80
China	31	20	30	40
Japan	16	0	0	0
Korea	17	12	17	23
Hong Kong and Singapore	17	12	17	23
Indonesia	67	50	60	80
Malaysia	11	3	5	35
Thailand	17	12	17	23
Vietnam	17	12	17	23
Rest of Asia	17	12	17	23
Russia	23	10	18	40
EU15	0	0	0	0
Acceding EU10	4	7	10	13
Rest of Europe	3	0	0	0
North America	0	0	0	0
Brazil	5	13	19	25
Other Latin America	8	6	8	11
West and Central Africa	25	20	30	40
Rest of Africa	3	0	0	0
Rest of the world	3	0	0	0

^a Applying Australia’s import share of hardwood and softwood roundwood, lumber and plywood.

^b Turner et al (2007) estimates the suspicious roundwood harvest.

Australia’s imports of wood products from high risk countries

In 2007 Australia imported A$8.4 billion of timber and wood products. Furniture(imports classified to chapter 94 of the Harmonized System (HS) of trade nomenclature — HS94, which also includes non-wood products) is the biggest component, valued at almost A$3 billion (35.5 per cent), followed by paper and paperboard (HS48) at A$2.8 billion (33 per cent), and wood (HS44) at A$1.2 billion (14.8 per cent).

Sources of imports

In 2007, 26.7 per cent of Australian imports of timber and timber products were from China, with 22.3 per cent coming from EU-15 group of countries, 10.3 per cent from New Zealand, and 7.9 per cent from the United States. China’s share has grown from just 4.7 per cent in 1994 to 26.7 per cent in 2007. The ten countries/regions with the largest shares of Australian imports accounted for 86.3 per cent of total imports in 2007.

The commodity structure of Australia’s imports varies considerably across the source ‘regions’. For example, in 2007 over two thirds of timber imports from China were furniture, while over 90 per cent of imports from South Korea were paper and paperboard.

Proportion of Australia’s timber product imports might incorporate illegally logged timber

Turner et al’s low and most likely estimates suggest that around 8-12 per cent of Australia’s imports of timber products could contain illegally logged timber. These are consistent with direct estimates for Australia of approximately 9 per cent or A$400 of imported forest products and wooden furniture (Jaakko Poyry, 2005).

Australia’s influence in world trade

World trade in timber and wood products appears to be around 15 per cent of world output by value. Australia’s imports of timber products account for a very small share of world exports, and an even smaller share of world output. Consequently, its importation of products incorporating illegally logged timber is also small, as the following summary shows:

§ World production of timber products (excluding furniture) is estimated to be around US$1 trillion a year.

§ World exports of timber products (excluding furniture) is around 15 per cent of this:

– this is valued at around US$150 billion

– (approximately 10 per cent of this, worth US$ 15 billion, incorporates illegally logged timber).

§ Australia’s imports of these products is estimated at:

– A$4.4 billion;

– equivalent to around US$ 3.75 billion or 0.375 per cent of global output and 2.5 per cent of global trade.

§ Australia’s imports of product incorporating illegally logged timber is estimated at A$400 million which is equivalent to around US$340 million, or 0.034 per cent of global production and 0.34 per cent of estimated global production of timber products incorporating illegally logged timber.

Costs of illegal logging

There is a range of economic, social and environmental costs associated with illegal logging. Illegal logging involves waste and reduction in aggregate national welfare in the source countries, and imposes global costs.

Table 2.3 summarises the main financial, social and environmental effects associated with illegal logging. Financial effects are generally market related while social and environmental effects can be considered as intangible or non-market effects. The OBPR guidelines require that both market and non-market effects and impacts be taken into account when a RIS is being prepared.

2.3 Impacts of illegal logging

Financial

Social

Environmental

§ Loss of revenue for governments and legal producers of timber

§ Distortion of global prices of timber

§ Losses of non-wood forest products

Illegal logging also results in a number of economic transfers associated with:

§ lower prices of timber and timber products

§ income from logging and transport operations

§ non-payment of taxes by illegal loggers.

§ Displacement of forest-dependent communities from their livelihoods, cultural identity and spiritual values

§ Challenges to law and order and encouraging arbitrary (corrupt) exercise of power from government officers

§ In some countries illegal harvesting practices have been linked to funding of armed conflicts.

§ Waste of resources in pursuing gains from illegal logging.

Illegal logging that leads to a net loss of forest resources causes a number of environmental problems:

§ Loss of biodiversity

§ Removal of important carbon sinks which also compounds global warming

§ Soil and water degradation which could lead to erosion, reduced water quality, landslides and avalanches

§ Loss of future resource

Source: TheCIE.

Financial costs of illegal logging

The literature offers estimates of the extent of the main financial effects attributed to illegal logging.

§ Seneca Creek Associates (2004) estimate that illegal logging depresses global prices of timber. Turner et al (2007) estimate that world wood product^{^[4]} prices would increase if illegal product were eliminated. Their estimates show that production in Asia, South America and Russia would decline but it would increase for countries and regions such as the USA, the EU, Australia, New Zealand and Finland, where the occurrence of illegal logging is considered to be small. That is, there would be a switching from illegal to legal logging (switching would also occur in countries where illegal logging is prevalent). Overall, Turner et al (2007) estimate that global production of wood and wood products would decline in the short term if illegal logging were eliminated.

§ The World Bank (2006) estimates that illegal logging in developing countries causes losses in assets, and industry and community revenue streams, in excess of US$10 billion per year. The World Bank also estimates that some US$5 billion of logging tax and royalties is evaded each year.^{^[5]}

However these estimates do not capture all of the financial consequences of illegal logging, as they ignore the wider economic impacts on downstream users and consumers and some other trade-offs.^{^[6]} Modelling undertaken for this study, of the financial consequences of illegal logging at current levels using a comprehensive general equilibrium global trade model (details of the modelling are presented in appendices B and C) gives the following results:

§ Producers of legal forest products in non-risk (high cost) countries like the United States, Europe and New Zealand are around US$15 billion a year worse off due to reduced production, lower prices and lost trade opportunities caused by illegal logging;

§ High cost legal producers in risk countries^{^[7]} such as China, Indonesia, Russia and Malaysia receive profits and income that are around US$31 billion lower than they would be without illegal logging.

§ On average, total production of wood products is about 3 per cent higher than it would be without illegal logging, and consumption of timber substitutes is lower than it would otherwise be (without illegal logging, consumers would switch to substitute such as steel, concrete and aluminium).

The implication of this analysis is that illegal logging imposes financial costs on those involved in legal logging of around US$46 billion a year. Prices to consumers and down-stream users of wood products are about 3 per cent lower than they would otherwise be, and average prices in developing countries are more than 8 per cent lower than they would otherwise be.

Social and environmental (non-market) costs of illegal logging

Various international organisations have estimated some of the social and environmental costs of illegal logging (see, for example, World Bank 2006 and FAO 2005). The European Commission has commissioned studies that have tried to quantify the costs of biodiversity loss. Other estimates in the literature provide a basis for homing in on the possible magnitude of social and environmental costs borne by the world as a result of illegal logging. Drawing on these sources, it has been possible to construct estimates of the costs of six types of non-market social and environmental impact of illegal logging (see appendix C for the methodology and assumptions employed):

§ Loss of non-wood forest products
Illegal logging can result in the loss of non-wood forest products such as animals, food, fruit, and plants. It is estimated that the loss of non-wood forest products due to illegal logging could be around US$0.86 billion annually.

