Augmenting Forest Sustainability Certificates with Fiscal Instruments

Rotterdam Institute of Law and Economics (RILE) Working Paper Series No. 2015/7

35 Pages Posted: 13 Jun 2015 Last revised: 14 Nov 2017

See all articles by Dirk Heine

Dirk Heine

Erasmus University Rotterdam (EUR) - Rotterdam Institute of Law and Economics; University of Hamburg - Institute of Law and Economics; University of Bologna - Department of Economics; World Bank, Macroeconomics, Trade and Investment Global Practice

Michael G. Faure

University of Maastricht - Faculty of Law, Metro; Erasmus University Rotterdam (EUR) - Erasmus School of Law

Chih-Ching Lan

Erasmus University Rotterdam (EUR) - Rotterdam Institute of Law and Economics; University of Hamburg - Institute of Law and Economics; University of Bologna

Date Written: November 13, 2017

Abstract

Several countries with large end-consumer markets for timber have the declared objective of supporting forest sustainability around the globe, but the world’s most important forests are, in fact, outside their jurisdictions. Actions to protect these forests are therefore constrained by the legal problem of extraterritoriality. To legally act outside their borders, these countries support voluntary certificates on production practices and price-based instruments, but, unfortunately, neither instrument reaches beyond niche market shares, administration and compliance costs are high, the environmental gains are variable, and the two types of instruments work alongside each other without much synergies.

In this paper, we use a Law and Economics methodology to design a mechanism that integrates forestry certificates with price-based instruments, in a way that exploits synergies, and provides dynamic incentives for sustainable use of forests while keeping down the costs of compliance and administration. It is a mechanism that satisfies legal extraterritoriality constraints while nevertheless allowing countries to act outside their borders.

The mechanism consists of a tax imposed by a timber-importing country on a default assumption regarding the sustainability of the timber, combined with a tax discount that is provided on proof that the sustainability was higher than assumed. The proof is established by showing a sustainability certificate to the customs authority when the timber is imported.

This Feebate mechanism reduces standard problems in the literatures on certification and taxation of overseas forestry, such as the problems of threshold costs, free-riding and consumer recognition in markets with competing sustainability certificates, and the problem to compute efficient Pigouvian tax rates in a sector plagued by data unavailability. We show that a combination of price-based instruments with certificates can lead to better incentives for sustainable timber production than each of the instruments alone, without infringing the sovereignty of forest nations in an extraterritorial manner.

Keywords: Forestry, extraterritoriality, feebates, sustainability certificates, Pigou

JEL Classification: K32, K34, Q23, Q27

Suggested Citation

Heine, Dirk and Faure, Michael G. and Lan, Chih-Ching, Augmenting Forest Sustainability Certificates with Fiscal Instruments (November 13, 2017). Rotterdam Institute of Law and Economics (RILE) Working Paper Series No. 2015/7. Available at SSRN: https://ssrn.com/abstract=2617815 or http://dx.doi.org/10.2139/ssrn.2617815

Dirk Heine (Contact Author)

Erasmus University Rotterdam (EUR) - Rotterdam Institute of Law and Economics ( email )

Burgemeester Oudlaan 50
PO box 1738
Rotterdam, 3000 DR
Netherlands

University of Hamburg - Institute of Law and Economics ( email )

Johnsallee 35
Hamburg, 20148
Germany

University of Bologna - Department of Economics ( email )

Strada Maggiore 45
Bologna, 40125
Italy

World Bank, Macroeconomics, Trade and Investment Global Practice ( email )

1818 H Street, NW
Washington, DC 20433
United States

Michael G. Faure

University of Maastricht - Faculty of Law, Metro ( email )

PO Box 616
Maastricht, 6200 MD
Netherlands
+31 - 43 - 388 30 60 (Phone)
+31 - 43 - 325 90 91 (Fax)

HOME PAGE: http://www.michaelfaure.be

Erasmus University Rotterdam (EUR) - Erasmus School of Law ( email )

3000 DR Rotterdam
Netherlands

Chih-Ching Lan

Erasmus University Rotterdam (EUR) - Rotterdam Institute of Law and Economics ( email )

Burgemeester Oudlaan 50
3000 DR Rotterdam, Zuid-Holland 3062PA
Netherlands

University of Hamburg - Institute of Law and Economics ( email )

Johnsallee 35
Hamburg, 20148
Germany

University of Bologna ( email )

Piazza Scaravilli 2
Bologna, 40100
Italy

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