§ Resources wasted in pursuit of gains from illegal logging
Although much of the impact of illegal logging may be the illegal transfer of assets and income from the legal owners to loggers, real economic costs may be imposed from the waste of resources used to effect the illegal transfer. For illegal logging, this benefit includes the value derived from the timber that is illegally logged, and the taxes and other payments that should have been made to the government. We estimate the value of resources wasted to be around US$7.5 billion annually.

§ Displacement of forest communities
Deforestation can potentially displace subsistence communities from their livelihoods, cultural identity and spiritual values. About 60 million indigenous people are fully dependent on forests for their livelihoods (FAO 2007c). Quantifying the costs of displacement of forest-dependent communities caused by illegal logging requires that some consideration be given to the extent to which these groups’ forests would have been at risk from legal logging or land clearing activities anyway, which might be occurring due to the land pressures associated with broader demographic pressures and economic development. One way of placing a value on these costs is to estimate how many people may be displaced each year by illegal logging, and use estimates of expenditure on relocation outlays made in donor supported relocation programs designed to compensate communities for the loss of amenities associated with their move. Using a relocation cost estimate drawing on actual experience in donor-funded projects, we have estimated the loss associated with community displacement caused by illegal logging to be of the order US$6.6 million a year.

§ Costs of greenhouse gas emissions
Increased greenhouse gas emissions and reduced carbon absorption are considered to have global impacts on the climate that imposes real costs on the world. There are many uncertainties surrounding the cost of greenhouse gas emissions caused by illegal logging operations. However we have estimated that US$43 billion annually is a plausible representation of the cost of greenhouse gas emissions caused by illegal forestry activities.

§ Costs associated with loss of ecosystem services and biodiversity
Illegal logging can impose costs on society because of the loss of ecosystem services provided by forests, in particular through loss of biodiversity. Annual loss of ecosystem services species and flora and fauna in forested biomass due to land use change has been estimated at €28 billion (say US$45 billion a year) (Braat and Brinks 2008). Using a similar process to estimating green house gas costs we estimate that illegal logging might be imposing costs due to loss of forest ecosystem services of around US$4.5 billion a year.

§ Soil and water degradation
Forests influence the chemical composition of underground water and affect rain patterns. The effects of forests filtering and regulating water flows can be lost with deforestation and landslides and avalanches can occur. Reduction of forests affects the productivity, temperature and humidity of the soil. According to the FAO (2007b) mismanagement of woodlands in humid and subhumid tropical countries significantly contributes to soil losses equivalent to a 10 per cent loss of agricultural gross domestic product (GDP) per year. We estimate the costs of soil and water degradation caused by illegal logging to be around US$5 billion annually.

The derivation of these estimates is discussed in appendix C. It should be noted that in some cases, it is hard to be certain what the underlying cost estimate actually covers, although all such estimates have been taken from internationally or domestically reputable sources. In some cases, the estimate of underlying cost is rather indirect, using a measure of what society might be prepared to pay to achieve a reduction in the costs, or upper bounds based on assumptions about the behaviour of firms and individuals engaging in illegal logging.

Costs of removing illegal logging to consumers

The modelling that generated the estimates of the financial costs of illegal logging imposed on legal producers’ losses also indicates that in the absence of illegal logging:

§ It would cost consumers and down-stream users of wood and wood products in low risk countries and regions (such as the United States and the European Union) an extra US$12 billion a year to buy their wood products due to having to pay higher prices— in response they would reduce consumption of these products and switch in part to other products made of substitutes.

§ Producers, consumers and downstream users of illegal forest, wood and paper products in risk countries such as China, Indonesia, Russia and Malaysia would have profits and income some $80 billion lower than would otherwise be the case.^{^[8]}

Total costs of illegal logging

Table 2.4 summarises the estimates of the various costs associated with illegal logging. The non-market costs associated with illegal logging are estimated to be of the order of US$60.5 billion a year. The financial costs to legal producers around the world are estimated at US$46.0 billion a year, but these are more than offset by the fact that without illegal logging, consumers in the developed world would be worse off by around US$12 billion a year, and that in source countries consumers and producers of illegal timber and products using it would be worse off by US$80 billion a year. So the net cost to the world associated with those impacts included in the estimates is US$14.5 billion a year. Australia’s consumption of imported products incorporating illegal timber accounts for around 0.34 per cent of this cost.

2.4 Estimates of costs of illegal logging

Source	Estimate
	$ billion a year
Financial costs/benefits
Losses to legal producers	46.0
(less financial benefits to consumers and those involved in illegal logging)	-92.0
Total financial costs	-46.0
Non-market costs
Social costs
Loss of non-wood forest products	<1
Wasted resources	7.5
Displacement of forest communities	<1
Environmental costs
Greenhouse gas emissions ^a	43.0
Loss of ecosystem services (biodiversity)	4.5
Soil and water degradation	5.0
Total non-market costs	60.5
Total costs	14.5

^aMidpoint based on a range of estimates using different values placed on emissions of greenhouse gases and on the share of emissions caused by deforestation (see appendix C).

* May not add exactly due to rounding errors.

Source: TheCIE calculations.

3 Regulatory and non-regulatory policy options

The OBPR has indicated that a RIS is required to assess the impacts and efficiency of potential measures to deliver the import restriction and product disclosure elements of the proposed policy for combating illegal logging and associated trade. In doing so, the RIS should consider whether the underlying problem might be best addressed by alternative approaches to regulation, ranging from self-regulation by Australian operators, through to quasi-regulation and co-regulation to black-letter law approaches.

The RIS has to address the complexity of the factors potentially impacting on the effectiveness of import restrictions and product disclosure requirements in contributing to the overall objective of the policy. At the same time, consideration of the findings of the RIS has to recognise that measures aimed at these elements will be implemented in the context of complementary actions taken by the Government with respect to the other three elements of the policy as outlined in chapter 1. As such, the RIS is looking at a range of regulatory import restriction and product disclosure options to be used in conjunction with Australia’s non-regulatory efforts to combat illegal logging by encouraging the enforcement of forestry laws in other countries.

Further, the effectiveness of the measures may be enhanced because other governments are introducing measures to restrict their country’s imports of products incorporating illegally logged timber, and to help with the construction and enforcement of laws in source countries. Most wood producing countries are improving their systems of forestry governance and timber suppliers are introducing timber legality assurance and chain of custody schemes.

This chapter discusses the potential mechanisms that suppliers could use to verify the legal origins of timber products based on their compliance with forestry laws, the range of products to be targeted, and the potential regulatory options available for government enforcement of the import restriction and product disclosure elements of the new policy.

Context for the policy

At the present time the Australian Government is using bilateral agreements on forestry with countries in the Asia-Pacific region and multilateral processes combined with capacity building to support efforts for combating illegal logging and associated trade. It may be possible to enhance each or all of these activities as part of the Government’s overall policy response, in association with the import restriction and product disclosure elements. Further, initiatives being taken or contemplated by the United States and the European Union which provide examples of alternative approaches to the problem will also affect the way in which Australian measures might impact on illegal logging and associated trade.

Multilateral processes

Multilateral processes seek common agreement through a convention or other internationally agreed instrument on the mechanisms for achieving a common objective such as combating illegal logging or improving forest management. In the case of illegal logging and sustainable forest management, Australia participates in multiple forums. The United Nations Forum on Forests (UNFF) has an agreed objective to combat illegal logging and the United Nations Commission on Criminal Prevention and Criminal Justice (UNCCPCJ) has focussed on reducing illicit trafficking of timber products.

A process aim at combating illegal logging in the East Asia Pacific region (East Asia-Pacific Forest Law Enforcement and Governance, EAPFLEG) was established in 2001 but has been slow in achieving outcomes. The United Nations Framework Convention on Climate Change (UNFCCC) is seeking to reduce greenhouse gas emissions and has noted the importance of enforcing forestry laws (which may be interpreted to include the combating of illegal logging).

However, despite there being numerous forestry-related multilateral processes, there is currently no universal mechanism or plan of action in place to meet a common objective of combating illegal logging or to address the multiple drivers (corruption and capacity to enforce forestry laws) which underpin illegal logging.

Bilateral processes

Bilateral forestry agreements between countries can be employed to support cooperation in sustainable forest management and improve the systems of governance that could be used to verify the legal origins of timber products. These elements are captured in Australia’s existing bilateral forestry agreements with countries such as Indonesia and Papua New Guinea. Governments use these bilateral agreements to accelerate the reform processes underpinning the changes in governance and law enforcement required to effectively combat illegal logging and associated trade.

Capacity building program

One of the options for achieving specific outcomes and targeted reforms is for governments to invest in capacity building activities in the developing timber producer countries. Examples include official aid from developed countries to fight corruption and improve the institutional and governance frameworks associated with forestry.

Phase I of the Australian Government’s Asia-Pacific Forestry Skills and Capacity Building Program contributed to these efforts by supporting the training of forest managers in forestry certification, and promoting the application and use of legality verification and certification schemes to demonstrate compliance with forestry laws. That is, assisting forestry managers to establish the systems for verifying the legal origins of timber products.

International initiatives

If Australia were to adopt import restriction and product disclosure measures on its own, this would represent a unilateral approach to achieve its policy objective. There is a risk, assessed in later chapters, that a unilateral approach may impose costs on Australia with limited effectiveness in reducing illegal logging and associated trade because trade in illegal product may be diverted to other markets. However the options proposed for the restriction (and disclosure) element(s) may interact positively with the initiatives of other importing countries. The combined effect of these efforts, by bolstering requirements for governments in producer and consumer countries to verify the legal origins of timber products, will reduce the potential for trade to be redirected to markets with less onerous requirements.

The US Lacey Act amendments and the ‘due diligence’ regulation being considered by the EU represent two such processes for combating illegal logging and encouraging enforcement of forestry laws in producer countries. Indonesia is implementing a Timber Legality Assurance Scheme (TLAS) scheme as part of its Voluntary Partnership Agreement (VPA) with the EU, and Association of South East Asian Nations (ASEAN) is currently developing a TLAS for its member countries. As national and international initiatives proliferate, it is anticipated the additional costs for timber producing countries to comply with Australia’s requirements will be reduced, as long as those processes continue to develop in a consistent way. A multilateral agreement for verifying the legal origins of timber products would further enhance the capacity of these initiatives to achieve their objectives.

Regulatory options for the restriction and disclosure elements

Regulatory options that could be employed to achieve the import restriction and disclosure outcomes sought by the Australian Government might include using quasi-regulation, co-regulation or explicit regulation policy in conjunction with one or more of the non-regulatory processes.

Self-regulation — existing industry arrangements

In recent years, as the impacts of illegal logging and associated trade have become of wider public concern, Australian importers have increased their efforts to source legal timber and wood products, with some enterprises able to provide credible assurances of the legality of their products. However, a substantial number of importing firms still do not seek any legal verification of their products under voluntary arrangements. Industry-wide willingness to comply with a voluntary arrangement is an important factor to consider when assessing the potential effectiveness of regulatory policy options to combat illegal logging and associated trade.

The current legality verification approaches adopted by Australia’s timber and wood products importers (and domestic producers) include a mix of voluntary industry guidelines, legality verification schemes, codes of ethics and procurement policies. These instruments are employed by industry on an ad hoc basis to guide their purchase decisions and to assess potential risks that products might be derived from illegally harvested sources. There is no reported assessment of performance of any of these instruments and therefore no way of assessing their effectiveness. However, the restriction and disclosure elements adopted by the Government could build on these existing systems and processes.

Quasi-regulation

Quasi-regulation includes a wide range of rules or arrangements where governments influence businesses to comply, but which do not involve government regulation. Some examples of quasi-regulation include industry codes of practice developed with government involvement and guidance notes or industry–government partnership agreements and accreditation schemes.

An example of government/industry co-operation under quasi-regulation could be the development of a draft code of conduct for timber product importers. Such a draft generic code is currently being developed for Australian importers by the Timber Development Association of NSW. Such a code should assist companies along the supply chain to demonstrate the legality of their products. Legality verification guidelines for importers purchasing timber from PNG and Indonesia (currently being prepared with funding from phase 1 of the Asia-Pacific Forestry Skills and Capacity Building Program) could assist importers to understand the risks of sourcing illegally-harvested products and the verification schemes available to demonstrate legality.

Co-regulation

Co-regulation typically refers to the situation where industry develops and administers its own arrangements to demonstrate the legality of its product, but government provides legislative backing to enable the arrangements to be enforced. This is known as the ‘underpinning’ (through legislation) of codes, standards and other forms of legality verification schemes.

Explicit government regulation

Explicit government regulation, prescribing a standard to be met, is the most commonly used form of regulation to achieve the objectives of government policy. In this case, regulation would prescribe the requirements for verifying that timber products have been legally sourced.

Factors to consider in designing the regulatory options

Design of any of the regulatory options outlined above requires a consideration of:

§ the definition of legality to be employed;

§ the range of products to be covered;

§ mechanisms for demonstrating compliance with forestry laws;

§ enforcement of regulatory options for the restriction and disclosure elements;

§ penalty regimes for non-compliance with the restriction and disclosure elements; and

§ international trade agreement implications.

Definition of legality

In its 2007 election commitment, the Government defined illegal logging as occurring when timber is: stolen; harvested without the required approvals; bought, sold, traded or processed in breach of law; or authorised for harvest or trade through corrupt practices. However, to restrict the importation of illegally-logged timber it will be necessary to differentiate between legally and illegally harvested timbers. Legality of product may be demonstrated through the use of credible timber legality verification and chain of custody schemes that provide proof of compliance with the applicable laws of the country of harvest.

Product coverage

The US Lacey Act Amendments provide an indication of how product coverage may be phased in over time to enable importers and their suppliers to comply with new regulatory requirements. For the purpose of this analysis, three product categories are proposed for Australia’s policy response, based on the complexity of their components (for example, sawn timber versus furniture) and of their supply chain (single versus multiple input sources) (table 3.1).

The Australian Government could choose any or all of these categories as the range of products to be targeted by the restriction and disclosure elements, or could seek to target category I products in the first instance and provide a time frame for phasing in the coverage to include category II and/or category III products.

§ Category I covers about 12 per cent of Australia’s current timber imports.

§ Category II covers about 39 per cent of Australia’s current timber imports.

§ Category III covers 70 per cent of Australia’s current timber imports.

The remaining timber product categories not included in this analysis are those products in which the timber and wood component is difficult to identify and therefore regulate (for example, wooden tool handles, composite products containing wood and other materials).

3.1 Proposed product categories for regulation

Category I

Category II

Category III

Solid timber and wood products and some paper products

Partially processed/processed timber and wood products

Complex products – e.g. highly processed/composite timber and wood products/from multiple sources

Wood in rough (4403)
Sawn wood (4407)
Plywood (4412)
Newsprint (4801)
Printing & writing (4802-03;
4808-11; 4823)

Category I plus

Particleboard (4410)
Fibreboard (4411)
Mechanical (4701)
Semi-chemical (4705)
Chemical pulp (4702-07)

Categories II plus

Household and sanitary (4803, 4818)
Packaging & industrial (4804-08, 4810-11, 4823)
Paper manufactures (4811-23)
furniture (9403)
Veneer (4408)
Casks and barrels (4416)
Other articles of wood (4421)
Continuously shaped wood (4409)

Note: Number in parentheses is harmonised system tariff codes.

Source: TheCIE.

Mechanisms for demonstrating compliance with forestry laws

The Australian Government could recognise different off-the-shelf legality verification and chain of custody schemes to demonstrate compliance with forestry laws. These schemes range from self-declaration of legal origin, through to verification of legal origin, verification of legal compliance, and full certification.

Self-declaration

Self-declaration of legal origin requires suppliers to provide evidence that all timber products are legally sourced. They could be required to provide, for example, credible documentation to demonstrate that a forest manager holds a right to harvest, has paid all royalties, taxes and fees and has complied with all legal trade and export procedures. This level of legal compliance is termed SDL (self-declared legal).

A higher level of compliance using the verification of legal origin, legal compliance, or full certification schemes would require the use of existing schemes and an acceptable standard of auditing of compliance against their particular requirements to provide a credible level of assurance that timber was obtained from legal sources.

Verified legal origin

Verification of legal origin would cover compliance with forestry laws including right to harvest, forestry practices and payment of taxes and royalties using a formal standard or scheme. This form of legal verification is termed VLO (verified legal origin).

Verified legal compliance

Verified legal compliance covers all forestry and trade laws in the source country, which include requirements for compliance with harvesting rules, codes of practice and observing indigenous rights and meeting social obligations. This form of legal verification is termed VLC (verified legal compliance) and represents a greater level of legality assurance than exists for SDL or VLO.

Full certification

Full certification relates to compliance with all forestry and trade laws including environmental, social and economic regulations. This level of legality verification represents the highest tier achievable and may be considered equivalent to legal and sustainable forest management. It is termed FC (fully certified).

Self-declaration and schemes for VLO, VLC, and FC only verify the legal origins of harvested timber up to the forest gate. Chain of custody schemes are required to provide a verification of legality for timber products as they move along the processing and product supply chain to the end user.

In each case, auditing of compliance with the legality verification schemes could be undertaken by first (self), second (government or industry organisations), or third party (independent) auditing (with levels of rigour and independence associated with the auditor’s auditing processes which might vary according to whether industry accredited auditors or auditors accredited by an international body were involved).

The Government could consider implementing the above legality verification requirements under the restriction element using a phased approach, depending on the capacity of both domestic producers and exporters in producer countries to comply with the proposed requirements. A timeframe could be identified for implementing these requirements across the range of SDL to VLO, VLC, and possibly FC.

A phased approach for the enforcement of legality verification requirements could also sit over the top of a possible phasing-in of timber product categories covered by the restriction element, as described earlier, to minimise the economic impacts or unnecessary trade impacts and any possible unintended consequences of compliance.

Regulation in the form of quasi, co- or explicit regulation could then rely on these processes and product coverage as previously described.

Enforcement of regulatory options for the restriction element

Quasi-regulation

Under quasi-regulation industry could establish its own code of conduct (designed in accordance with the government’s policy objective) and manage its enforcement. The government could establish a suitable timeframe for implementing this option and expectations of how it should provide an effective regulatory measure in terms of the proportion of industry that becomes a signatory to the code, the strength of the compliance auditing regime, and the performance of industry in complying with the code.

It might be suggested that this option would be relatively ineffective. However, the incentive for industry sign-on and effective compliance auditing would be the potential for the government, in the event that this approach was ineffective, to mandate that all importers and domestic producers have to be signatories to the code to be able to market their products within Australia. In effect, this would shift this quasi-regulation option to a co- regulation or explicit regulation instrument.

Co-regulation

Under a co-regulation option, the government would legislate which standard of legality verification from the four compliance levels (SDL, VLO, VLC, or FC) would be acceptable for providing an adequate assurance of legal origin.

Explicit regulation

Under an explicit-regulation approach the government would legislate, as for co-regulation, but prescribe the legality verification compliance schemes industry should use to demonstrate an acceptable level of assurance. These would impose additional costs on industry and government including the need for having a regular review of schemes to be accredited as adequately verifying the legal origins of timber products or meeting the increased legality verification requirements.

Due diligence

Another option for government regulation may be to establish legislation for due-diligence requirements. This could take the form of a positive measure whereby importers (and domestic producers) are required to undertake a due diligence assessment of risk over the legal origins of their timber products. On the basis of that assessment, importers and producers would determine which of the available SDL, VLO, VLC, or FC schemes should provide adequate evidence of product legality. The Government’s role under this option would only be to legislate the requirements for the due diligence assessment.

An important distinction between this regulatory option and the co-regulation and explicit regulation options is that a due diligence regulation would require the government to assess:

§ the adequacy of the due diligence process used by importers and domestic producers to determine the level of risk of sourcing illegal timber products;

§ the actual level of risk of timber products being illegally sourced; and

§ whether the legality verification schemes selected by suppliers adequately addresses the risks to avoid acquiring illegally sourced product.

Enforcement of options for the disclosure element

The regulatory options for the disclosure element might include voluntary labelling or a government specified requirement that includes disclosure of species, country of harvest and any certification at a particular point along the supply chain. Its enforcement could be partially addressed through collection, assessment and verification of relevant information at the border and linked to existing procedures employed by the Australian Customs Service, Australian Quarantine and Inspection Service (AQIS) and the Convention on International Trade in Endangered Species (CITES) procedures under the EPBC Act. This information could be provided to importers and suppliers using their legality verification and chain of custody schemes. However, the election commitment is to enforce this requirement ‘at point of sale’.

Substantial costs might be associated with the provision and collection of this information for both government and industry. Some products such as sawn timber are likely to involve a simple supply chain, while furniture and particle board may incorporate several species and places of origin for the timber products utilised in their manufacture. Importers such as IKEA (2008) have indicated, in a submission on the disclosure requirements for the US Lacey Act amendments, that they will be challenged by the significant amount of record keeping in that regard.

It might be possible to have the enforcement regimes for both the restriction and disclosure elements managed as part of a single process. Using a single enforcement regime for the two elements, might mean that the data collected for the disclosure element assists with enforcement of the restriction element.

Penalty regimes for the restriction and disclosure elements

Consideration will need to be given to the penalty regime for non-compliance with each regulatory option. Industry could develop its own sanctions for non-compliance under a code of conduct in the case of quasi-regulation. For the government’s regulatory options, decisions would have to be made on the level of penalty applied.

Proposed penalty regimes would need to take into account the management and associated costs of seizing products that arrive without appropriate documentation versus those that have been identified as sourced from illegally harvested forests, including:

§ whether they would be held at importers cost until the required documentation is provided;

§ how they would be disposed of either through destruction or re-export, if the required documentation cannot be provided;

§ the level of sanction to be imposed such as a warning for a first offence, a fine for a second offence, and more substantive penalties for continued non-compliance; and

§ the possible imposition of felony charges if timber is determined to be knowingly obtained from illegal sources.

Post-border compliance and enforcement checks could include random audits by the government once cleared shipments have been released by Customs. This might require establishing a government/industry partnership for post border inspections, similar to existing processes, which build on the post-border enforcement regimes for timber product imports currently implemented by the Australian Government agencies noted above. These government enforcement procedures might be complementary to industry’s own enforcement regime applied under a code of conduct (as described by the quasi-regulation option).

International trade agreement implications

Australia’s longstanding position has been to ensure that trade and environment policies are developed and implemented in a mutually supportive way. That is, policies will be developed to address legitimate environment concerns in an effective manner while at the same time preserving our interest in maintaining an open international trading system.

Efforts made by Australia to address illegal logging could be greatly enhanced through effective cooperation with both timber-producing and timber importing countries. In relation to illegal logging policy, the Government will need to ensure that whichever regulatory measures are adopted not only achieve the stated objective, but are also consistent with Australia’s international trade obligations.

Illegal logging regulatory options examined in this RIS

The ultimate objective of the policy is to promote trade in timber products from sustainably managed forests, but the emphasis of the framework under consideration is on restricting the importation of illegally logged timber. Accordingly, a strategy for progressively shifting towards the more demanding levels of legality verification (that is, VLO to VLC to certification) might be a way of targeting the ultimate objective in the medium term. Using a phased approach, it might be possible to move in a systematic way from an emphasis on relatively simple aspects of legality through to eventual certification of timber products from sustainably managed forests. This way, legality verification could provide a logical stepping stone towards measures targeting sustainable forest management practices. A phased approach to legality verification could be assisted by phasing-in the range of products covered by the restriction measure, and be assisted by the disclosure measure requirements.

A number of regulatory and non-regulatory options, and possibly a combination of these, are available to the government to achieve its policy objective. The cost–benefit analysis will indicate the relative efficiency of alternative regulatory approaches to meeting the Government’s objective.

Examining the costs, and subsequently the cost–benefit outcomes of these options requires a multi-dimensional examination in the draft RIS of the:

§ products to be covered;

§ legality verification compliance regimes available to industry and government; and

§ potential phasing from less to more onerous legal verification schemes, taking into account domestic and producer countries’ capacity to comply with the requirements of such schemes.

The regulatory options for the restriction element are summarised in table 3.2. This summary indicates whether there could be a phasing-in of the product categories covered by each measure, whether legislation is required to support implementation of the regulatory options, if there might be a phasing from less to more onerous legality compliance regimes over time, and whether industry or government would be responsible for enforcing the regulatory options.

3.2 Key elements of the regulatory options analysed in this draft RIS

Regulatory option	Phasing product coverage	Legality, verification compliance	Phasing compliance options	Enforcement regime
Self	-	Current systems	-	Industry
Quasi-regulation	+	Code of conduct	-	Industry
Co-regulation	+	Legislate	+	Government
Explicit regulation	+	Legislate	+	Government
Due diligence	+	Legislate	-	Government

Source: TheCIE.

The modelling approach and costs of compliance with the legality verification options are outlined in chapters 4 and 5. A cost–benefit analysis is presented in chapter 6 and an assessment of the possible effectiveness of the regulatory options for achieving the government’s objective in chapter 7.

Additional matters to be considered around the regulatory and legality verification compliance options available to industry and government are the costs to government for administering the policy response and the potential use of non-regulatory measures.

Australia’s participation in bilateral and multilateral processes, maintaining consistency with plurilateral processes during the design of regulatory options and the possible use of capacity building to assist other countries with their enforcement of forestry laws would all be expected to influence the costs and benefits of the government’s final regulatory response.

Because the regulatory options do not deal directly with the causes of illegal logging, their effectiveness in reducing the phenomenon is inevitably constrained. Complementary initiatives measures targeting the underlying causes and fostering greater legal compliance in countries where illegal logging and use of illegally logged timber is prevalent could increase the effectiveness of Australian import restriction and other domestic regulatory measures. But if complementary initiatives were successful, there would be less of a problem for the Australian measures to influence, and less of a case to impose the burdens of additional regulation.

4 Approach to modelling policy options

In chapter 2, we used the Global Trade Analysis Project (GTAP) model (see appendix A) to assess who would be better off and who would be worse off if there were no illegal logging, and how large these effects might be. The analysis did not consider how illegal logging might be eliminated, nor what the costs of compliance and enforcement of policies to achieve this outcome might be.

Chapter 3 considered ways in which the Australian Government’s policy approach could be implemented through a phasing of product coverage (from category I to III) and adopting a range of increasingly stringent systems of legality verification (from SDL to FC) over time. It was also pointed out that levels of disclosure could be made more or less demanding.

In this chapter we summarise how we have modelled the costs of compliance on businesses and the global and domestic economies from verifying the legal origins of timber products. The modelling of verification of legally-sourced timber products uses a combination of the three product categories and four legality verification options described in chapter four. The potential compliance costs of extending disclosure are also discussed. Estimates for the cost of quasi regulation, co-regulation and explicit regulation options will be interpolated from the legality verification modelling outcomes.

Table 4.1 summarises the elements of legality compliance covered by each of the VLO, VLC, and FC compliance schemes, and illustrates how the coverage increases across the spectrum of these schemes.

4.1 Compliance requirements for SDL, VLO, VLC and FC schemes

	Compliance standards
Compliance elements	SDL	VLO	VLC	FC
Tenure/use rights/responsibilities	(Minimum*) ü	ü	ü	ü
Compliance with national laws		ü	ü	ü
Indigenous people’s rights			ü	ü
Community relations/worker rights			ü	ü
Environmental impact				ü
Forest management plan				ü
Monitoring and assessment systems				ü

* This would be a minimum requirement.

Source: TheCIE.

Impacts of compliance costs on willingness to supply

Having to comply with the requirements to achieve legal verification will impose direct costs on business. Importers will need to demonstrate that the products they are bringing in are legally produced and meet the government’s prescribed standards. In order for Australia to comply with its international trade obligations, comparable efforts to address illegal logging would be required for domestic suppliers. This may increase the compliance costs for smaller Australian producers depending on the measures employed.

The increases in costs imposed will affect the willingness of producers and importers to supply to the Australian market. This willingness to supply will determine the economic impact of the policy. In general, willingness to supply will vary across three groups of producers.

§ Producers who are already compliant with the standard or are progressing toward it will face very small additional costs other than potentially small increases in paper work to provide proof to Australian importers or wholesalers that they are compliant. This group will be largely unaffected and are likely to continue to supply to the Australian market.

§ Producers who are highly reliant on illegal sources of timber or who are engaged in other illegal activities will face very high costs of compliance. Essentially, to become compliant, this group will need to abandon their cheap sources of timber supply or other illegal activities. This will cost them dearly. That is, it will impose a high opportunity cost on them to meet the required standard and to provide proof of legality. In effect, they face a prohibitively high cost of compliance. In the main this group will not be prepared to pay the high costs required to comply and they will cease supplying the Australian market.

§ Producers who are either mostly already compliant but as yet have no proof of compliance will potentially be able to meet the required standard but may resist doing so owing to a moderate cost impost of achieving and proving it.

– Some may respond by no longer supplying the Australian market to avoid the compliance costs.

– Others could be responsive to the import restrictions if higher prices are received for legally verified products in Australia. They may decide to invest in meeting the standard and trying to recoup some of the additional costs from Australian consumers.

Factors affecting compliance costs

Systems for verifying legality of timber products vary according to the definition of legal applied and the extent of other elements included. The number of items to be ‘ticked’ during the legality verification process using existing legality verification schemes will influence the costs of compliance to domestic and overseas forestry businesses.

Stakeholders consulted reported a wide range of costs associated with certification, and verifying the legal origins of timber products. Estimates of these potential costs are provided in appendix E with the costs of compliance dependent on many variables such as the size of the enterprise, the complexity of the value chain and the level of economic development of the country of operation.

Modelling compliance costs of legal verification

To model the impacts of the different levels of legal verification, it is necessary to identify the average legality verification compliance costs of the most responsive of the three groups of producers in each country.

In practice, high cost producers in any country will not be willing to incur additional costs in order to supply exports to Australia, so for the modelling, it is only low and medium cost producers that are of interest. In general, costs of compliance to export to Australia will be low in developed countries where producers are large with already well developed systems to prove compliance. Costs will be higher in high-risk developing countries, due to lower scales of operation, less well developed and more ambiguous forest laws and under-developed systems for proving compliance.

Developing, high-risk countries

The analysis in appendix E and stakeholder consultation leads TheCIE to believe the responsive group in high risk (developing) countries will face the following compliance costs (presented as a share of the fob value of exports).

§ Full certification (FC) — 10 per cent.

§ Verified legal compliance (VLC) — 5 per cent.

§ Verified of legal origin (VLO) — 3 per cent.

§ Self-declared legal (SDL) — 1 per cent.

Developed countries

Producers in developed countries face relatively low legality verification compliance costs due to their established systems of forest management and governance. TheCIE has assumed the patterns of compliance for New Zealand, the United States and the European Community apply only to their exporters to Australia, and generally these exporters are large with low potential costs of compliance.

Analysis in appendix E and stakeholder consultation leads us to believe developed country exporters to Australia in the responsive group will face the following (very low) compliance costs (presented as a share of costs of production).

§ Full certification (FC) — 0.1per cent.

§ Verified legal compliance (VLC) — 0.1 per cent.

§ Verified of legal origin (VLO) — 0.05 per cent.

§ Self-declared legal (SDL) — 0.025 per cent.

Because developed countries typically already have strong and strongly enforced forest laws, changes in forest practices to achieve full certification are likely to be relatively small, so the major costs will be administrative and relate to chain of custody costs. For this reason it is unlikely that there will be a large difference in legality verification in compliance cost between full certification and verified legally compliant.

Australia

In Australia, costs of compliance are likely to be higher than for developed country exporters to Australia. This is because in Australia, not only large exporters will be affected. There are small forest enterprises in Australia, small furniture makers, small cabinet makers, small to medium sized importers and producers of products such as veneer suppliers who may struggle economically to obtain full certification and verification of legal compliance. However, TheCIE assumes most operators are likely to be able to achieve the requirements of VLO and SDL.

Analysis in appendix E and stakeholder consultation leads us to believe Australian producers, on average will face the following compliance costs (as a percentage of production costs).

§ Full certification (FC) — 0.6 per cent.

§ Verified legal compliance (VLC) — 0.6 per cent.

§ Verified of legal origin (VLO) — 0.3 per cent.

§ Self-declared legal (SDL) — 0.15 per cent.

Inclusion of the costs in the GTAP model

The legality verification compliance costs are included in the GTAP model in two different forms. For exporting countries they are modeled as a special form of export tax on each country’s exports of timber products to Australia, since they will operate as an increase in domestic costs of supplying the Australian market. For Australia, they are modeled as a special form of a ‘production tax’. These notional export and production taxes are treated as an increase in costs, and are not counted as contributing to government revenues.

The compliance costs are expressed as percentage of the production cost/ export price and are applied only to the share of products covered in each product category for each region of the model.

The GTAP model simulations show how much producers’ willingness to supply will alter in response to the assumed compliance costs. This is indicated by changes in output of forestry products in risk and non risk countries and changes in levels of exports to Australia. However, not all of the changes in forestry production and exports arising from meeting Australia’s legality verification requirements from Australia will be due to changes in illegal logging. Several outcomes are possible.

§ Illegal loggers decrease their output and legal loggers increase theirs.

§ Illegal loggers transform their activities to be legally compliant.

§ Some legal loggers may decrease their production if compliance costs are too high to profitably supply the Australian market.

§ Illegal loggers increase their production by substituting away from the restricted markets to non-restricted less onerous markets.

The economy-wide costs of the different legality verification options are presented as the foregone welfare resulting from restricting Australian imports of illegally sourced timber products. The GTAP model simulations give estimates of the welfare changes (indicators of income and levels of consumption) for each country identified in the model. We are therefore able to calculate the costs to Australia, risk countries, and the world. The benefits of these policy options are calculated by applying the reductions in illegal logging, as discussed above, to the total global reduction in the costs of illegal logging.

Costs of disclosure measures and chain of custody costs

Suppliers may need to extend documentary proof (of species, country of harvest and any certification) up to the point of wholesale or retail sale to meet the disclosure element requirements. Additional costs will be incurred to establish and operate chain of custody schemes to demonstrate the legal origins of timber products throughout the supply chain.

In the case of reconstituted panels (particle board, OSB, MDF and other fibreboard) as well as pulp and paper, the investment needs may be substantial in mills which use both certified and uncertified raw materials and have to keep these separate in storage areas and during processing. In addition, operational costs may increase due to less efficient use of equipment and increased handling requirements (Vogt et al 2000). These problems can also occur in further processing of tropical timber into furniture and joinery if the end products contain only a specified percentage of certified material.

The chain of custody compliance costs can become high in situations where wood supply is very fragmented and comes from a very large number of small and medium-scale landowners (see appendix E). As regards tropical timber, such situations occur among for example, small-scale rubber wood producers in Asia and in the case of various tree farm and out grower schemes (ITTO 2004, p. 14).

Chain of custody costs may increase the further along the supply chain the disclosure of information is required. For instance disclosure of information at retail level will be more expensive than at the point of wholesale and the more information required, the more expensive it will become. For the compliance cost estimates presented above, it is assumed that:

§ the verification for traceability of legal products using a chain of custody scheme and verification of legal origin represent the same proportional costs along the supply chain only to the point of free-on-board (fob) in the case of exports to Australia and at-factory-gate in the case of Australian production; and

§ beyond these two points the compliance costs are simply passed along the supply chain and are no longer proportional to production costs.

This restricted treatment of disclosure and chain of custody costs may represent a conservative representation of costs in some instances, particularly for complex value chains and if disclosure is required at higher levels along the supply chain.

Government enforcement cost

At this stage the costs to government of enforcement have not been estimated and have therefore not yet been included in this exercise. TheCIE has been informed that the costs to government will be determined once a decision on the preferred policy option has been made. There may be additional costs of border management and control, as well as costs of vetting certification systems and dealing with breaches of regulations. The non-inclusion of these costs in the analysis will lead to an underestimation of the total costs of policy options.

Uncertainties about estimates of compliance cost

Although it is possible to narrow down the range of compliance costs, what remains uncertain is the true extent of illegal logging, how close some producers in some countries may be to achieving verification of legality using acceptable schemes, the flow through effects of compliance costs along the supply chain and enforcement costs. For this reason, compliance costs should be considered indicative. Sensitivity tests are conducted around these estimates in the economic modelling exercise to address some of these uncertainties.

Summary of assumptions and implications of compliance costs

§ Compliance costs vary widely within and between countries due to a wide range of factors.

§ In general, compliance costs will be substantially higher in developing countries than developed countries because:

– legal loggers in non-risk developed countries who currently export to Australia will, in general, already be compliant, so extra costs will be minimal or negligible;

– legal loggers in high-risk developing countries will have to set up systems to prove and maintain their legality;

– the integrity and enforcement of forest laws is not as well established as in developed countries, even though the laws are often similar to those in developed countries;

– ambiguity surrounds elements of forest laws and ownership in developing countries;

– significant levels of illegal logging currently occur in developing countries; and

– systems for verifying legality are not as well developed.

§ Illegal loggers who cause environmental, social and financial damage will face very high or prohibitive costs of compliance because, to comply, would require them to give up the substantial financial advantage they gain by currently engaging in illegal activities (the opportunity cost of compliance is high). Illegal loggers who gain substantial financial benefits from illegal logging will be forced to cease supplying the Australian market due to these costs.

§ Legal loggers in high-risk countries are not likely to face the high opportunity costs of compliance that illegal loggers face, but nonetheless may face some opportunity cost due to changes in forestry and other practices required to become compliant. However, it is assumed in this exercise that these producers face no opportunity cost, only costs of proving and maintaining legality.

§ Legal loggers in non-risk developed countries with low compliance cost are likely to face financial incentives to expand supply to Australia if Australian prices rise by more than compliance costs due to restriction on illegal imports. In developing countries this is less likely to occur because costs of compliance are likely to be substantially higher to prove and maintain legality for most producers. Were this not the case, they would in all likelihood, already be compliant.

§ Chain of custody/disclosure costs are assumed only to apply up to fob or factory gate stage in the supply chain which is a conservative assumption and may indicate compliance costs are underestimated.

§ Enforcement costs have not been included biasing down estimates of total costs.

§ Forestry enterprises in developing countries are assumed to be of a moderate size with an average forest area of 90 000 hectares and production of 60 000 cubic metres per year. If average areas and production are larger, compliance costs could be lower than estimated.

§ Various unknown factors may bias estimates of compliance costs either up or down, making a wide range of sensitivity testing around compliance costs important.

5 Economic costs of legality verification

We use the Global Trade Analysis Project (GTAP) model discussed in appendix A and C to explore the potential range of economic impacts of legality verification costs of compliance. In this chapter we examine what would happen if Australia were to act unilaterally. Later, in chapter 7, we assess how this would change given that some other countries may be restricting imports of illegally logged products in parallel with Australia’s proposed action. To address some of the uncertainties regarding the many assumptions that underpin the legality verification cost modelling, we have conducted a sensitivity test that has the compliance costs for import restriction measures varying by plus or minus 50 per cent.

Reductions in imports

An important consequence of any measure requiring legality verification is that it will impose costs on trade in legal timber as well as (hopefully prohibitively) costs on trade in products incorporating illegally logged timber. It could thus reduce imports of products that do not incorporate illegally logged timber.

Tables 5.1 and 5.2 show the percentage reductions in wood product and paper product imports to Australia from risk countries ^{^[9]}associated with each tier of legality verification. Table 5.1 shows that using full certification schemes could reduce imports of wood products from risk countries by up to 33 per cent. Table 5.2 shows that such a requirement could reduce imports of paper and related products from these countries by up to 47 per cent. The least demanding requirement — for self declaration over Category I products — would decrease imports of timber products and paper products by around 1 per cent. (The numbers given in parentheses in the tables are the results of sensitivity tests, showing how the estimated reduction in imports varies if compliance costs are assumed to be 50 per cent lower or 50 per cent higher than the estimates used.

Product category III include products that account for about 70 per cent of Australia’s wood and paper product imports, so options with that coverage are likely to target imports at risk of incorporating illegally logged timber that account for 7 per cent of total imports (since risk imports account for an estimated 10 per cent of total world trade) or 14 per cent of imports from risk countries (since risk imports account for an estimated 20 per cent of imports from those countries). Reductions in imports of wood and paper products from risk countries of between 33 and 47 per cent under a full certification requirement reflect the fact that the measure would also reduce imports that do not include illegally logged timber — the additional costs make some ‘legal’ products uncompetitive. This problem arises also with other options — cells in tables 5.1 and 5.2 shown in bold are for options where a substantial reduction in imports may occur.

5.1 Simulations: Australian imports of wood products from risk countries
(percentage change from unilateral action)

Standard for access	Product coverage
	Category I	Category II	Category III
Self-declared	-0.75 (-0.38~-1.11)	-0.76 (-0.39~-1.12)	-5.38 (-2.72~-8.00)
Verified legal origin	-1.46 (-0.75~-2.14)	-1.48 (-0.76~-2.16)	-10.55 (-5.38~-15.51)
Verified legal compliance	-2.13 (-1.12~-3.05)	-2.13 (-1.12~-3.05)	-16.89 (-8.73~-24.46)
Full certification	-5.18 (-2.79~-7.25)	-5.30 (-2.85~-7.43)	-32.65 (-17.57~-45.35)

Note: Numbers in parentheses are ranges of results assuming 50 per cent lower and 50 per cent higher compliance costs.

Source: GTAP simulations.

5.2 Simulations: Australian imports of paper products, printing and publishing from risk countries (percentage change from unilateral action)

Standard for access	Product coverage
	Category I	Category II	Category III
Self-declared	-1.67 (-0.85~-2.46)	-6.82 (-3.47~-10.05)	-8.89 (-4.55~-13.04)
Verified legal origin	-3.23 (-1.67~-4.69)	-13.16 (-6.82~-19.06)	-17.00 (-8.89~-24.40)
Verified legal compliance	-5.15 (-2.71~-7.36)	-20.87 (-11.07~-29.57)	-26.61 (-14.33~-37.13)
Full certification	-9.45 (-5.19~-13.06)	-37.56 (-21.05~-50.52)	-46.56 (-26.90~-60.85)

Note: Numbers in parentheses are ranges of results assuming 50 per cent lower and 50 per cent higher compliance costs.

Source: GTAP simulations.

Reduction in illegal logging if Australia acts unilaterally

Although the reductions in imports can be considerable, the percentage reduction this causes in logging in risk countries might be very small if Australia acts unilaterally. Many excluded imports would then find markets elsewhere in the world. Further, if legality verification only extends to category I product coverage, some countries could decrease category I product exports to Australia, but increase exports of category II and III product that incorporate illegally logged timber. This might be an unintended consequence of implementing a system that requires legality verification for a limited range of products only. This scope for leakage and substitution explains why for some options shows in the tables the reduction in imports of products is smaller than the estimated share of trade incorporating illegally logged timber.

Table 5.3 shows the estimated reduction in logging in risk countries that results from imposition of the various options. It shows that even for the most demanding option (full certification and category III product coverage) the reduction in logging is very small at 0.0134 per cent, a small fraction of 1 per cent.

Not all logging is illegal, but it is the percentage reduction in illegal logging that is of interest to assess effectiveness. The percentage reduction in illegal logging will be greater than the percentage reduction in logging. Table 5.4 shows the estimated reduction in illegal logging that results from imposition of the various options. Under all options the impact is still small — 0.0035 to 0.0331 per cent^{^[10]}.

5.3 Simulations: global reductions in logging in risk countries from unilateral action (%)

Standard for access	Product coverage
	Category I	Category II	Category III
Self-declared	-0.0003 (-0.0002~-0.0005)	-0.0002 (-0.0001~-0.0003)	-0.0021 (-0.0011~-0.0031)
Verified legal origin	-0.0006 (-0.0003~-0.0009)	-0.0004 (-0.0002~-0.0006)	-0.0041 (-0.0021~-0.0060)
Verified legal compliance	-0.0005 (-0.0003~-0.0007)	-0.0002 (-0.0001~-0.0002)	-0.0062 (-0.0033~-0.0088)
Full certification	-0.0030 (-0.0017~-0.0040)	-0.0026 (-0.0015~-0.0034)	-0.0134 (-0.0074~-0.0181)

Note: Numbers in parentheses are ranges of results assuming 50 per cent lower and 50 per cent higher compliance costs.

Source: GTAP simulations.

5.4 Simulations: changes in illegal logging in risk countries (%)

Standard for access	Product coverage
	Category I	Category II	Category III
Self-declared	-0.0035 (-0.0017~-0.0051)	-0.0028 (-0.0013~-0.0042)	-0.0147 (-0.0096~-0.0193)
Verified legal origin	-0.0068 (-0.0035~-0.0075)	-0.0054 (-0.0028~-0.0061)	-0.0237 (-0.0147~-0.0274)
Verified legal compliance	-0.0068 (-0.0051~-0.0084)	-0.0046 (-0.0036~-0.0048)	-0.0284 (-0.0198~-0.0285)
Full certification	-0.0087 (-0.0049~-0.0117)	-0.0081 (-0.0046~-0.0108)	-0.0331 (-0.0319~-0.0356)

Note: Numbers in parentheses are ranges of results assuming 50 per cent lower and 50 per cent higher compliance costs.

Source: GTAP simulations.

It was indicated in chapter 2 that Australia imports of illegally logged products account for about 0.34 per cent of global production incorporating illegally logged timber. The 0.0331 per cent reduction in illegal logging (for FC and category III) in table 5.4 indicates that Australian import restrictions at best would stop the production of about a tenth of the illegally logged timber that presently comes into Australia. The rest would be diverted to other export markets and the domestic market of origin.

Trade diversion and leakage outcomes

The small reduction in log production for legality verification in Australia, despite quite large reductions in imports, is due to trade diversion and because Australia’s imports as a share of world round wood production is so small. Wood and paper products denied access to the Australian market could be diverted to other markets, so the overall reduction in logging resulting from import restriction measures is small

Costs of unilateral action for legality verification

With reduced imports, prices in Australia will rise. In some cases price increases induce increased Australian production and provide benefits to Australian producers, particularly large producers. Smaller producers whose legality verification compliance costs increase by more than the price rises would lose. However, not all options create increases in production (table 5.5). For the less demanding legality verification (for example SDL) small domestic production decreases occur. This is a result of the fact that small compliance cost increases in Australia are not matched by large enough increases in timber product prices. The effects vary significantly between sectors of the wood and paper products industry.

5.5 Change in production in Australia from unilateral action: all wood products (per cent)

Standard for access	Product coverage
	Category I	Category II	Category III
Self-declared	-0.0316 (-0.0156~-0.0480)	0.0266 (0.0141~0.0376)	0.1562 (0.0801~0.2285)
Verified legal origin	-0.0648 (-0.0316~-0.0994)	0.0471 (0.0266~0.0623)	0.2969 (0.1562~0.4232)
Verified legal compliance	-0.1580 (-0.0771~-0.2419)	0.0143 (0.0148~0.0003)	0.4063 (0.2234~0.5528)
Full certification	-0.0506 (-0.0176~-0.0950)	0.2819 (0.1701~0.3478)	0.9951 (0.5744~1.2930)

Note: Numbers in parentheses are ranges of results assuming 50 per cent lower and 50 per cent higher compliance costs.

Source: GTAP simulations.

With more demanding legality verification options, domestic prices increase sufficiently to offset the higher compliance costs, so domestic production on average increases. The largest increase in domestic production is associated with the most demanding verification option, which generates an average 1 per cent increase (table 5.5).

Where legality verification leads to increased production, it may also lead to changes in employment in the wood products and paper industries. For the most demanding legality verification option, full certification with category III product coverage, an estimated 1108 extra forestry jobs might be created (table 5.6). However, the net increase in jobs for the economy would be lower as forestry bids for labour from some other sectors. Some options, however, lead to increased production and an estimated reduction in jobs in the industry (of up to 383 with category II product coverage VLC). This occurs because the effects of restr

	*www.TheCIE.com.au*
	Regulatory Impact Statement Proposed new policy on illegally logged timber

	Prepared for

	Department of Agriculture, Fisheries and Forestry


	DRAFT RIS
	Centre for International Economics Canberra & Sydney 13 October 2009